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FINRA Proposes OHO and NAC Hearings Via ZOOM
September 3, 2020
As if things weren't bad enough among the FINRA broker-dealer community, now the self regulator wants to force respondents to participate in ZOOM teleconferenced regulatory hearings before its Office of Hearing Officers ("OHO") panels and its National Adjudicatory Council ("NAC"). FINRA Files Proposed Rule Change To Conduct OHO and NAC Hearings Via Video Conference
https://www.finra.org/sites/default/files/2020-08/SR-FINRA-2020-027.pdf
As set forth in part in FINRA's filing with the SEC [Ed: footnotes omitted]:
In seeking to implement the so-called temporary video protocol, FINRA asserts that:(a) Pursuant to the provisions of Section 19(b)(1) of the Securities Exchange Act of 1934 ("Act" or "Exchange Act"), the Financial Industry Regulatory Authority, Inc. ("FINRA") is filing with the Securities and Exchange Commission ("SEC" or "Commission") a proposed rule change to temporarily amend FINRA Rules 1015, 9261, 9524 and 9830 to grant FINRA's Office of Hearing Officers ("OHO") and the National Adjudicatory Council ("NAC") authority to conduct hearings in connection with appeals of Membership Application Program decisions, disciplinary actions, eligibility proceedings and temporary and permanent cease and desist orders by video conference, if warranted by the current COVID-19-related public health risks posed by an in-person hearing. As proposed, these temporary amendments would be in effect through December 31, 2020.
The outbreak of COVID-19 has disrupted critical adjudicatory functions nationwide due to the serious public health risks it poses in connection with conducting traditional, in-person hearings. In order to comply with the guidance of public health authorities and to ensure the safety and well-being of parties, counsel, adjudicators and FINRA personnel, FINRA has administratively postponed in-person OHO and NAC hearings for over four months now - starting on March 16, 2020, with in-person hearings currently postponed through October 2, 2020. The result is an expanding backlog of cases, which if left unchecked, will compromise FINRA's ability to provide timely adjudicatory processes and fulfill its statutory obligations to protect investors and maintain fair and orderly markets.
at Page 4 of the Rule Proposal
In justifying the resort to video hearings, FINRA asserts that:
FINRA's protocol for conducting hearings by video conference will ensure that such hearings maintain fair process for the parties. FINRA will, among other things, use a high quality, secure and user-friendly video conferencing service and provide thorough instructions, training and technical support to all hearing participants.6 In addition, FINRA has experience conducting numerous hearings and oral arguments utilizing video conferencing technology in similar contexts.7= = = = =FOOTNOTE 6: FINRA plans to conduct video conference hearings using Zoom, a program that has been vetted by FINRA's information technology staff. FINRA may consider alternate video conferencing services, if those services have features and capabilities analogous to those available through Zoom.FOOTNOTE 7: From the postponement of in-person hearings starting on March 16, 2020, through August 21, 2020, 43 FINRA arbitration cases have proceeded with one or more video conference hearings conducted via Zoom. Of those 43 cases, 23 conducted one or more video conference hearings pursuant to the parties' joint motion. As of August 21, 2020, the NAC, through the relevant Subcommittee, has conducted 3 oral arguments by video conference using Zoom in connection with appeals of FINRA disciplinary proceedings pursuant to FINRA Rule 9341(d), as temporarily amended. See infra note 19.
at Page 5 of the Rule Proposal
Bill Singer's Comment
Yet another example of how FINRA's Board of Governors has abdicated its role in overseeing the self-regulatory-organization's conduct.
Absent from FINRA's proposal is a meaningful consideration of the likely prejudice that industry respondents will suffer from the lack of in-person-and-in-the-same-room presence of their legal counsel because of COVID-related distancing concerns. Additionally, there is no substantive discussion about how FINRA's lack of constitutional due process protections will be exacerbated by forcing those who should be presumed innocent unless and until proven guilty by a preponderance of the evidence during an OHO hearing to conduct their defense remotely and without the ability to confront witnesses in person in the same room. Given that the observation of one's demeanor is often a critical issue for any finding of fact, it is ridiculous for FINRA to allege that video proceeding offers the same opportunities as a live hearing with all participants and hearing officers in the same hearing room.
