NASD EFFORTS TO DENY YOUR RIGHT TO COUNSEL

At some point in your career, the staff of a regulatory organization may decide that they need to talk to you. Normally, these interviews (as the staff euphemistically style them) or interrogations (which is what they really are) occur in a conference/hearing room, with several staff members interrogating you, with a reporter transcribing your testimony, and under oath. Because these interrogations are on-the-record (OTR), they are known among industry professionals as OTRs.

Upon receiving notice of a scheduled OTR immediately contact an attorney.  Provide the attorney with a copy of the staff letter scheduling the interrogation and all other communications between you and the staff.  Do not discuss the conversations between your lawyer and you with any third person: this could destroy the attorney-client privilege.  Similarly, most firms require you to immediately inform your Compliance Dept. of any regulatory requests.   Do this in writing and retain proof for your records.  Following your retention of a lawyer do not answer any subsequent questions from regulators without referring them to your attorney.  Decline any such demands politely and professionally, but refer them to your lawyer.  Keep a log of all such inquiries.

A CASE IN POINT

Let me tell you about a recent incident involving a broker-dealer (BD) client. The NASD had been on premises for weeks conducting an examination. During this examination, the staff demanded numerous documents, the client provided them, and the BD's employees were asked a number of questions. My law firm was retained to represent the BD and the company's responses were submitted under our letterhead.

A few days ago, without prior notice to my law firm, an NASD examiner attempted to telephone two employees of our client during market hours. The policy at the BD, which is the same in place at most members, is that all telephone calls from regulators, outside attorneys, and the press are to first be directed to the Director of Compliance. The examiner was upset that the Director of Compliance insisted on ascertaining the purpose of the call. Additionally, the examiner was incensed when informed that the employee he demanded to speak with was busy.

What was the urgent purpose of the examiner's call? Ultimately, he explained that it was to "orally" advise the Director of Compliance and another employee that they should expect a written letter demanding their appearances at an OTR. No sooner did the examiner hang up the telephone on the Director of Compliance, then an NASD Assistant Director showed up on premises and hand-delivered a letter to the two subject employees demanding their appearance at OTRs at 10AM on two separate dates approximately three weeks hence. Such a hand-delivered demand is rare, as most are forwarded by mail and/or facsimile.

Here's an interesting paragraph in the one page OTR letter:

Once a regulator has been informed that a member firm or a registered/associated person is represented by outside counsel, most industry professionals would tell you that the regulator should contact the lawyer before seeking to speak with the client - - if for no reason other than professional courtesy. Now there are some limitations to this requirement, and there is admittedly some disagreement as to all the circumstances under which such courtesy should be extended. The difficult case often arises, as in our example, when the lawyer represents the employer-entity but individual-employees are being contacted. In some cases, the lawyer may not be able to represent the individuals. In some cases, the individuals may not want the lawyer to represent them. Nonetheless, given that the staff sent a facsimile copy of the OTR letter to my law firm, the confidentiality of the contacts was not an issue for the NASD. The question is begged: why not contact my law firm before contacting my client's employees?

During the initial phases of regulatory examinations or investigations, an attorney is usually first retained to represent the BD, i.e., the entity. Of course, that representation may include, where appropriate and absent obvious conflicts of interest, representing the employees of the member firm. Generally, such representation involves the individual's conduct as an employee involved in corporate activity, rather than what might be considered purely personal conduct. Typically this early representation of the individual requires providing information about when a trade was entered, what a specific holding-page entry states, or whether the employee attended compliance seminars.

A request for an employee's OTR testimony raises serious concerns. An employee could be asked to admit personal wrongdoing or implicate the firm or other employees. The testimony could present an opportunity for the employee to "cut a deal" with the regulator and the presence of the employer's attorney could have a chilling effect. Nonetheless, at the early stages in a typical regulatory inquiry, these concerns may simply not exist and the employee often prefers and benefits from the use of the BD's outside counsel. Why? The obvious reason is that the firm normally pays for the lawyer. Equally as important is that the firm's outside counsel is often familiar with the client's business. Finally, many employees have nothing to hide and nothing to fear during an OTR because they may not be so-called targets, i.e., someone likely to be charged with wrongdoing.

In addressing conflicts, two things are generally material. First, as much advance time as possible to meet with clients and talk about all possible facets of what they know. Second, information from the regulator disclosing the intended scope of the OTR. Keep in mind that simply because a law firm is usually retained as a client's outside counsel, does not mean that the outside counsel is fully familiar with a particular investigation or examination. Outside counsels are often expensive and frequently retained only when a firm perceives it is in trouble. Further, many BDs employ in-house attorneys to deal with regulatory inquiries or respond to routine complaints and litigation.

