Regulatory Investigation FAQ

• I just received a letter from a regulator saying I am under investigation, what do I do?

  • First thing is to take a deep breath and do the following two things: 1) disclose the investigation to your compliance department in compliance with their disclosure requirements, most firms require disclosure within two days and 2) start looking for legal representation to guide you through this process. If you are a financial advisor in need of a lawyer, ask us what we can do for you.

• What if my employer is providing a lawyer for me to handle this investigation?

  • This is always a catch-22, having “free” legal representation seems nice on its face. However, a lot of the time, your employer can recoup these costs against you through insurance, your employment agreement, or commissions/pay structure. The most important part to consider is the title of the lawyer. Is this General Counsel for the firm? In-house counsel for the firm? If you have answered yes to one of the options, that lawyer represents the corporation, not you. This distinction is subtle, but general counsel must act in the best interest of the company and that may not be in your best interest. Contact us if you need a lawyer to help you with your regulatory investigation.

• What are common types of investigations?

  • The most common investigations revolve around allegations of undisclosed Outside Business Activities (“OBA”), failure to disclose fees, unauthorized discretion trading, misleading/unapproved financial literature, and suitability of products. These are common allegations, but there are numerous other possible allegations.

• What are potential consequences of an investigation?

  • There are multiple resolutions to investigations by a regulator, they range from the investigation closed with a finding of no evidence of wrongdoing to a complete bar from the industry and potential criminal implications. HLBS Law’s number one goal for our clients is to get the investigation tossed with a letter saying there was no evidence to support any of the allegations. An investigation can be closed out with a letter of no action. An investigation can be closed by a stipulation and consent, which is a settlement with the regulator that can result in a fine and/or suspension and/or heightened supervision. Any stipulation and consent will trigger a regulatory disclosure on your CRD, which can impact your career forever. Finally, you can be barred from the industry. Call HLBS Law for an attorney representing financial advisors in this situation.

• What is the first step of an investigation?

  • Generally, an agent from the regulator is assigned to your case and they will send a letter requesting answers to certain questions and request documents. While this is the first step, this is often where IARs and FAs make mistakes because everything you put in writing from this point on will be used against you moving forward. It is imperative to be forthcoming and honest to the questions asked by the agent. However, there is an art to responding to these letters that takes years of experience to master, to resolve these investigations at the beginning as opposed to the end.

• What is the cost to hire a lawyer at HLBS Law to guide me through the investigation?

  • HLBS only requires an initial 5k retainer to start your representation for this matter. We charge this because our goal is to eliminate the investigation with a responsive letter. If the investigation proceeds, HLBS Law will explain the next steps and what the pricing would look like from there and our estimated cost to see this case to the finish line based on your specific facts and circumstances.

Expungements FAQ

• What are my chances of successful expungement?

  • There are a variety of factors to consider when coming up with your chances of success in an expungement request. Typically, customer disputes are broken down into four different categories:1) The disclosure is listed as Withdrawn, 2) The disclosure is listed as denied, 3) The disclosure is listed as settled, and 4) The disclosure is listed as an award judgment. Typically, disclosures that are withdrawn or denied have the highest chance of success. The settled occurrence must factor in the type of product and settlement contributions. Award judgements are the most challenging disclosures to remove when it comes to customer disputes.How long does this process take to get expungement for an Investment Advisor Representative?

  • Unfortunately, this all depends on where your home state registration is. Some states like Virginia, have put together a quasi-arbitration system to handle these types of requests, which results in an expedited timeline. Expungements in Virginia can take anywhere from 3-6 months.
    In other states where there isn’t a quasi-arbitration system, for example, Colorado, the process can take longer, anywhere from 4-9 months.

• Who would be named in the lawsuit?

  • This is a complex question, but typically we will name your home registered state securities regulator. This often seems intimidating, but state regulators are often helpful to work with on these matters. The reason we do this is because they are the ones who control the information that is entered into the Investment Adviser Registration Depository or more commonly known as the IARD.
    We typically try to avoid naming BDs or RIAs in state court as we don’t want to waste your employer’s resources when we can typically get all of the information we need through them by informal discovery requests.

• Are there any time limits to bringing a claim for expungement?

