Inside the Litigation Lion

FINRA’s “Present,” The Wells Notice: Is It Beatable?

The dreaded Wells Notice is one “present,” no matter what time of year, that registered representatives and broker-dealers loathe to receive.  Is it the beginning of the end?  Far from it!  While there is certainly mail one would rather receive, a Wells Notice is simply a letter that FINRA or the SEC sends to individuals or firms (the “Subject”) when it intends to commence an enforcement action. The Notice states that FINRA or the SEC has made a determination that it will commence a litigation/arbitration against that Subject.  Specifically, a Wells Notice from FINRA, means that FINRA will be bringing a disciplinary proceeding a/k/a an enforcement arbitration.  The Wells Notice provides the Subject the opportunity to explain why, through the facts and the law, the enforcement action should not be brought.  While the Notice is not mandatory, it is the custom of both the SEC and FINRA to send one.  

The name "Wells Notice" comes from the Wells Committee of the SEC, which was named after John Wells, its chair, in 1972.  That committee recommended, among other things, that “a prospective defendant or respondent should be notified of the substance of the staff’s charges and probable recommendations in advance of the submission of the staff memorandum to the Commission recommending the commencement of an enforcement action and be accorded an opportunity to submit a written statement to the staff to be forwarded to the Commission together with the staff memorandum."

But the Wells Notice is not the beginning of the end.  It just, as we lawyers say, sets forth the allegations against the Subject and allows that Subject to “join issue” by submitting a response.  Are those allegations beatable?  Often times, yes!
Because this article is generally read by brokers/registered representatives, it will focus on the FINRA Wells Notice.   Similar rules apply to the SEC Wells Notice.  The main exception is that when it comes to the SEC, it brings an action in federal court, not before a FINRA arbitration panel.

First and foremost, long before any Wells Notice is handed out, typically FINRA has already commenced an inquiry and/or an investigation.  That is, the Subject generally has already produced to FINRA, pursuant to FINRA Rule 8210, documents and/or information.  In most cases, FINRA has also already conducted an On The Record (“OTR”) interview of the Subject which enabled FINRA to elicit testimony from the Subject to allow it to better understand the facts and allows the Subject to explain those facts and more to the point, do it with your attorney.   Many brokers take that OTR for granted, do not hire counsel and just “wing it.”  That is an extremely risky strategy.  That is because once one testifies under oath, that testimony is, if you will, locked.  Yes, what many brokers do not understand is that the second purpose of the OTR is to solidify a broker’s testimony so that, should FINRA decide to commence an enforcement proceeding, that testimony can be used to nail the broker for allegedly violating a FINRA rule or rules.

So, the way to beat the enforcement hearing is to realize that in every step along the way -- from the sales practice audit, to the Rule 8210 production and, most importantly, through the OTR and response to the Wels Notice -- FINRA is making a determination as to whether any wrongdoing occurred.  Like everything else in life, be prepared!!!  

Don’t walk into an OTR without pouring through the documents.  Don’t answer questions posed by FINRA in a written request or even informally without understanding where it is going with the question.  Go through the documents, the information and the facts with your lawyer. Second, there are strategies to employ at the OTR that can help you in defending any eventual enforcement hearing.  Yes, at an OTR a broker is under oath and it is imperative that he/she always tell the truth.  But with experienced counsel at his/her side, there are methods and strategies in which to minimize any potentially damaging testimony.  Third, once the Wells Notice is received, FINRA will not proceed against a Subject where the response is well reasoned, thorough and supported by legal authority, as it will lead the examiner and FINRA enforcement to conclude that it will lose any arbitration.  Fourth, the broker must remember that the Wells Notice is the beginning of the process.  Just because FINRA decides to bring an arbitration does not necessarily mean that it’s game over.  FINRA must still prove that the Subject engaged in whatever violation it alleges.  Yes, FINRA must prove its case through the submission of evidence at the hearing.  In that action discovery is conducted to enable the Subject to mount a defense to the charges.  Thus, there are several actions and strategies that effective counsel can do throughout discovery and in preparation for the hearing to enable the Subject to simply beat FINRA.  And yes, many times FINRA simply loses the hearing.  And yet other times FINRA actually wins the arbitration and then loses the appeal.  That’s right!  Even if FINRA wins, the Subject has a right to appeal an enforcement arbitration decision to the National Adjudicatory Counsel (the “NAC”).  And that is not even the end.  Thereafter, there are other avenues to defend any eventual negative finding.

No broker wants to receive a Wells Notice.  For that matter, no broker wants to even be the subject of an inquiry or an investigation.  However, the one thing to keep in mind is that a Wells Notice, inquiry or investigation is far from the end.  It is the beginning of a process that, through effective counsel, good strategy and a strong defense, may be winnable. 

Richard Roth is the founder and president of The Roth Law Firm, PLLC, a boutique litigation firm that concentrates in litigating securities arbitrations and SEC/FINRA enforcement actions.

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Richard Roth

Richard Roth is the founder and president of The Roth Law Firm, PLLC, a boutique litigation firm that concentrates in litigating securities arbitrations and SEC/FINRA enforcement actions. He...
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