Matasar: Surviving A FINRA Investigatory Deposition
Author’s Note: This column is the second in a multi-part series explaining the FINRA investigation and disciplinary process. The first column addressed best practices in responding to a FINRA subpoena for documents and information. Future columns will such topics as strategic considerations in deciding whether to accept a FINRA “plea bargain”; how to prevent FINRA from initiating an enforcement proceeding; an explanation of the FINRA enforcement process; and how to get back into the industry after a suspension.
As readers of my last column know, financial advisors can wind up facing a FINRA review of their conduct as a result of any number of triggers, from customer complaints, to allegations of misconduct made by their former firm on their Form U5 after being terminated, to inadvertently triggering a red flag during the course of a FINRA sweep of market activity. Whatever the cause, FINRA’s first step usually is to serve the advisor with a Rule 8210 subpoena that demands the advisor answer questions about their conduct, and to hand over a wide variety of documents. The key for the advisor is to try to prevent this informal FINRA “inquiry” that is not reportable on their Form U4 from escalating into a formal investigation being run by the Enforcement Division, Office of Fraud Detection and Market Intelligence, or another department within FINRA that is reportable on their Form U4.
However, despite your best efforts to allay FINRA’s concerns through one or more productions of documents and information this is sometimes unavoidable, and FINRA will escalate its investigation. Usually, the next step in the process is for FINRA to order you to appear for an “On the Record Interview”—commonly referred to by experienced FINRA lawyers as an “OTR”.
As an initial matter, OTRs—at least for advisors located in the eastern half of the country—are usually conducted at the FINRA office in New York or Washington. However, if you and your counsel have been cooperative and are on good terms with the lead investigator you may be able to persuade them to conduct the OTR in the FINRA regional office closest to you, saving you substantially on travel costs.
A FINRA OTR is very similar to depositions that are conducted in ordinary civil lawsuits. Advisors who appear for an OTR are placed under oath, and must answer questions truthfully or face severe consequences for committing perjury. As with depositions, a court reporter will record your testimony and create a transcript that will go into FINRA’s investigation file. And as with a regular deposition you are entitled to have an attorney representing you and attend to the OTR to protect your interests.
However, there are some very important differences between an OTR and an ordinary civil deposition that even experienced litigators who lack experience dealing with FINRA enforcement matters are not aware of. First, at a civil deposition only the lead attorney for the other side can ask you questions; by contrast I have defended clients at OTRs where the advisor has faced interrogation by up to 6 different FINRA investigators and/or lawyers during the questioning. Second, in a civil deposition witnesses can refuse to answer questions that would violate the attorney-client privilege, or on the grounds that it would violate their 5th Amendment rights against giving testimony that could incriminate them. However, because FINRA is not a government agency, you cannot invoke the 5th Amendment to avoid answering questions during an OTR even if it means that your answer could open you up criminal prosecution. Third, in a civil deposition the only people who usually get to read the transcript of your testimony are the lawyers and parties for the other parties in the case. By contrast, FINRA can share the transcript from your OTR with government agencies and law enforcement authorities that might also be conducting parallel investigations of your conduct—such as the Securities Exchange Commission, or federal prosecutors. Finally, in civil depositions your lawyer can assert a wide range of objections to questions that are unfair, misleading, repetitive or otherwise faulty; in OTRs, the bases for objection are considerably narrower.
Given the perils that come with come with testifying in an OTR, what should you do to prepare? Initially, if you haven’t yet retained an attorney now is the time to do it—preferably one who has experience defending OTRs and understands the differences between an OTR and a deposition. Going into an OTR without a lawyer would be extraordinarily unwise and dangerous. And, do not just rely on an attorney offered to your by your broker/dealer: you need truly independent advice from a lawyer who is solely focused on your best interests. This is especially true if you may be facing penalties for regulatory violations that could lead to your firm terminating you. During your preparation your attorney will review key documents with you, review your answers to difficult questions you are likely to be asked, and also help you rehearse making a good impression during your testimony.
Next, when preparing for your testimony, bear in mind that if you are the target of the FINRA investigation, you are likely the last person FINRA is questioning. It is very likely that while you’ve been producing documents and information to FINRA over the past several months, FINRA has likely subjected your co-workers and supervisors to OTRs of their own behind the scenes, as well as informally interviewed your clients about their accounts. Particularly with your current or former colleagues, you are unlikely to know that these other interrogations have taken place because FINRA will have ordered these people not to tell you that they’ve been questioned. While of course it is critical that you testify truthfully at your OTR, it is even more essential that you not provide half-truths in your answers because the investigators have a huge informational advantage over you—and part of what FINRA is going to be assessing is whether your testimony is consistent with the other documents and testimony it has already gathered behind the scenes.
Finally, if you are indeed facing the risk of criminal prosecution for your actions, you and your lawyer need to give deep consideration to whether it makes sense even to testify in the first place. Although refusing to appear for your OTR will lead to you being suspended and then barred from the securities industry, that outcome is far preferable to you voluntarily giving answering questions that can be used to bolster a criminal case against you, or expose you to perjury charges.
Getting summoned to testify at an OTR is not necessarily a cause for panic. But, it is nothing to take lightly, either. At a minimum, it is a strong indication that FINRA is contemplating instituting formal proceedings to take disciplinary action against you. However, an OTR is also likely the first time you will meet the people investigating you face-to-face and, as such, this is your best chance to educate the investigators about why their suspicions of you are misguided and to persuade them by the way you handle yourself that the investigation should be closed. Approached properly, an OTR can be your golden opportunity to prevent further damage to your career. If this is not successful, FINRA’s next step is usually to issue the dreaded “Wells Notice,” which will be the subject of my next column.
Scott Matasar, Esq. is a founding member of the law firm Matasar Jacobs LLC. Based in Cleveland, Scott represents broker/dealers, financial advisors and industry recruiters across the country in providing advice about the legal and regulatory issues involved in practice transitions. He also represents both corporate clients and individuals on a wide range of other securities industry related issues including customer arbitrations; defending clients in investigations brought by FINRA, the SEC and/or state securities regulators; and in negotiating and structuring purchases and sales of books of business. To learn more about Scott, please visit