  • Most states do not contemplate a statute of limitation for this type of claim. However, the longer the lapse in time, the more difficult it is to produce physical evidence to support the claim for expungement.

• What are the costs associated with this type of request?

  • HLBS Law is cognizant of our client’s funds and we always attempt to be as frugal as we can. Generally, we require a minimum 5-10k in trust money to start your case. You only pay as you see your case proceed and get routine updates. Depending on the facts of your case, sometimes this is enough and may result in a refund. If this will require more money, an estimate will be provided to explain the need for additional retainers. We pride ourselves on transparency when it comes to our client’s money.

• What happens if after I file my claim and there is heavy opposition from the state regulator, can I withdraw my request?

  • Yes. We always have the option to withdraw our claim as there are generally never any monetary requests for damages. HLBS Law has a great relationship with most state regulators to withdraw these claims. Any money not earned in your trust account will be refunded to you.

• Why HLBS Law and not some other firm?

  • HLBS Law has some of the most experience in the industry when it comes to state court expungement. Other firms handle expungement in FINRA arbitration, which is a substantially different process for FINRA members with disclosures. Our vast network with local counsel and other state regulators allows us to handle your case in the most effective way to succeed on the request and be cost effective.
    If a firm wants to handle this type of request, they must understand the intricate layered system brought forth by FINRA, NASAA, and others, to understand expungement of IARD systems.
    HLBS Law is a small firm. However, HLBS Law maintains a professional working relationship with AdvisorLaw for resources on bigger cases that require in depth discovery or other time consuming tasks.

• Should I tell my employer that I am seeking expungement?

  • We always encourage our clients to be transparent with employers. HLBS Law works with compliance teams to ensure how the process will work. This often leads to a high level of trust and makes it easier for our firm to request documents from your employer, if applicable. 

 Securities Litigation FAQ

- Beginning of a Lawsuit

• What happens when I am named in a lawsuit?

  • Typically, you are served with notice and a copy of the lawsuit. Service is traditionally done by a process server. Once this happens, you are officially on the clock as a response is required to a lawsuit. It depends on the state you are in, but the average is 21 days to respond. HLBS recommends you immediately consult with a law firm.

• What is my duty if named in a lawsuit to my employer?

  • Most firms in the finance industry have policies on point with regards to lawsuits. Most firms require that you disclose the lawsuit immediately. Failing to do so and violating firm policy is ground for termination as most firms have a duty to report lawsuits. If a firm terminates you this will lead to a public disclosure on your BrokerCheck that is published by FINRA. Your Form U-5 could also contain negative information that can harm your future employability.

• What is my duty if named in a lawsuit to regulators?

  • FINRA and state regulators usually require disclosure of any lawsuit if the allegation for damages is over a certain threshold. These updates are usually required by a Form U4 of Form ADV, depending on your registration. Failure to report is a common way to trigger a regulatory investigation by FINRA or a state regulator. This can result in penalties that can be monetary and/or suspension.

• What happens if my firm offers to have the firm attorney represent me?

  • Be very careful in this situation, a firm lawyer will have the best interest of the firm in mind, even if that firm’s best interest is not in your best interest. We have seen several instances where a firm will opt to settle a matter and the settlement is only disclosed on your BrokerCheck by FINRA. This results in you harmed by the firm attorney. While it may cost more, HLBS recommends you consult with independent counsel on this decision.

• What duty do I owe to the person filing the lawsuit?

  • The rules are strict on this point, if the other side is represented by an attorney, you cannot contact this individual anymore. In addition, you are under the obligation to preserve evidence as this will be important later in the lawsuit when discovery is conducted.

• What are common causes of actions in a lawsuit?

  • This is going to depend on who is bringing the lawsuit: is it the Customer, Financial Adviser, or a Firm? Typical causes of actions can be breach of contract (including but not limited to a promissory note, noncompete, firm handbook), suitability, failure to supervise, negligence, unauthorized trading, and breach of fiduciary duty.

• What are potential options to resolve a lawsuit?

  • There are many ways to resolve a lawsuit, the most common way lawsuits are resolved is by settlement. Settlements happen because lawsuits are expensive and tiring for all parties, often time, it makes more sense to settle due to the costs associated with taking a case all the way to trial. Cases can be disposed of in different stages of a case by motion. Cases are usually dismissed by motion if there isn’t a shred of evidence against you, the case is time barred, or the case was filed in the wrong forum or jurisdiction. Another way a case is resolved is if the claimant voluntarily withdraws the case. The final way to dispose of a case is by trial and have a fact finder (judge or jury) reach a decision.

