When Fairness Demands Dismissal: What the Flesche NAC Decision Means for FINRA Respondents

In most FINRA disciplinary cases, “fairness” is an argument respondents make and regulators acknowledge, but rarely a basis for throwing a case out altogether. That is what makes the National Adjudicatory Council’s 2025 decision in Department of Enforcement v. Paul Eric Flesche, No. 2016049565901r, 2025 FINRA DISCIP. LEXIS 18 (NAC Sep 24, 2025) so striking. After the Securities and Exchange Commission remanded the case, instructing FINRA to build a record that would allow the SEC to assess whether the proceeding had been fair, the NAC did something almost unheard of: it dismissed the proceeding altogether and reversed the sanctions against the respondent.

For financial professionals, compliance officers, and firms, the Flesche decision is important not because most cases will end this way—they will not—but because it shows how the statutory requirement of a “fair procedure” has real teeth. It is also unusual in another sense: the fairness problem in Flesche did not arise from delay or ordinary discovery fights, but from FINRA’s own non-transparent handling of an internal bias/conflict concern in the Office of Hearing Officers.

This article examines Flesche through the same fairness lens developed in foundational SEC cases like Jeffrey Ainley Hayden and Mark H. Love, and more recently in the NAC’s decision in Southeast Investments. In earlier writing, I analyzed how those cases use fairness to police delayed and procedurally defective proceedings.

Flesche takes that line of authority a step further, demonstrating that when FINRA’s own internal processes create a fairness problem, the appropriate remedy can be dismissal rather than another round of litigation.

The Basics: What Happened in Flesche?

Paul Eric Flesche served as chief financial officer, financial and operations principal, and chief compliance officer of Glendale Securities, Inc. In 2017, FINRA Enforcement brought a disciplinary case against Glendale, Flesche, and others, alleging an unlawful distribution of restricted securities, AML violations, and supervisory failures.

An extended Hearing Panel issued its decision in April 2019. The panel dismissed the unlawful distribution claims, found no AML liability for Flesche, but did find him liable for certain supervisory failures. For that misconduct, it fined him $30,000 and suspended him for 30 business days, jointly and severally responsible for the fine with Glendale.

What followed is the heart of the fairness problem. Ten days after the panel decision, the Chief Hearing Officer—who was not on the panel—convened a conference call, announced that “information [had] recently come to [his] attention” requiring review for potential conflicts and bias, and stayed the case while outside counsel investigated. He referred generally to OHO policies designed to ensure a fair process, but did not disclose what the conflict or bias concern was, who it related to, or how it might affect the case.

Roughly two weeks later, the Chief Hearing Officer lifted the stay by order, simply stating that outside counsel’s review was complete. No explanation, no report, and no disclosure of the nature of the alleged conflict or bias.

Enforcement appealed parts of the Hearing Panel’s decision to the NAC, and a NAC Review Subcommittee separately called other portions for review. Flesche moved to dismiss the appeal as untimely, arguing that the Chief Hearing Officer had no authority to unilaterally stay the case and reset appeal deadlines, and, crucially, that he and the other respondents had never been told what the alleged bias or conflict was, who raised it, or what the outside counsel investigation found. He requested all information and materials related to the bias investigation, arguing that respondents have a right to know that their proceeding was fair and free of bias.

A NAC subcommittee denied those motions, stating that the materials relating to the outside counsel review were “not part of the record” and not required to be. The NAC later affirmed that conclusion in its 2021 decision affirming the Hearing Panel’s findings and sanctions.

At that point, the case headed to the SEC.

The SEC’s Remand: Fairness is Not Optional

On appeal, the SEC did not immediately decide whether FINRA’s findings against Flesche were factually or legally correct. Instead, it focused on whether it could determine if the proceedings had been fair, as required by Sections 6(b)(7) and 15A(b)(8) of the Exchange Act, which obligate self-regulatory organizations like FINRA to provide a fair procedure in disciplining associated persons.

The SEC underscored a point that runs through Hayden, Love, and later Southeast: when reviewing an SRO disciplinary action, the Commission must consider the “overall fairness” of the proceeding based on the entirety of the record, and must reverse SRO decisions where proceedings are inherently unfair or improperly prejudicial, regardless of whether the underlying misconduct could otherwise be proven.

In Flesche, the problem was that the record did not allow the SEC to assess the fairness of FINRA’s process. The Chief Hearing Officer had identified a potential conflict or bias serious enough to warrant an outside counsel investigation and a stay, yet none of that information was in the record, and respondents had been denied access to it. The SEC observed that when the record does not contain an adequate explanation for FINRA’s findings or conclusions on fairness issues, the Commission cannot discharge its review function or determine whether a conflict or bias rendered the proceeding unfair, and to what degree.

The Commission therefore remanded the matter to FINRA for “further proceedings” with two key instructions: respondents must have “meaningful participation and input,” and the resulting record must “provide sufficient information” for the SEC to determine whether FINRA afforded Flesche a fair procedure and hearing. See Paul Eric Flesche, Exchange Act Release No. 101991, 2024 SEC LEXIS 3549, at *9-10 (Dec. 19, 2024).

Two Commissioners dissented. They would have dismissed the proceeding outright, reasoning that FINRA’s failure to explain how it concluded there was no conflict or bias, despite the Chief Hearing Officer’s earlier concerns, left Flesche “subject to additional time, legal fees, and other burdens to address a FINRA issue for which he played no role.” In their view, he was being penalized for FINRA’s own shortcomings.

On remand, the NAC effectively agreed.

The NAC’s Decision on Remand: When the Only Fair Option is Dismissal

When the case returned to the NAC, it faced a procedural dilemma. On the one hand, the SEC had directed FINRA to conduct further proceedings with meaningful respondent participation and an expanded record. In practical terms, that likely would have meant remanding to a Hearing Panel or otherwise developing a factual record about the bias/conflict issue.

