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When The SEC Comes Calling

The SEC Serves a Subpoena, or FINRA wants an OTR. Now what?

By Mark J. Astarita, Esq.  


WHILE BROKERS OFTEN BECOME upset or even angry when they are named in customer arbitration, nothing strikes fear in the hearts of licensed individuals as much as being called to testify before their own regulatory body. 

The situation can arise in a number of ways, either by a simple telephone call from an SEC investigator, a call from a FINRA examination, an SEC Subpoena, or a request for an On The Record interview from FINRA.

Whether the request is formal or informal, whether the testimony is recorded or not, all such interactions with the regulatory authorities is a serious matter, and brokers have good reason to be concerned.

Testimony before regulatory agencies is an extremely serious matter. Regulators can ask questions on nearly any topic they choose, and incorrect testimony can have serious repercussions for the broker. Therefore, such testimony should not be given without first speaking to an attorney, and rarely should a witness give such testimony without an attorney present. While most testimony is given by witnesses, not wrongdoers, the SEC and FINRA can have a serious impact on a broker's license, and the testimony can start a lengthy process that could take years to resolve. If the matter is not properly handled from the outset, the damage can be long lasting, and costly.

Of course, the regulators can refer a matter to a criminal prosecutor for further action or conduct further proceedings based on witnesses' testimony.  Nothing demonstrated the need for representation and preparation more dramatically than the conviction of Martha Stewart for lying to the FBI and the SEC in just such a scenario. And she was not testifying under oath. She voluntarily spoke to the investigators, with her attorney, and lied.

While the seriousness of the event is enough to cause concern, a large part of any subpoenaed broker's concern is the fear of the unknown, including the procedure, what will be discussed and the target of the investigation. 

While the SEC will not disclose the target of an investigation to a witness, or even his attorney, a knowledgeable lawyer can obtain SEC information that will lead to a reasonable idea of the witness' role in the investigation and the scope of inquiry.  FINRA will often attempt to keep the topics of the examination a secret too, by not disclosing the full scope of the investigation or review. In fact, I have been involved in FINRA OTRs where the examiner has refused to disclose the subjects to be addressed during the OTR. More on that later, since it is an inappropriate way to conduct an OTR, and must be dealt with by the attorney for the witness. Since there are very few rules which govern the conduct of a FINRA investigation, the event becomes a bit trickier, since one never knows exactly what the topic of discussion is going to be.

However, the process itself is not complicated, but is important to understand. Where testimony is being compelled, the witness receives a subpoena (from the SEC) or a letter from FINRA. The testimony is given under oath and recorded by a court reporter or tape recording equipment, is usually taken by an SEC attorney at one of their regional offices. An investigator is also present, and other SEC staff may attend.  The same is true for the FINRA and the NYSE.

In the SEC situation, In order for the staff attorney to subpoena a witness, there must be a Formal Order of Investigation. Witnesses who are subpoenaed to appear and give testimony are entitled to see the formal order, and it should be reviewed carefully. It contains information as to the scope of the investigation, when it began and who is authorized to conduct it. Additionally, the formal order may contain information regarding staff conclusions and possible subjects of the investigation. 

In FINRA or NYSE situation, there is no such order, and the staff can basically conduct its own investigation, with the staff deciding the scope of the examination and who will be interviewed. This again is a problem for the witnesses, and needs to be addressed by counsel.

In all situations, the Staff makes an opening statement and describes the general process to the witness. In the SEC examination, the witness is informed that he has the right to be represented by an attorney of his choice, that he may refuse to give testimony based upon his right against self-incrimination, and that any testimony given can be used in other proceedings.  Of course, in FINRA proceeding the witness has no such rights, and cannot assert his right against self-incrimination. If he does so, the FINRA will immediately move to bar the individual from the industry, on the grounds that he has failed to cooperate in a FINRA investigation.

The witness will also be told that he cannot "go off the record" and that only the staff can direct the reporter to stop recording the session. This is a true statement, but witnesses should be advised of one salient fact — whether the reporter records the statement or not, the staff can use anything that is said. In other words, a witness is never "off the record." 

An examination typically begins with a series of general questions. Depending on the responses, these may take more than an hour to complete. General questions include: the witness' name; date of birth; home and office addresses and telephone numbers; all telephone calling card numbers; social security number; names of all immediate family members; full employment history, including job descriptions and dates of employment; complete educational background and identification of any securities- or business-related courses taken; all licenses held and when obtained; any disciplinary proceedings in which the witness was named; every occasion in which the witness has testified under oath; details of all lawsuits and arbitrations in which the witness was a party; involvement with any public companies; and the location of all brokerage accounts and bank accounts controlled by the witness. Often your attorney can have the staff use a background questionnaire, completed and delivered before the testimony. In theory that reduces the background questions to "did you complete this questionnaire and are the responses accurate." Rarely is it that simple, but it can shorten the preliminary examination.

The examination then continues into the specifics of the investigation. Although the details of the examination will vary, every witness must testify truthfully, fully and honestly. It is a federal crime to make a false statement or representation to any government official, including a member of the SEC. FINRA claims that it will have the witness prosecuted for lying, but it cannot file criminal charges on its own. It can however, bring enforcement proceedings for a permanent bar, and refer the matter to criminal authorities.

During the testimony, the witness' attorney's ability to object to questions is somewhat limited. However, a witness is permitted to seek an attorney's advice at any time during the examination, and any question that he does not understand must be clarified by the examiner. The witness has the right to review documents he is being asked to testify about if he does not recall the exact details of the response.

During the examination, it is important to keep in mind that the staff members who attend the deposition will have a role in determining whether further action will be taken. Therefore, the witness' demeanor and attitude during the examination are important. See my articles, A Witness Guide to SEC Testimony and Tips For Responding to an SEC Subpoena for more on demeanor and conduct.

After the examination is over, the witness or his attorney is allowed to make a statement on the record. This must be decided on a case-by-case basis but should be used if there were any unclear responses that were not addressed during the examination. 

At the examination's conclusion, the witness has a right to inspect the transcript of the proceedings and may — at his own cost — obtain a copy. Although the SEC may deny transcript access, it does not do so in general practice. FINRA on the other hand, will routinely deny or delay access to the transcript, and it is essential to obtain and review a copy of the transcript as soon as possible to ensure its accuracy, since the transcript may be used in other proceedings. To correct substantive mistakes, an affidavit will have to be prepared, and there may be a request for an additional examination. 

Unfortunately, the SEC and FINRA have no obligation to inform witnesses of an investigation's outcome or even its termination. In fact, the witness may never hear from them again. Should the matter proceed further, there are a number of other possible outcomes, including a cautionary letter, a referral to civil or criminal law enforcement organizations, a referral to a self-regulatory agency, administrative proceedings or injunctive actions. 

Receiving a subpoena is not an indication that the SEC thinks you have done something wrong. Most people are subpoenaed as witnesses, not as investigations' targets. The goal during this process should be to ensure that the witness remains a witness, and nothing more. 

This article was updated in March 2004 and originally appeared in the May 1997 edition of Research Magazine. 


Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.  

Updated January 2015   
















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Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.SECLaw.com was created by and is sponsored by Mark J. Astarita, Esq., a securities attorney and partner in the law firm of Sallah Astarita & Cox, LLC, who represents all participants in the financial markets. Mr. Astarita can be contacted by email at mja@sallahlaw.com.

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