Mark J. Astarita, Esq. represents investors, financial professionals and firms in litigation, arbitration and regulatory matters across the country. He is a partner in the national securities law firm of Sallah Astarita & Cox, LLC and can be reached by email at email@example.com or by phone at 212-509-6544.
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The SEC Serves a Subpoena, or FINRA wants an OTR. Now what?
Introduction to SEC Subpoenas
If you are subpoenaed by the SEC, or even just receive a letter or telephone call from the SEC or FINRA that call or subpoena is a serious matter, regardless of how informal the caller claims to be. The SEC subpoena power is almost limitless, and you must carefully respond. Regulators can ask questions on nearly any topic they choose, and incorrect testimony can have serious repercussions. Keep Martha Stewart in mind, she went to jail for lying to the SEC, not for insider trading.
So too at FINRA. FINRA has the ability to send a request for testimony and documents to any person or entity that is registered with it. Again, there is virtually no limit to what they can ask, no meaningful way to object to the subpoena, and at FINRAno ability to take the Fifth or refuse to cooperate. If you do either of those, you will be permanently barred from the industry.
If the matter is not properly handled from the outset, the damage can be long lasting, and costly. Theworst thing you can do is ignore it. The SEC will sue you in federal court, FINRA will bar you for life.
SEC Subpoena Power
The SEC subpoena power is granted under Section 19(c) of the Securities Act, Section 21(b) of the Securities Exchange Act, Section 209(b) of the Advisers Act, and Section 42(b) of the Investment Company Act. The Commission designates members of the staff to act as officers of the Commission in an investigation by issuing a Formal Order of Investigation (“formal order”).
The SEC Formal Order
The formal order is important and should be immediately requested once a subpoena is received. The formal order generally describes the nature of the investigation and it designates specific staff members to act as
officers for the purposes of the investigation and empowers them to administer oaths and affirmations, subpoena witnesses, compel their attendance, take evidence, and require the production of documents and other materials. Formal investigative proceedings are nonpublic unless otherwise ordered by the Commission.
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’s 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. 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 what is known as an “8210 request” 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 FINRA.
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.
Subpoena Enforcement Actions
If a person or entity refuses to comply with a subpoena issued by the staff pursuant to a formal order of investigation, the Commission may file a subpoena enforcement action in federal district court, seeking an order compelling compliance. See Section 21(c) of the Exchange Act.
FINRA Document Requests
For FINRA, 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. FINRA does not have the ability to force document production from individuals or entities who are not registered with FINRA, or who have not been registered for more than two years.
Without any type of formal order, the document request needs to be addressed by counsel. Often FINRA staff will attempt to keep the witness in the dark regarding the scope of the interview, and counsel needs to address that issue before the witness testifies.
SEC Deposition Testimony
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 a FINRA proceeding, the witness has no such rights, and cannot assert his right against self-incrimination. If he does so, FINRA will immediately move to bar the individual from the industry, on the grounds that he has failed to cooperate in an 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 vary based on the type of investigation, but may include not only the include the witness’ name; date of birth; home and office addresses and telephone 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.
Background Questionnaire – Perjury Trap?
FINRA ses a “background questionnaire” which it requests the witness submit prior to the OTR, which speeds up the questioning, but requires the witness to spend more time on background, as the questionnaire is more detailed than any examiner could reasonably ask during an OTR.
The background questionnaire is important, as it is a sworn statement. We have been involved in cases where even a minor error in the questionnaire turns into a cause celebre for the Staff, who may argue that the witness has committed perjury, in an attempt to rattle the witness. Fortunately, I am unaware of any case where FINRA brought a proceeding over an alleged false statement in a questionnaire, but the threat of such a proceeding is an unnecessary distraction for the witness. I have witnessed FINRA staff making such a threat, although they did not follow through. It is better to make that questionnaire as accurate as possible and avoid the nonsense.
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.
Unfortunately, SEC testimony often has the appearance of being informal. The testimony is held as the SEC’s office, often in a dingy conference room, with a tape recording and three SEC attorneys. The informality of the setting sometimes leads witnesses not focusing on the question, the answer, and being 100% accurate in their answers.
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 the exact details of the response. In fact, the witness is entitled to see any document that he believes will assist him in giving truthful and accurate answers.
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’s demeanor and attitude during the examination are important.
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.
Review of the Transcript
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. There was a time when FINRA routinely denied or delayed access transcript, but 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.
Termination of the Investigation
Unfortunately, the SEC and FINRA have no obligation to inform witnesses of an investigation outcome or even its termination. However, the SEC’s policy is to notify individuals and entities at the earliest opportunity when
the Staff has determined not to recommend an enforcement action against them to the Commission.
This notification takes the form of a termination letter. The SEC states that a termination letter must be sent to anyone who:
- is identified in the caption of the formal order;
- submitted or was solicited to submit a Wells submission;
- asks for such a notice (assuming the staff has decided that no enforcement recommendation will be recommended against that person or entity); or
- to the staff’s knowledge, reasonably believes that the staff was considering recommending an enforcement action against them.
It is important to remember that a termination notice does not mean that the party has been exonerated, or that no action may ultimately result from the staff’s investigation of that particular matter. A termination notice does not mean that the staff has found that there was no violation or that the party did not violate the law. The staff may continue its investigation for several months or even years after a termination notice. Termination notices are issued to parties for a variety of reasons including a conclusion that the staff’s investigation was thorough and complete, that the staff believes that no violation occurred, that the staff has determined that a violation was not willful, or that the staff’s investigation revealed no other violations.
All that such communication means is that the staff has completed its investigation and that at that time no enforcement action has been recommended to the Commission. In fact, I represented a party in an SEC insider trading investigation, who after the production of hundreds of pages of documents, and a full day of testimony received a termination notice, only to be named in a proceeding based on the same series of transactions a year later. Fortunately, we were able to have the proceeding dismissed, after additional time and expense.
Despite the procedure for a termination notice, and in the FINRA context, the witness may never hear from the SEC or FINRA 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 or an 8210 request is not an indication that a regulator 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.
Witnesses who receive a subpoena or a document request should not attempt to respond alone. An experienced securities lawyer can limit requests, assist in responding, and work with the witness and the Staff to limit the pain.
If you have questions regarding an SEC subpoena or a FINRA document request, feel free to contact me at 212-509-6544 or by email at firstname.lastname@example.org. I represent parties across the country and have been doing so for 30 years.
Updated August 2020, November 2021