In Department of Market Regulation, Complainant, v. Alex Lubetsky, Respondent (Decision, FINRA Office of Hearing Officers, Expedited Proc. No. FBI140011, STAR No. 20110297130-02 / March 12 2015)
https://www.finra.org/sites/default/files/OHO_9550Expedited_Lubetsky_FPI140011_0.pdf, FINRA suspended Respondent Lubetsky with the threat of a follow-on Bar for his refusal to provide testimony at an OTR. In Lubetsky, FINRA's OHO asserts that it is not a governmental actor and, as such, there are no Due Process rights or other Constitutional protections [Ed: footnotes omitted and highlighting added]:
[In] June 2014, in connection with its investigation and pursuant to Rule 8210, Market Regulation issued a written request for Lubetsky to appear for an OTR.7 The Rule 8210 request scheduled Lubetsky's testimony for July 8, 2014. Attached to the request was an Addendum informing Lubetsky that: (1) he was "obligated, under FINRA rules, to answer all questions asked by FINRA staff;" (2) FINRA "is not a governmental agency, and thus, does not recognize the Fifth Amendment privilege against self-incrimination in any of its proceedings, including an OTR;" (3) should he "refuse to answer any questions based on an assertion of the privilege, [he] may be subject to a FINRA disciplinary action and the imposition of sanctions, including a bar from the securities industry, suspension, censure, and/or fine;" and (4) "FINRA is subject to oversight by the SEC and routinely provides the SEC with access to its files."
Pointedly, in briefs that FINRA regularly submits to the SEC, the self-regulator admits that it is not a governmental actor and Due Process protections do not apply; e.g., "FINRA's Brief In Opposition to Application for Review In the Matter of the Application of The Association of Robert J. Escobio with Southern Trust Securities, Inc." (Brief submitted to SEC, November 24, 2017) [Ed: emphasis added]
https://www.sec.gov/litigation/apdocuments/3-18143-event-10.pdf:
https://www.sec.gov/litigation/apdocuments/3-18143-event-10.pdf:
Footnote 15: Further, the Commission's precedent discussed herein belies Escobio's argument that adjudicating the Application while his appeal of the Judgment was pending denies him of due process or is otherwise unfair. See infra Part III.A. I. In any event, FINRA is not a state actor such that constitutional due process rights apply in FINRA proceedings. See D.L. Cromwell Jnvs., .lnc. v. NASD Regulation, Inc., 279 F.3d 155, 162 (2d Cir. 2002) (stating that it is a well-settled principle that FINRA is not a governmental actor); Charles C. Fawcett, Exchange Act Release No. 56770, 2007 SEC LEXIS 2598, at *13-14 (Nov. 8, 2007) (same); see also Robert J. Prager, 58 S.E.C. 634, 662-63 (2005) (holding that in determining the fairness of FINRA's proceedings, the Commission looks to whether the proceedings were conducted in accordance with FINRA's rules and whether FINRA implemented its procedures fairly).
Without the protection of Due Process, no one should take lightly FINRA's rule proposal about videoconferencing regulatory hearings. The consequences of testimony during a ZOOM OHO/NAC hearing can lay the foundation for the imposition of significant fines and crippling suspensions/Bars -- all of which are added on top of considerable legal fees incurred in such regulatory investigations and hearings. All the more reason for any respondent to hit the Pause button before logging on to an outdated home computer, competing with your self-quarantined family for bandwidth, and participating in a career-threatening regulatory hearing while you are in a one-bedroom apartment within ear-shot of your spouse and children. Sure, when I put it that way it seems unfair for FINRA to pressure a respondent into a teleconferenced ZOOM hearing. Which is why I put it that way.
