A recent 2-1 decision by the Financial Industry Regulatory Authority Office of Hearing Officers stretched Rule 8210 beyond its wording and intent, barring a registered representative in the process.
The case, Department of Enforcement v. Wilfredo Felix, et al., involved several issues, including Felix’s failure to produce his Wage and Income Transcript (IRS transcript), which he could have obtained by submitting an IRS Form.
An IRS transcript is an IRS-created document that shows “most line items” from tax returns, including adjusted gross income. During the investigation, FINRA staff asked Felix to produce his IRS transcripts (a very rare request), which he did not have in his possession, or to sign an IRS Form instructing the IRS to send them to him.
He refused, stating that FINRA’s request went beyond the scope of Rule 8210.
What Rule 8210 Requires
FINRA has the right to obtain “the books, records, and accounts of such member or person … that is in such member’s or person’s possession, custody or control.”
The Supplementary Material section explains that “of such member or person” refers to “books, records and accounts that the broker-dealer or its associated persons make or keep relating to its operation as a broker-dealer or relating to the person’s association with the member.”
The rule goes on to state that a firm or individual “must make available its books, records or accounts when these books, records or accounts are in the possession of another person or entity, such as a professional service provider, but the FINRA member, associated person or person subject to FINRA’s jurisdiction controls or has a right to demand them.”
What About IRS Transcripts?
Are IRS transcripts “of such member or person” or “its books, records or accounts”?
The answer should be no, but the Hearing Panel majority answered in the affirmative, ignoring and conflating the rule’s language.
First, the majority analyzed the issue by introducing words not found in the rule. The panel stated that, even though the IRS “maintained” the information, the tax information was:
personal to Felix and related to his association with a FINRA member firm. The 2013 IRS Transcript FINRA wanted therefore was “of” Felix because it concerned his own tax-related information even though the IRS stored it[.] (Emphasis added.)
The panel’s analysis does not withstand scrutiny. Simply because information is “personal” (which presumably means it is about him as a person) and “concerned” his taxes, does not mean that the IRS documents are books, records or accounts “of” Felix.
For example, while the Social Security Administration has records of a representative’s “personal” information, like date of birth, those documents are not books and records “of” the individual. Similarly, while a fund sponsor or insurance company may have information on their documents “concerning” a broker-dealer, that does not mean those documents are “of” the broker-dealer.
Second, the panel considered “Enforcement’s reliance” on a pre-hearing order in a different case, where a Hearing Officer (not a Hearing Panel) ordered a respondent who was litigating against FINRA to submit an IRS Form to the IRS.
The Panel’s reliance on this order is problematic for several reasons. In the order, the Hearing Officer did not analyze the wording of Rule 8210. She appears to have assumed that Rule 8210 applied. Thus, it is not “settled law” because the Hearing Officer made her ruling without considering the meaning of the word “of” or at least explaining her rationale.
In addition, a Hearing Officer’s pre-litigation order is not binding precedent on a different Hearing Panel.
A Hearing Officer order is certainly not precedential authority for a higher adjudicatory body, like a Hearing Panel that comprises a Hearing officer and two panel members.
Finally, as explained in this article, the order was incorrectly decided.
Third, the panel found that Felix had “control” of the information maintained by the IRS, within the meaning of Rule 8210, because he had the authority to ask the IRS to produce the 2013 IRS transcript. The panel misread the rule.
Simply, because a person has “control” over a document and can request another party to produce it, does not mean that the document is subject to Rule 8210.
The rule’s “control” language relates to “its” books, records or accounts (meaning documents of the firm or the individual). Here, the IRS transcripts are not books, records or accounts of Felix, even if he could order a copy of them.
It is incredibly rare for Hearing Panel members to dissent. Indeed, it appears that only five Hearing Panel members have dissented in the past eight years. Here, a panelist dissented primarily because “Rule 8210 is not intended to compel an associated person to produce the sort of information preserved in an IRS Transcript that is only indirectly created by the taxpayer[.]”
Hopefully, this issue will be overruled on the current appeal to the NAC, or FINRA will rethink its approach, which makes no sense when carried to its logical conclusion.
For example, it is unlikely that a Hearing Panel would find that FINRA could require an individual under Rule 8210 to file a Freedom of Information Act request to ask the IRS, the FBI, or the Department of Homeland Security for all documents created by the IRS, FBI or Department of Homeland Security containing the individual’s name or information provided by the individual.
Similarly, FINRA would not be able to require a representative to fill out a form or log into his or her Google or YouTube account and access all of the prior searches performed by that person. Such documents and information are not books and records of the individual, even though the IRS, FBI, DHS, or Google may have used information provided by the individual to create those records.
If FINRA wishes to expand its authority to cover these circumstances, it can certainly try to do so by filing a proposed rule amendment with the SEC. In the meanwhile, firms and individuals need to be aware of this potentially dangerous precedent.
Brian Rubin and Clifford Kirsch are partners at Eversheds Sutherland (US) LLP.