FINRA has been conducting an investigation regarding an allegation that I was selling away. They’ve now offered me the choice of entering into a settlement of the charges or proceeding to a disciplinary hearing. I don’t think I did anything wrong, but my attorney says we should settle. I know you can’t tell me what to do without knowing all the details, but what happens if I want to go to a hearing?

Breaking this down logically, your two options are to either tell FINRA you’re willing to discuss a settlement of the allegations, or that you’re not willing to discuss settlement.

The possible outcomes for each choice are as follows:

If you engage in a settlement discussion, FINRA will respond with an offer. They will most likely seek a fine and a suspension.

The likelihood, however, is that the final offer would be something less than their original proposal. At that point, you would either work out a settlement or reject their final offer.

If either you or FINRA reject the other’s final offer, you’ll face the same situation you would be in if you had declined to discuss settlement in the first place.

In that case, FINRA would file a Wells notice indicating they will seek enforcement action. They will seek to take your testimony in a deposition, then schedule a hearing before an officer.

If you decide to cooperate, you will have to appear for testimony and before the hearing officer. Depending on the strength of their case, if the officer were to find against you, he could very likely impose whatever sanctions FINRA is seeking.

In that case, you would have no opportunity to negotiate for a lower sanction.

If you decide not to cooperate, FINRA will proceed with the hearing anyhow, and, in light of your non-cooperation, they will most likely impose a lifetime ban.

Consequently, entering into settlement discussions with FINRA has the best chance for the most positive outcome. Even if, at the end, you do not want to accept their settlement offer, there is nothing forcing you to do so. At that point, you’d be no worse off than if you’d told them you don’t want to discuss settlement at all.

I have a friend who’s a registered investment adviser. He mainly deals with mutual funds, so when he has a client who wants to trade equities, he refers them to me. I want to pay him a referral fee, but my compliance office says it’s not permitted. Why is it that the adviser can pay me a referral fee when I send him someone, but I can’t pay him a referral fee?

There is a difference between your friend, as a registered investment adviser, paying a referral fee to a person acting as a solicitor for referring him an advisory client, and you paying him what amounts to transaction-based compensation for investing in a particular security.

In your case, you would be paying the adviser a percentage of your commission, which is transaction-based compensation. In order to receive that payment, your friend would have to be a registered representative of a broker-dealer.

However, when you send him a client, he’s only paying you a percentage of the fee for the advisory services. The referral compensation is not tied directly to an investment in a particular security.

Note, however, that even in the case of a solicitor, most states require that the solicitor be registered as an investment adviser representative, either of their own advisory firm or of the advisory firm they are soliciting for.

Florida, however, is one of the few states that doesn’t require a solicitor to be registered as an investment adviser representative, as long as the solicitor otherwise complies with the federal solicitor rule.

Alan J. Foxman

Alan J. Foxman

Alan J. Foxman is a partner in the law firm of Dew Foxman & Haugh and a senior consultant with National Compliance Services in Delray Beach, Fla.