Sutherland Asbill & Brennan LLP has completed its annual analysis of litigated disciplinary proceedings brought by the Financial Industry Regulatory Authority (FINRA, formerly NASD) against broker-dealer firms and registered representatives. The study, authored by partner Brian L. Rubin and associate Christian J. Cannon, analyzes cases from January 2006 through June 2007 where the self-regulatory organization charged respondents with violating NASD rules and U.S. Securities and Exchange Commission rules and statutes.

What follows are among the findings of the study:


FINRA disciplinary proceedings begin when a complaint is filed, and culminate in a hearing before a Hearing Panel that comprises two current or former industry members and one Hearing Officer, who is a FINRA employee. The Hearing Officer serves as Chair of the Hearing Panel and oversees the proceedings with authority to make all rulings about the schedule, the procedures, and what evidence will be admitted. The Hearing Officer also writes the decision of the Panel.

The study revealed the following regarding Hearing Panel decisions:

Of all the charges alleged, approximately 90% of the time, the Hearing Panels ruled in favor of FINRA.

  • Member firms had more success than average, winning 22% of their cases outright. In contrast, no registered representatives had their cases dismissed entirely. They did, however, succeed in getting individual charges dismissed approximately 5% of the time.
  • Member firms, even where they lost on liability, were successful in beating back the staff's proposed sanctions 55% of the time. In one highly publicized case, using
    alternative theories, the staff sought a fine of either $28 million or a whopping $98 million; the Hearing Panel demurred, ordering a fine of $5 million.
  • In fraud cases, where the staff need to prove "bad intent," respondent firms and representatives had greater than average success, winning on the fraud charge approximately 17% of the time.
  • With regard to the staff's proposed fines, approximately 70% of the time, respondents convinced the Hearing Panel to order fines less than those demanded by the staff. When this occurred, the fines were reduced by 40%, from an average of approximately $30,000 sought to $19,000 ordered.
  • Respondents were less successful in convincing the Hearing Panels not to order the suspension or bar sought by the staff.
    • When the staff sought a suspension, respondents convinced the Hearing Panel to reduce it 56% of the time. When the Hearing Panel reduced the suspension, the period was reduced by 63%, from an average of 9.2 months sought to 3.4 months ordered.
    • When the staff sought a bar, respondents convinced the Hearing Panel to reduce it 48% of the time. When the Hearing Panel reduced the proposed bar to a suspension, it averaged 14.5 months.

Appeals to the National Adjudicatory Council

After the Hearing Panel trials, appeals are heard by the NAC, which is composed of representatives of member firms and the public. The study made the following findings regarding NAC decisions:

  • Respondents who appealed faced long odds with regard to sanctions. Approximately 84% had the sanctions against them either substantially affirmed or reduced by a de minimis amount.
  • Between January 2000 and February 2006, pro se litigants went 0-for-33 before the NAC. In a historic turn of events, on February 23, 2007, a pro se respondent succeeded in convincing the NAC to reduce his sanctions ($15,000 fine reduced to $10,000; nine month suspension reduced to zero).

Appeals to the U.S. Securities and Exchange Commission, Federal Courts of Appeals

Respondents who are unsuccessful before the NAC have the right to appeal to the SEC, and from there to the appropriate Federal Court of Appeals. The study made the following findings:

  • Respondents were not very successful in appealing to the SEC, losing approximately 71% of the time.
  • During 2006, the Federal Courts of Appeals issued only one decision addressing NASD disciplinary cases. The respondent lost.

Rubin (a former Deputy Chief Counsel with NASD's Enforcement Department) and Cannon (a former NASD registered representative) reviewed 55 Hearing Panel decisions, involving 67 respondents and 119 total charges. In addition, the study reviewed 32 NAC decisions, addressing the cases of 43 respondents. The SEC published 16 decisions addressing appeals by 21 respondents.

This year's study is a follow-up to two previous articles written by Rubin and Cannon. In May 2005, they authored an article entitled "The House That the Regulators Built: An Analysis of Whether Respondents Should Litigate Against NASD," published in BNA's Securities Regulation & Litigation Report. That study which analyzed litigated cases brought by NASD from 2000 through 2004, won the 2006 Burton Award for Legal Achievement. Rubin and Cannon also authored an analysis of litigated proceedings from January 2005 through December 2005. Those results were published in a May 2006 article entitled "The House That the Regulators Built (Revisited): An Analysis of Whether Respondents Should Litigate Against NASD," published in BNA's Securities Regulation & Litigation Report.