When FINRA Comes Calling: Who Pays for the Lawyer?

Regulatory inquiries from FINRA, the SEC, the DFPI, or the California Department of Insurance often raise an uncomfortable question for financial-services firms and their personnel: who pays for the employee’s lawyer? Under California Labor Code section 2802, employers must indemnify employees for necessary expenses incurred as a direct consequence of performing their job duties. In Grissom v. Vons Companies, Inc., the California Court of Appeal held that this obligation can include reimbursement of attorney’s fees incurred by an employee who reasonably retains independent counsel in connection with matters arising from the course and scope of employment.

That does not mean employees automatically get to hire any lawyer they want and send the bill to the company. California courts have emphasized that reimbursement turns on whether the expense was “necessary” under the circumstances. Factors may include whether the employer timely offered competent counsel, whether conflicts of interest exist, and whether the employee reasonably believed separate representation was needed. In other words, if the firm provides qualified, conflict-free counsel, reimbursement for separate counsel may not be required.

While no California court appears to have squarely addressed section 2802 in the context of FINRA, SEC, DFPI, or Department of Insurance investigations, the reasoning of Grissom is highly relevant. Regulatory matters frequently create tension between a firm’s interests and those of its personnel, particularly where regulators are examining both an individual’s conduct and the adequacy of the firm’s supervision. In those circumstances, an employee may argue that independent counsel was reasonably necessary and therefore reimbursable under section 2802.

The lesson for broker-dealers, investment advisers, insurance agencies, and other regulated firms is simple: reimbursement issues should be considered early, before a regulatory inquiry becomes a separate dispute. When regulators start asking questions, firms should evaluate potential conflicts and indemnification obligations before deciding who will represent whom. If your firm is facing these issues, the attorneys at Shustak Reynolds & Partners regularly advise financial-services firms and industry professionals on regulatory investigations, indemnification obligations, and employment-related disputes.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes.
We represent many investment advisors, financial professionals, broker-dealers, registered representatives, investors and businesses.
Attorney Joseph M. Mellano can be reached in the firm’s San Diego office at (619) 696-9500.