The SEC Does Not Care about Your FINRA Document Request

May 8, 2013

If you are a broker-dealer or a registered representative at one, you sign on for some meddling by FINRA.  The self-regulatory organization is responsible for overseeing your securities business and even for your outside business activities.  So if FINRA asks you for documents related to those activities, you pretty much have to turn them over.  Gregory Evan Goldstein found this out the hard way in an SEC administrative opinion in February.

Facts and Procedure

FINRA began investigating one of its member firms, Marquis Financial Services, Inc. and its employees, including Goldstein, in 2010 after receiving a referral about suspicious trading in penny stocks at Marquis.  During the investigation, FINRA learned that Goldstein had been operating an outside consulting business called Wall Street at, Inc., since at least 2005, but had failed to report that activity as FINRA Rule 3270 requires.

As Goldstein stipulated, Wall Street at Home is an indirect owner of Marquis: Wall Street at Home owns 100 percent of a holding company called Steven Gregory Securities, which in turn owns at least 95 percent of Marquis.  Goldstein also stipulated that he is the president of all three companies and the sole officer and voting stockholder of Wall Street at Home and that neither Steven Gregory Securities nor Wall Street at Home ever had any employees.

On January 9, 2012, FINRA staff conducted an on-the-record interview of Goldstein pursuant to Rule 8210, during which FINRA staff asked Goldstein questions about his activities at Wall Street at Home, including the company’s ownership structure.  Goldstein declined to identify any minority shareholders or to acknowledge whether Wall Street at Home had any investment accounts.  Goldstein also declined to identify any customer for whom he provided consulting work or to specify an industry in which he had performed such work.  After the interview, FINRA sent Goldstein a written request for information and documents pursuant to Rule 8210, and again zoned in on the ownership of Wall Street at Home.  Goldstein refused to respond to the written requests, claiming FINRA had no authority to require an associated person to produce documents relating to a third party.

The FINRA staff did not love this response, and issued a notice of suspension to Goldstein on March 13, 2012.  A FINRA hearing panel suspended Goldstein on January 4, 2013, finding that he had failed to respond to FINRA’s requests as he was required to do under Rule 8210.

Goldstein’s Appeal

Goldstein appealed his suspension and moved to stay the imposition of any sanctions.  He argued that by asking for documents and information about an unrelated third party, FINRA engaged in an impermissible fishing expedition and violated his due process rights.  FINRA opposed Goldstein’s motion, arguing that its rules expressly require associated persons to disclose outside business activities “precisely for the purpose demonstrated here – to enable both member firms and FINRA to oversee and, if necessary, investigate associated persons’ activities away from member firms.”  FINRA added that, because of Wall Street at Home’s close connections to both Goldstein and Marquis, Wall Street at Home is not an unrelated third party.  “Indeed,” FINRA argued, “the business and financial affairs that Goldstein operates through Wall Street At Home have a direct relationship to Marquis Financial’s customers because they purchased minority interests in Wall Street At Home through Marquis Financial.”

The SEC’s Decision

As for Goldstein’s motion, the SEC was not impressed.  As the opinion noted, Rule 8210 expressly requires associated persons to provide information and testify “with respect to any matter involved in [a FINRA] investigation, complaint, examination, or proceeding.”  The rule also says flatly, “No member or person shall fail to provide information or testimony or to permit an inspection and copying of books, records, or accounts pursuant to this Rule.”  Here, the SEC did not find FINRA to be seeking information from an unrelated third party but, rather, information about Goldstein himself.  Wall Street at Home was simply not an unrelated party, as it had close ties to both Goldstein and Marquis.  Goldstein also did not establish that FINRA’s requests raised “privacy and confidentiality issues,” as FINRA investigations are non-public and confidential.  The SEC also said Goldstein appeared unlikely to succeed on his due process claims because FINRA is not a state actor.  Under Exchange Act Section 15A(b)(8), FINRA is required only to “provide a fair procedure for the disciplining of members and persons associated with members.”

Again, if you’re a broker-dealer or registered representative, you can’t dance around your obligations to provide documents and testimony when FINRA asks for them.  Your securities business is under scrutiny.  Even your non-securities business is under scrutiny.  Answer the call or get into another line of work.

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