Looking for Leniency From FINRA? Don't Count on Mitigation

This flexible approach naturally gives hearing panels important leeway in tailoring an appropriate penalty, but this flexibility comes with a number of important caveats.

First, respondents who engage in certain types of serious misconduct will rarely, if ever, benefit from mitigating circumstances. To give two examples, individuals found to have stolen customer funds will virtually always be barred from the industry regardless of the amount of money that was stolen. Similarly, respondents who ignore requests for information from FINRA under Rule 8210 will usually be barred. In Guidelines parlance, a "bar is standard" for these types of violations, a position that reflects FINRA's unforgiving attitude toward violations that, in its view, are incompatible with professional integrity.

Second, some of the sanctions considerations have the potential only to aggravate, not mitigate, a penalty. Hearing panels routinely reject arguments that the lack of prior disciplinary history should be mitigating. In FINRA's view, a registered representative should not be rewarded for compliance with industry regulations. In other words, while recidivism can lead to a harsher than usual sanction, respondents with clean records get no mitigation credit because it is assumed that registered representatives will follow the rules.

Third, the mitigating factors can be narrowly applied. Sometimes this is clear on the face of the Guidelines themselves. For instance, the Guidelines give credit to respondents who accepted responsibility for their misconduct, but only when acceptance of responsibility comes "prior to detection."  Effectively, then, only respondents who self-report can receive mitigation credit on this basis; a respondent who accepts responsibility after being interviewed about the misconduct by her employer, for example, would not be eligible.

In other cases, mitigation factors are analyzed through a precedent-based framework that adds gloss to how they are applied. Respondents who reasonably rely on competent legal advice may cite their attorney's advice as a mitigation factor, but the written decisions suggest that respondents may not get mitigation credit if their attorneys had no experience in securities regulation or compliance (i.e., the legal advice was not "competent") or where respondents did not tell their lawyers all the relevant facts (i.e., the reliance on the lawyer's advice was not "reasonable").

Likewise, a medical condition might be reason to mitigate a sentence, but only if the ailment somehow affected a respondent's ability to comply with FINRA's rules. Written decisions addressing this argument make clear that a respondent arguing for mitigation on this ground bears a heavy burden.

None of this is to say that mitigation arguments are not an important part of the FINRA enforcement process. In the right case, they can help secure a penalty on the low end of the Guidelines range. And, just as important, introducing mitigating facts into the case may help put otherwise unexplained violations into context. But be forewarned: The flexibility built into the Guidelines is not guaranteed to soften the blow.

John Curley is a partner at Hoguet Newman Regal & Kenney, LLP in New York. He focuses his practice on complex business and securities litigation, as well as securities-related regulatory investigations and proceedings. He can be reached at [email protected].