Financial Advisers – What Are They Hiding?


Financial advisers continue to object to a recent rule that grants securities regulators more access to potentially relevant documents under the adviser’s control. The Securities and Exchange Commission has approved a rule change proposed by the Financial Industry Regulatory Authority (FINRA) that significantly increases FINRA’s ability to discover a member firm’s documents.  FINRA is now empowered to require the production of such documents even though they are in the possession of another firm that is not a FINRA member – such as the investment advisory firm of one of its registered representatives. This development has been met with approval by those interested in investor protection and with consternation from many in the brokerage industry (“Brokers fear FINRA wants to dig fingers in outside pies,” by Dan Jamieson, InvestmentNews).

FINRA Rule 8210 has long required any firm or person subject to FINRA’s jurisdiction to produce their books, records and accounts. The amended rule now requires that such documents be produced to the extent that they are in a member’s or associated person’s possession, custody or control.  A document that is not in a member’s possession or custody is nevertheless within its control, and subject to production, if the member has the legal right, authority or ability to obtain it upon demand.

FINRA says it will use the rule to obtain a broker-dealer’s or associated person’s documents, but some in the industry have objected on the grounds that FINRA could use the rule to obtain completely irrelevant documents.

One prominent defense attorney was quoted as saying: “If you own another business, maybe even something like a restaurant, under FINRA’s interpretation, the documents owned by that restaurant could be viewed by FINRA because you control them. … There are lots of third-party entities that might share ownership with a B-D.  I’m not sure FINRA has a right to see those documents.”

Rule 8210, however, limits the scope of documents that are required to be produced to documents “with respect to any matter involved in the investigation, complaint, examination, or proceeding.”  To use the restaurant example, if a broker engaged in the outside business activity of selling ownership interests in the restaurant, or promissory notes issued by the restaurant, to customers of his member firm, relevant documents in the possession of the restaurant would (and should be) discoverable by FINRA from the member, if the member has the right to obtain them.

In a situation like this, in which the broker is “selling away,” the member firm typically does not have possession of the relevant documents, and may not have been aware of its broker’s outside business activities at all.   The issue is typically whether the firm should have been aware, and whether it clothed the broker with its “apparent authority” to sell the securities.

Page Perry is an Atlanta-based law firm with over 150 years of collective experience maintaining integrity in the investment markets and protecting investor rights.