When a broker-dealer or registered representative is suspected of violating industry conduct rules, FINRA investigates and enforces discipline through the Code of Procedure. Unlike arbitration, which resolves monetary disputes between industry parties, the Code of Procedure is a formal regulatory disciplinary process designed to punish misconduct, protect investors, and maintain market integrity.
Investigations can stem from routine firm examinations conducted by FINRA staff or from serious customer complaints detailing severe financial losses and rule violations.
Investigation and Response Requirements
When FINRA opens an inquiry under the Code of Procedure, the respondent receives formal written notification detailing the allegations.
The respondent must provide a written response to all information requests within 25 days. Registered persons and member firms are required by regulation to cooperate fully with FINRA investigators by producing requested documents, financial records, and sworn testimony.
Three Pathways to Resolving Disciplinary Charges
Respondents facing disciplinary charges under the Code of Procedure generally navigate one of three resolution methods:
- Acceptance, Waiver, and Consent: FINRA may offer a summary complaint procedure. If the respondent accepts the findings and proposed sanctions, they execute an Acceptance, Waiver, and Consent agreement within 10 business days. By signing this agreement, the respondent accepts the outcome and waives their right to a hearing and any future appeals.
- Offer of Settlement: A respondent can submit an offer of settlement proposing their own penalties and conditions before a formal hearing takes place.
- Contested Hearing: If the respondent rejects settlement offers or denies the charges, the matter proceeds to a formal disciplinary hearing. While not held in a civil court of law, the proceeding resembles a trial where the respondent is typically represented by legal counsel.
Potential Penalties and Fine Structure
If a respondent is found to have violated conduct rules through an Acceptance, Waiver, and Consent agreement, an accepted offer of settlement, or a contested hearing decision, FINRA can hand down any of the following penalties:
- Censure: A formal public reprimand detailing the nature of the violation.
- Fine: Monetary penalties assessed against the individual or firm.
- Suspension: A temporary prohibition from associating with a specific member firm or all member firms for up to 1 year.
- Expulsion: A mandatory revocation of membership applying exclusively to member firms for up to 10 years.
- Bar: A permanent prohibition preventing an individual from working in the securities industry.
Regarding financial penalties, FINRA sets no maximum cap on fines for major conduct violations. While minor rule violations may carry a capped fine threshold, severe infractions can result in unlimited monetary penalties based on the extent of the misconduct.
The Appeals Process
A major distinction between the Code of Arbitration and the Code of Procedure is the existence of an appeals process. In arbitration, decisions are final and binding. Under the Code of Procedure, a respondent who is dissatisfied with a hearing decision has the right to appeal through a three-tier review hierarchy:
- Appeal to the National Adjudicatory Council: The first level of review is conducted internally by the FINRA National Adjudicatory Council.
- Appeal to the Securities and Exchange Commission: If the National Adjudicatory Council upholds the sanction, the respondent can appeal to the Securities and Exchange Commission.
- Appeal to the Federal Appellate Court: If necessary, the final level of appeal is brought before the appropriate United States Federal Appellate Court.
While appealing a disciplinary decision involves significant legal fees and rarely leads to an overturned ruling, the Code of Procedure guarantees this structured path of regulatory and judicial review.