Once again, Rule 8210 has me frustrated. And angry. Well, not the rule itself, but the aggressive manner in which FINRA continues to wield it, and how its scope is interpreted by hearing panels called upon to consider cases involving what seem to me, at least, to be troublesome uses of Rule 8210.
Let’s start by making a pretty obvious observation: Rule 8210 is not the equivalent of a search warrant. FINRA does not have the right to march into your office, slap an 8210 request on your desk, and then simply start rummaging through your drawers and file cabinets, looking for documents pertinent to its exam. Only law enforcement gets to do that, and even then they have to go to court – where, theoretically, some semblance of due process exists – to obtain permission to conduct such a search. Yet, when it comes to its own members and their documents, particularly electronic documents, i.e., documents maintained on a computer hard drive, FINRA takes the attitude that it is entitled to conduct the equivalent of a search warrant. And that is simply wrong.
Here’s the situation: let’s say that you’re the owner of a small BD, and you have a single laptop computer. On that laptop, you keep all the emails, documents, spreadsheets, whatever, that are related to the operation of the BD. All documents which FINRA is absolutely entitled to review. But, in addition, you also keep on the same computer all your personal stuff, i.e., pictures, personal emails, stuff wholly unrelated to the BD. All documents FINRA is clearly not entitled to review. Yet, according to FINRA, if you do maintain your documents like this, then, guess what? FINRA does get to look at your photos, your personal emails, etc. Here’s how FINRA put it last week in an Enforcement decision:
FINRA member firms and their associated persons . . . are on notice that FINRA may request the production of Firm materials, whether stored electronically or on hard copy. A firm or an associated person who nevertheless elects to commingle personal or unrelated business materials with member firm materials, whether stored electronically or in hard copy, does so at its own risk.
This is a staggering statement. Remember, if you choose to keep your personal documents and your BD documents in the same desk drawer in your office, that does not mean FINRA simply gets to open that drawer and rifle through everything that’s in it, regardless of whether it pertains to the BD. Before you produce the contents of that drawer, you can pull out your personal files so FINRA does not see them, and no examiner can do anything to prevent you from doing that. Yet, this statement suggests otherwise. It states that FINRA can somehow compel you to produce personal documents, whether in hard copy or in electronic format, if they happen to be “commingled” with firm documents. That, apparently, is the “risk” that is being referred to here.
This is, simply, wrong. The requirement to respond to a request for production of documents pursuant to Rule 8210 does not depend on where the documents may be located. Rather, according to the language of the rule itself, it depends merely on whether the documents in question (1) are in your possession, custody or control, and (2) relate to the subject matter of the exam. The mere fact that a firm document may be “commingled” with a personal document that has nothing to do with the exam does not magically render the personal document subject to FINRA’s review. FINRA is not entitled to the unrelated personal documents, no matter where they are located. The idea that somehow physical proximity to a firm document creates a “risk” that FINRA will insist on its supposed right to see something it is clearly not allowed to see is a scenario not at all contemplated by Rule 8210.
Abuse of Rule 8210 by FINRA examiners happens everyday. That’s bad enough. But, when hearing panels encourage that sort of activity by issuing pronouncements condoning it, even though it is clearly against the rules, enough is enough. Member firms must continue to speak out against FINRA’s increasingly aggressive use of Rule 8210, to challenge FINRA’s efforts to expand the scope of its jurisdiction to cover areas that are properly subject to the jurisdiction of other regulators. Otherwise, BDs run the “risk” that not only will FINRA force you to produce, among other things, those personal emails with your spouse that happen to reside on your laptop’s hard drive, but that the contents will be reviewed and held against you in an Enforcement action.