Folks, it's not merely if you desire counsel, it's that you have a right to legal counsel before, during, and after the OTR. Of course, it's not really in the staff's best interest to urge you to seek counsel, so they try to soften the option. However, your right to counsel must not be compromised by preconditions, e.g., you must retain someone within 20 minutes, they must be a resident of Chicago, they must be available after 8 P.M. on Tuesday night. Clearly there are reasonable limits on your right of choice. You must undertake reasonable efforts to timely retain a lawyer. You must be prepared to appear at the OTR within a reasonable time following notice. The regulators are not required to provide you with counsel at their expense (that only occurs in criminal cases if you cannot afford one). However, regulatory staff must never be allowed to intimidate you into surrendering your right to counsel.

The hand-delivered NASD OTR notice states at the top: RE: XYZ BD Examination #123456789. There is no reference in the body of the letter to any substantive issue in the examination. There is no reference to any subject or topic to be covered. There is no reference to any date or time periods. In fact, there is nothing indicating whether the individual is even being called to answer questions about his personal conduct.

Does the NASD believe that outside counsel can make a determination about conflicts based solely upon an examination number? Is the fairness of the entire process - - and keep in mind that the employees are supposed to be innocent until proven guilty - -being served by the refusal to memorialize the purpose of the OTR? Regulators defend this hide-and-seek process by noting that testimonial subpoenas are issued all the time without such details, and that witnesses must appear to give depositions or trial testimony regardless. This is a specious argument.

Civil depositions and certainly trials do not normally occur prior to the issuance of both a Complaint and Answer. Those two documents memorialize the issues in the case. Similarly the parties agree to a deposition schedule or must seek the intervention of a neutral court. One party does not simply demand a witness's appearance at an arbitrary date and time and then have the right to discipline that person for failing to appear. As to trial testimony, the judge sets the dates and witnesses are often called subject to their availability.

The NASD likes to pretend that it is engaged in something akin to a criminal investigation. The NASD argues that Grand Jury subpoenas aren't much different from the OTR demand letter. But the NASD is not a governmental agency, has no power to incriminate, and refuses to provide its members with the constitutional protection afforded by the Fifth Amendment. In criminal proceedings, the government must provide indigent defendants with counsel; the NASD makes no such offer. We should also recall that it was only a few years ago that the SEC criticized the NASD in the historic 21(a) Report for being biased and for allowing its enforcement activities to be improperly influenced and politicized.

Although the staff makes much ado about the "importance of the subject matter," the OTR letter fails to disclose any subject matter other than the internal NASD examination number. Worse, witnesses are additionally warned of the corollary regulatory significanceof the undisclosed subject matter.What the hell is corollary regulatory significance anyway? Is outside counsel supposed to contact the witnesses and engage in a guessing game as to what they think they are being called to testify about?

Imagine that you have been personally requested to appear at an OTR in three weeks. It may not seem that a lot of advance time is necessary to resolve possible conflicts and to prepare for your appearance. You'd be surprised! Let me use an illustration to show the fallacy of this misplaced confidence.

So you've just been called into the Director of Compliance's office and handed an OTR letter demanding your appearance at the NASD in three weeks. You don't think you did anything wrong, but you're frightened: your career, your reputation is at stake. You've been warned that the NASD wants to speak to you about something important and significant. The firm offers to have its outside counsel represent you, but you want to speak to another lawyer first.

You ask around the office and someone suggests an attorney they recently used. You quickly telephone that lawyer. He asks what the NASD said they want to talk to you about. Your answer? About an examination. The lawyer's next question: what about the examination? Your answer? Well I'm not exactly sure, they've been here for weeks, spoken to a lot of people, and it could be about this or that. The lawyer, somewhat exasperated, says just tell me what the letter says. The client tells the lawyer that the letter references an examination number and warns that the OTR will cover important subject matter of corollary regulatory significance. Now you be the lawyer and tell me how that helps you determine your conflicts or to prepare your client.

I can already hear the objections. People get subpoenaed all the time, for jury duty, for testimony . . . and they don't have any choice. But think about it. That's not really true is it? How many times do you get a jury-duty notice and are allowed an adjournment or exemption? We all know that's a common event. I'm sure that the NASD staff has asked to be excused from such arbitrary dates themselves.

So you located a lawyer and arranged for an initial interview.Lawyers, as with most professionals, don't normally service walk-ins, and their schedules are often booked weeks in advance, if not months. The lawyer will require a retainer, perhaps several thousands of dollars. The lawyer will not begin work until that retainer is paid. Consequently, it is not unusual for clients to have to wait a few weeks in order to obtain the funds necessary to retain a lawyer. Money doesn't grow on trees and the cost of being innocent is often as dear as that of being guilty.

However, added to the lack of information, added to the intimidation, the NASD now insists that your lawyer must be available at 10 am on a specific date three weeks in the future, or you must show up by yourself, unrepresented, or presumably face some suspension or bar. The lawyer you located apologizes, but he has a schedule conflict on the date the staff selected. Remember that the letter threatens that no adjournment or continuances will be granted. As a layperson, you are frightened. You understand that admonition to be ironclad. Afraid of angering the staff you go to the OTR by yourself. You destroy your career.