Code of procedure

In the brokerage accounts section, we learned about the Code of Arbitration, which lays out how disputes with customers and other industry professionals are handled. Here, we’ll cover the Code of Procedure, which applies when FINRA believes a financial professional or firm has violated an SRO rule. If FINRA (or another SRO) discovers a potential rule violation, the Code of Procedure describes what happens next.

FINRA can learn about a possible violation in several ways, including customer complaints, whistleblowers, or through its own 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 receives a copy and must respond within 25 days of receipt.

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

• 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 outcome, the Department of Enforcement arranges a three-person panel to hear the case.

• If the violation is not denied, the panel focuses on agreeing on the appropriate punishment. The respondent will typically provide context about the violation, 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 closely resembles a court case:

• The Department of Enforcement acts like the prosecutor.
• The representative or firm (often represented by lawyers) acts like the defendant.
• Facts are presented and witnesses may be questioned.
• Instead of a judge and jury, a three-person panel oversees the hearing and issues the decision.

Once the hearing begins, the panel decides whether a violation occurred and, if so, what punishment to impose. The panel must render a judgment 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 submit an appeal, the appealing party must send 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 punishment. NAC decisions are published publicly on FINRA’s website. If either party still disagrees with the outcome, a final appeal can be made to the Securities and Exchange Commission (SEC).

The Code of Procedure process can feel intimidating, and it’s structured much like a criminal court process. If you want more detail, FINRA provides a guide available online that walks through the steps (although the Series 7 will most likely not test you on them).