Know When to Hold ‘Em…

In a recently published paper, law firm Sutherland Asbill & Brennan poses the question: when should broker/dealers and advisers play it safe or tough it out when facing litigation from the SEC or FINRA? 

When advisers are faced with the possibility of litigating against the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA), many often decide to settle right away, rather than dragging the case into timely and costly litigation.  However, after examining cases dating back to 2005, Sutherland Asbill & Brennan explains in its paper that sometimes, “swinging for the fences” is the right decision.    

The paper, “Swinging for the Fences: An Analysis of Whether Broker-Dealers and Registered Representatives Should Litigate Against the SEC or FINRA,” uses a baseball metaphor throughout, arguing that just as a batter sometimes swings and sometimes doesn’t, advisers need to do the same.  To see whether advisers should adopt an aggressive approach at the plate, the firm has conducted a study of litigated disciplinary proceedings brought by FINRA against broker/dealers, registered representatives, and associated persons since 2005.  The firm also analyzed administrative proceedings brought by the SEC since 2008.

Of the 237 charges that were litigated by the SEC and FINRA and resulted in SEC initial decisions or FINRA Hearing Panel decisions during fiscal years 2009 and  2010 (October 2008 through September 2010), B/Ds and individuals succeeded in getting approximately 13% of the charges dismissed.

For advisers going up against FINRA, the numbers of cases winning a dismissal are shrinking, however. Approximately 7.6% of charges were dismissed, although they had slightly greater success during FY 2010 (8.6%) compared with FY 2009 (7%). Both years represent declines from FY 2008 when FINRA respondents succeeded in getting 15% of the charges dismissed.

Those going up against the SEC had a relatively high success rate during the period (approximately 28%), which was greater than in FY 2008 (approximately 19%).

The firm contends that “many broker-dealers, registered representatives, and associated persons fear going up to the plate and litigating against regulators because regulators are well-funded, have often spent months or even years investigating the conduct, have their own procedural rules, and have an employee of the regulator serve as a judge. Respondents fear that litigating in “the house that the regulators built” gives the SEC and FINRA a competitive advantage.”  But sometimes, it pays for advisers to litigate, rather than settle.

Sometimes, of course, advisers are dealt monetary penalties. When SEC and FINRA respondents were found to be liable for one or more charges, 33% of the time the SEC Administrative Law Judge (ALJ) or FINRA Hearing Panel imposed lower monetary sanctions than those sought by the regulators. This is a notable change from FY 2008, when respondents succeeded in obtaining lower monetary sanctions 60% of the time.

The law firm also looked at the prevalence of suspension times, the outcomes of appeals, time spent in litigation, and the effect of having counsel representation.  The paper is available here.