Among the more infuriating aspects of FINRA's proposal is that those who FINRA has charged (and intends to charge) with misconduct are NOT responsible for the postponement of OHO/NAC hearings since March 16, 2020. COVID and only COVID has prompted the postponements. It is that horrific pandemic that has produced over 6 million cases with over 190,000 deaths in the United States. It is COVID that fosters FINRA's assertion that the"expanding backlog of cases, which if left unchecked, will compromise FINRA's ability to provide timely adjudicatory processes and fulfill its statutory obligations to protect investors and maintain fair and orderly markets." Yes, FINRA has a backlog of cases. And many restaurants are still unable to open. And movie theaters are still shuttered. And many folks cannot get into their offices. And many business have failed. And more men and women will die from the COVID. And . . . well, you know, we're all sort of dealing with this pandemic as best we can.
We are asked to accept as an act of faith that "FINRA's protocol for conducting hearings by video conference will ensure that such hearings maintain fair process for the parties," and that FINRA will use a "high quality, secure and user-friendly video conferencing service." Clearly, FINRA doesn't get it. The issue of fair hearings is not one of bandwidth -- it is about due process and the right of confrontation at a self-regulatory-organization that has long proclaimed it is not subject to constitutional due process. Moreover, the mere fact that FINRA's proposal acknowledges that there will be a need to "provide thorough instructions, training and technical support to all hearing participants," clearly underscores that there are unique and additional considerations imposed upon already vulnerable respondents that require them to learn how to defend themselves through a newfangled conferencing system.
Among the most troubling aspects of FINRA's proposal is its apparent insensitivity to the advantage that FINRA will secure for its staff by forcing respondents to pursue their defenses via ZOOM hearings. As the proposal notes in part, "In addition, FINRA has experience conducting numerous hearings and oral arguments utilizing video conferencing technology in similar contexts." FINRA has OHO and NAC videoconferencing experience but most respondents and their lawyers will not have that same experience. Yet another advantage in favor of a regulator who will be prosecuting its docket on its home court before its hand-picked OHO judges and without any due process rights afforded to respondents. See, for example:
"GUEST BLOG: FINRA Hearing Process . . .BIAS . . . Real or Perceived???" (BrokeAndBroker.com Blog / August 1, 2019)http://www.brokeandbroker.com/4728/finra-hearings/"FINRA's Hearing Officers Are 70% Former FINRA And 30% Former SEC" (BrokeAndBroker.com Blog / August 2, 2019)http://www.brokeandbroker.com/4729/finra-hearing-officers/
Clearly, FINRA could lighten its regulatory load by seeking the consent of any given respondent to engage in a teleconferenced OHO/NAC hearing. Frankly, I don't much understand why that wasn't the proposed Pilot Project for at least the next three or so months. If the ZOOM option is so fair and so user-friendly, then there should be no reason for FINRA to compel respondents to avail themselves of the technology. Similarly, if respondents perceive a benefit from not having to travel to an OHO hearing room (and there will be such advantages from that option), then some teleconferenced hearings will be a favorable alternative to some respondents.
If FINRA wants to implement an "emergency" ZOOM regimen, I would think that the self-regulator should initially impose such a drastic remedy on cases involving alleged fraud upon public investors and for which Staff seeks a Bar. Many cases on FINRA's docket do not involve allegations of customer fraud but seek to redress alleged infractions of outside business activities, disputed business expenses, failure to timely disclose tax liens or bankruptcies, and the like. Such non-customer-fraud matters do not raise the same "public interest" considerations whereby a recidivist will be given further time to run amok. Accordingly, for respondents who are not presently registered with a member firm, FINRA could have proposed that they remain on the sidelines unless they agree to a ZOOM OHO hearing. When I was a regional attorney at NASD (FINRA's predecessor), we often had what management referred to as a "fire sale" during year-end when some director wanted to pad his annual stats and thought a bonus or promotion would depend upon clearing up a number of stale matters clogging up the docket. In those year-end days, a $20,000 fine was dropped to $10,000; an 18-month suspension would be reduced to one year. Perhaps FINRA needs to exhaust such horse trading before demanding ZOOM hearings?