 Arbitration

• What is FINRA Arbitration?

  • FINRA Arbitration is the largest dispute resolution program in the country when it comes to financial advisors. The main reason for FINRA Arbitration being the largest dispute resolution program is because financial advisors are required to agree to an arbitration agreement in FINRA when they sign the Form U-4. The FINRA Code provides the rules and procedure for FINRA Arbitration. Decisions in arbitration are rendered by a panel of neutral arbitrators that are selected by the parties. Most arbitrations are resolved by settlement.

• What happens if I am named in FINRA Arbitration?

  • You will know that you have been named in a lawsuit because of the arbitration agreement in place by signing the Form U-4 required by FINRA. The dispute resolution program will serve you with notice of the lawsuit when it is filed. The initiating legal document in FINRA Arbitration is called a Statement of Claim (“SOC”). The SOC outlines the claims that have been made against you. Typically, both the firm and advisor are named by the complaining customer’s counsel.

• How long do I have to respond to a Statement of Claim filed in FINRA Arbitration?

  • In most cases, the FINRA code provides a 45-day window to file a Statement of Answer (“SOA”), the SOA provides a response and defenses to the allegations made in the SOC. In addition, you can also make counter claims against the filer of the SOC, if applicable. This 45-day window allows you a good amount of time to retain counsel. The 45-day window can be extended with an extension agreed upon by both parties.

• What if my firm offers to have the firm attorney represent you?

  • Be very careful in this situation, a firm lawyer will have the best interest of the firm in mind, even if that firm’s best interest is not in your best interest. We have seen several instances where a firm will opt to settle a matter and the settlement is only disclosed on your BrokerCheck by FINRA. This results in you harmed by the firm attorney. While it may cost more, HLBS recommends you consult with independent counsel on this decision.

• What is my duty to my employer if I am named in a FINRA Arbitration?

  • In the rare instance in which you are individually named in a FINRA Arbitration, you are usually required to report it to your employer based on firm policy. In addition, regulatory requirements require you to report or update your form U-4 based on certain complaints, allegations, and lawsuits filed against you. Consult with your firm’s compliance department or counsel when reporting.

• When should I expect an arbitration to be filed by a customer?

  • In most cases, FINRA Arbitration can be expected when informal complaints are filed with the firm. These complaints are investigated by the firm and the firm can either deny the complaint or settle the complaint. If the customer is not satisfied with the resolution and is making escalating threats against you or the firm, you should probably start looking into hiring an attorney to be proactive.

• What happens after I file a Statement of Answer to the Statement of Claim?

  • The next step is to rank arbitrators to form a 3-person neutral panel that will make rulings and decide the resolution of the case if it goes to hearing. After a panel is selected, FINRA will schedule an Initial Pre-hearing Conference (“IPHC”) to select discovery cutoff dates and a final arbitration hearing. In some IPHCs, other dates are selected like mediation, motions to compel, witness lists, and exhibit lists.

• What is my duty if named in a lawsuit to regulators?

  • FINRA and state regulators usually require disclosure of any lawsuit if the allegation for damages is over a certain threshold. These updates are usually required by a Form U4 of Form ADV, depending on your registration. Failure to report is a common way to trigger a regulatory investigation by FINRA or a state regulator. This can result in penalties that can be monetary and/or suspension.

• What are common causes of action in FINRA Arbitration?

  • This is going to depend on who is bringing the lawsuit: is it the Customer, Financial Adviser, or a Firm? Typical causes of actions can be breach of contract (including but not limited to a promissory note, noncompete, firm handbook), suitability, failure to supervise, negligence, unauthorized trading, and breach of fiduciary duty.

• What happens if I am named in a different arbitration forum such as AAA or JAMS?

  • HLBS Law has experience in these arbitration forums as well. The rules in these forums are in general, like FINRA Arbitration. Response times and other procedural requirements vary slightly, but the general procedure outlined in FINRA Arbitration are similar in nature. The big difference between the forums are forum fees that are expensive and arbitrator selection.