No Dice in Taking the Fifth

In January 2017, the Securities and Exchange Commission (“SEC”), issued Release No. 79722, In the Matter of Behnam Halali, ruled a broker raising the Fifth Amendment against self-incrimination is still required to participate in FINRA Enforcement proceedings.

A broker asserted his Fifth Amendment Right of the U.S. Constitution in refusing to appear in a FINRA Enforcement request taking his testimony.  The broker was a named defendant in a federal criminal complaint and FINRA Enforcement sought to ask him about the criminal indictment, in addition to a customer complaint.  The broker failed to appear, and FINRA suspended and then expelled him pursuant to FINRA Rule 8210. Never did the broker request a review of the suspension even after FINRA notified him he could file a written request for termination of the suspension.  After FINRA had barred the broker, he applied for review with the SEC.

The SEC dismissed the broker’s application citing his failure to exhaust his administrative remedies.

Courts have held the Fifth Amendment Right against self-incrimination does not apply to FINRA enforcement proceedings and does not exhaust administrative remedies.  The SEC quoted various court cases stated,

“[I]nterrogation by [an SRO] in carrying out its own legitimate investigatory purposes does not trigger the privilege against self-incrimination.” This is because “[m]ost of the provisions of the Fifth Amendment, in which the self-incrimination clause is imbedded, are incapable of violation by anyone except government in the narrowest sense.” And it “has been found, repeatedly, that [FINRA] itself is not a government functionary.” Accordingly, we have held repeatedly that Rule 8210’s requirement that persons associated with FINRA member firms provide information in response to FINRA’s requests does not impinge on the privilege against self-incrimination.

The Fifth Amendment did not apply because FINRA was not a governmental agency.  However, any exceptions applying the Fifth Amendment in a FINRA proceeding was moot, because the broker never participated.  (The SEC has held a broker may refuse information requests based on the Fifth Amendment when there is a high degree of integration between FINRA and the government, such as FINRA investigating at the request of the government, such as the Federal Bureau of Investigations or District Attorney’s Office.)

The lesson to be learned is when a broker is summoned to appear in a FINRA On-The-Record proceeding, he or she must attend or will be suspended despite having any good faith defenses.