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Testify before FINRA? No thanks, I’ll take a bar

Financial Planning

Some 53 registered reps so far this year have committed what many might consider the ultimate act of regulatory insubordination: they ignored FINRA’s requests for information or declined to give on-the-record testimony knowing that doing so would get them barred from the industry.

While such an act may seem like career suicide, it can in fact be a move to do just the opposite, according to many attorneys.

When reps agree to cooperate with a FINRA investigation into potential misbehavior, they run the risk of having a long recitation of facts that they may not agree with on their record permanently, said New York attorney Jenice Malecki.

While brokers neither admit nor deny FINRA’s findings, they are forced to consent to them, and those findings, she said, are part of a publicly available regulatory record that lawyers and reporters can use and exploit.

“There are lawyers that will blog about it and there are reporters that will inquire about it. And it will be on google forever if you’ve consented to these facts,” said Malecki.

Brokers, of course, will have a regulatory black mark even if they comply with FINRA, but if they choose not to the amount of information open to the public and forever “googleable” will be limited.

“It doesn’t go into much factual detail,” Malecki said of brokers who opt not to cooperate and agree to an automatic bar.

Brokers can be subject to FINRA investigations for alleged offenses ranging from fraud and customer theft to mundane violations like writing checks with insufficient funds. Amy Pesina, a former J.P. Morgan rep, for example, recently agreed to be barred rather than provide testimony regarding personal checks she allegedly wrote to a third party without sufficient funds to cover them.

While FINRA does not keep statistics on the number of brokers barred for non-compliance with FINRA probes, an informal search of its disciplinary database showed that over the past five years the number has ranged from a low of 96 in 2014 to a high of 155 in 2015. The number of reps who have taken this route so far this year is on track to meet last year’s 125, according to FINRA’s database.

Choosing to be barred, rather than going through a full-blown investigation, makes sense for someone who is planning to leave the industry, said many attorneys.

Brokers might want to try a new line of work outside of financial services. If they want to take a job in the technology industry, for example, they can explain that they chose not to go through “FINRA’s long and expensive laborious process” to contest the allegations because they didn’t plan on going back to the investment brokerage business, said Malecki.

They might also intend to become investment advisor representatives, which are governed by the SEC, or do something else that doesn’t require registration with FINRA, according to Brian Rubin, a partner at international law firm Eversheds Sutherland.

“Brokers probably make a calculation about whether — based on what’s being investigated —they have a future in the industry, and if they’re not sure they do, it’s not worth making a record,” said Daniel Nathan, a partner at law firm Orrick, Herrington & Sutcliffe.

By and large, attorneys agreed that brokers were unlikely to cooperate if they knew they did something wrong.

“If somebody knows that by answering truthfully the questions that are posed to them it’s going to end up getting them thrown out of business or subjecting them to a serious fine, then they may assume that the best course of action is not to cooperate because they’re out of the business no matter what they do,” said Philip Aidikoff, a partner in the law firm of Aidikoff, Uhl & Bakhtiari.

Another reason brokers may opt for an automatic bar is that they may not have the money to be able to defend themselves, some lawyers said.

“The legal fees are not cheap to deal with this,” said Malecki, explaining that a hearing could cost $150,000 to $200,000.

“If you need to fight it, it’s probably half of your child’s college education,” she said.

Not everyone agreed on this point. Aidikoff, for instance, didn’t buy the money excuse. “At the end of the day, it costs nothing to go down there and just tell the truth, whether you have an attorney or not,” he said.

Malecki was skeptical that brokers could adequately defend themselves. “Why would anybody want to go into an adversarial proceeding without a lawyer when there may be two or three lawyers on the other side?” she asked.

Malecki noted that people are not taught in college or high school what to do in a deposition or what the rules of testimony are.

“Lawyers manipulate situations – even regulatory lawyers do that,” she said.