Restitution & penalties

In the brokerage accounts section, you learned about the Code of Arbitration, which lays out protocols for handling disputes with customers and other industry professionals. Here, we’ll cover the Code of Procedure, which applies when FINRA believes a financial professional or firm has violated a rule.

If FINRA (or another SRO) discovers a potential rule violation, the Code of Procedure explains what happens next.

FINRA might learn about a possible violation through customer complaints, whistleblowers, or during routine oversight. If FINRA believes the allegation has merit, it files a complaint through FINRA’s Department of Enforcement. The representative or firm named in the complaint (the respondent) receives a copy and must respond within 25 days of receipt.

The respondent will either admit, deny, or state they don’t have enough information to answer the complaint. Depending on the facts, the representative or firm could be subject to the following:

• Censure
• Fine
• Registration suspension
• Registration revocation

Penalties can range from a public reprimand (censure) to a significant fine and expulsion from the industry. To determine the appropriate penalty, the Department of Enforcement arranges for a three-person panel to hear the case. If the violation isn’t denied, the panel focuses on agreeing on an appropriate sanction. The respondent will typically provide context about what happened, which may affect the panel’s decision.

If the violation is disputed, the panel holds a hearing where the respondent can present their case, often with an attorney. The process is similar to a court case:

• The Department of Enforcement functions like the prosecutor.
• The respondent (often represented by counsel) functions like the defendant.
• Evidence is presented and witnesses may be questioned.
• A three-person panel (rather than a judge and jury) oversees the hearing and issues the decision.

Once the hearing begins, the panel decides whether discipline is warranted and, if so, what level of discipline to impose. The panel must issue its decision within 60 days. Any disciplinary actions are made public on FINRA’s website.

After the decision is issued, either the Department of Enforcement or the respondent may appeal. To file an appeal, the party must submit a written request within 25 days of the judgment to the National Adjudicatory Council (NAC), another FINRA body. After reviewing the case, the NAC may affirm, modify, reverse, increase, or reduce the sanction. NAC decisions are published publicly on FINRA’s website. If either party still disagrees with the outcome, a final appeal may be made to the Securities and Exchange Commission (SEC).

Overall, the Code of Procedure process can feel formal and court-like. If you want more detail, FINRA provides a guide available online that walks through the steps (though the Series 6 typically won’t test the fine details).