FINRA's teleconferencing proposal fails to explain why in cases where FINRA is sincerely convinced that a given respondent is engaging in ongoing conduct that exposes the investing public to dangerous risk, that a referral could not be made to a state or federal criminal prosecutor, or a state or federal regulator. There seems to be more than a bit of hypocrisy in FINRA's proposal to the extent that it warns of dire consequences if the self-regulatory-organization can't ram-rod respondents through its disciplinary process via ZOOM -- in fact, FINRA could refer the worst malefactors to other government regulators or prosecutors. Frankly, such a threat might grease the path to a stipulation from such targets to consent to a ZOOM OHO hearing.
I am disappointed with the lack of zealous advocacy from FINRA's Board of Governors and from other traditional industry advocates. Way back in April 2020, when COVID's shadow was first falling across our lives, FINRA Small Firm Governor Stephen Kohn noted his concerns about the rush by the self-regulatory-organization to use ZOOM in lieu of in-person interviews/hearings. Guest Blog: Riddle Of The FINRA Sphinx By Stephen Kohn (BrokeAndBroker.com Blog / April 22, 2020)
http://www.brokeandbroker.com/5183/guest-blog-stephen-kohn/. As Kohn so aptly noted in part:
http://www.brokeandbroker.com/5183/guest-blog-stephen-kohn/. As Kohn so aptly noted in part:
Why the draconian insistence to bully respondents to part with what few rights they have in this regulatory process for fear of further rule violations?We all know that there are local, state, and federal directives against non-essential public transport and in favor of social distancing if not "lock downs." It seems ill-advised, if not illegal, for witnesses to travel to their lawyers' offices, or for the lawyer to travel to a witness's home, as FINRA itself has noted: https://www.finra.org/rules-guidance/key-topics/covid-19/shelter-in-place.I was also told that they were only pushing ahead with "serious violations." Coronavirus, has brought the world to its knees, not making any distinction of race, religion, political affiliation, anything, yet to the Regulators, it's business as usual, unempathetic, forging ahead, leaving a path of destruction in their wake. Does that not trump (no pun intended) Due Process in this instance?So, in an attempt to move Due Process along, to "help" complainants and respondents comply, it seems the medium of choice is Zoom. I can't imagine being called to any video interview or hearing, where the fate of my business and career is examined without my attorney and me being at the same table as our accusers. How am I supposed to obtain legal counsel if my attorney and me can't even meet at his office and review documents together or prepare for my testimony?
Small Firm Governor Kohn was recently defeated in a three-way race. His valuable voice will now be lost. The silence from his compatriots on the Board is deafening.
Among the more cynical aspects of FINRA's proposal is that it doesn't line up with the regulator's own sensibilities, as first noted on its COVID-19 Guidance webpage during the onset of the pandemic:
Impact on FINRA Events & ConferencesThe health and well-being of our employees and stakeholders is a top priority for FINRA. Therefore, FINRA is canceling or postponing several of our upcoming events.
Isn't that thoughtful! Out of concern for its employees' "health and well-being," FINRA cancelled or postponed a whole host of typically nonsensical events that often amount to little more than an excuse for a junket. Where is the same concern when it comes to cancelling or postponing OHO/NAC hearings out of concern for the health and well-being of the industry's men and women? Perhaps that's just not a top priority for the industry's regulator.
I am not an idiot and I am not oblivious to the consequences of FINRA's stalled docket. I represent defrauded investors. Also, I represent industry respondents who seek to clear their names or argue for reduced sanctions. Without question, FINRA has a mission and, at times, the public suffers when miscreants are allowed to ply their frauds until such time as a prosecutor or regulator can schedule a trial and obtain a verdict. I am not blind to that danger. On the other hand, the deck has been stacked for too long in favor of FINRA staff, and at some point a line must be drawn and traditional notions of fair play must matter.