On the other hand, any such remand would impose more delay, more cost, and more uncertainty on a respondent who had done nothing to create the fairness issue. The fairness problem was not that the respondent had withheld evidence, manipulated the process, or caused delay. It was that FINRA had initiated a confidential bias/conflict review, kept the nature and outcome of that review secret, denied respondents access to the underlying materials, and then insisted that none of it was part of the record that the NAC or SEC needed to consider.

The NAC concluded that, to satisfy the SEC’s remand instructions, it would have to send the case back to OHO for further fact-finding, which would necessarily require additional time and expense. It recognized, however, that this would burden Flesche with “additional time, legal fees, and other burdens to address an issue that he did not create but rather resulted solely from FINRA’s shortcomings, including FINRA’s denials of his repeated requests for additional information.”

After weighing the Commission’s opinion, the dissent, and “the unique facts and circumstances” of the case, the NAC chose a different path. It dismissed the disciplinary proceedings against Flesche, dismissed the allegations and findings that he violated FINRA rules, reversed the sanctions, and vacated any order directing him to pay hearing or appeal costs.

That outcome is extraordinary. The NAC did more than remedy a discrete procedural defect. It acknowledged that the combination of an opaque bias/conflict review and the burdens of yet another round of litigation had rendered further proceedings unfair. Instead of asking the respondent to absorb those costs in service of FINRA’s institutional interests, it ended the case.

In an earlier article, I discussed fairness in FINRA and SRO proceedings through the prism of three key cases: Jeffrey Ainley Hayden, Mark H. Love, and the NAC’s decision in Southeast Investments. Together, those cases show that in the absence of a formal statute of limitations, fairness operates as a functional backstop on enforcement power.

In Hayden, the SEC set aside an NYSE action where the Exchange took more than 14 years from the first alleged instance of misconduct and over six years from the last, even though the Commission could not identify concrete prejudice in traditional evidentiary terms. The delay itself, in context, was “inherently unfair” and violated the Exchange’s obligation to provide a fair process.

In Love, by contrast, the Commission declined to adopt a mechanical rule based on the mere passage of time. Although NASD filed charges more than seven years after the first referral at issue, the SEC found that the respondent’s ability to defend himself had not been meaningfully impaired, and the proceeding remained fair.

In Southeast Investments, the NAC confronted a more complex fairness problem: years of delay combined with discovery violations and the death or unavailability of key witnesses. On remand from the SEC, the NAC concluded that the respondents could no longer be afforded a fair opportunity to defend themselves; the long passage of time, lost evidence, and withheld documents had irreparably compromised the proceeding. The NAC dismissed the most serious charges, recognizing that meaningful fact-finding was no longer possible.

Flesche adds another dimension to this fairness jurisprudence. The problem was not primarily delay, nor the typical failure to produce staff notes or emails. It was the lack of transparency and record development around an internal process designed—ironically—to protect fairness: an outside counsel review into potential conflict or bias in OHO.

The Chief Hearing Officer’s decision to stay the case signaled that the bias/conflict concern was serious. Yet neither respondents nor the reviewing bodies (NAC and SEC) were given the information needed to evaluate whether that concern was resolved appropriately. Respondents were denied documents and information they repeatedly requested. The NAC insisted, for years, that this material was “not part of the record,” only to be told by the SEC that it could not perform its oversight role without it. The SEC, in turn, declined to declare the proceeding unfair on the existing record, but instructed FINRA to fix the problem in a way that would protect fairness going forward.

When the case came back, the NAC ultimately accepted the logic of fairness as a backstop, much like in Hayden and Southeast, but applied it to FINRA’s own internal process. Continuing to litigate a case compromised by an opaque bias/conflict investigation, and doing so at the respondent’s expense, was itself unfair. Dismissal was the only remedy that truly restored the fairness the Exchange Act requires.

Practical Implications for Brokers and Firms

For respondents in FINRA proceedings, Flesche reinforces several practical points about fairness that go beyond the specific facts of the case.

First, fairness is not limited to classic due process concepts like timely notice and the opportunity to be heard. It also encompasses how FINRA handles its own internal processes—particularly when those processes implicate bias or conflicts in the adjudicatory system. When a hearing officer or panel is potentially conflicted, respondents have a legitimate interest in understanding what the concern is and how it has been resolved. They are not required to simply trust that the issue was handled behind closed doors.

Second, Flesche confirms that fairness challenges must be built in the record. Flesche and his co-respondents repeatedly raised concerns about the undisclosed bias/conflict investigation and requested the underlying information. Those efforts failed at the NAC stage, but they were essential to preserving the issue for SEC review and, ultimately, for the NAC’s own decision on remand.

Third, the case highlights that the remedy for an unfair proceeding is not always a “do-over.” In some circumstances, delay, lost evidence, or institutional missteps make a fresh hearing more burdensome than fair. When that happens through no fault of the respondent, dismissal can be the appropriate outcome. That is precisely the logic in Hayden, Southeast, and now Flesche.

Finally, the decision serves as a reminder that FINRA’s enforcement and adjudicatory arms operate under the SEC’s oversight. The Commission’s remand in Flesche was not about reweighing the evidence of alleged supervisory failures; it was about whether the process met the Exchange Act’s fairness requirement. When FINRA’s internal approach to conflicts and bias prevents that assessment, the SEC has both the authority and the obligation to intervene.

Why This Matters for Your FINRA Defense Strategy

If you are a registered representative, supervisor, or firm facing a FINRA investigation or complaint, it is easy to focus exclusively on the substance: what happened, what the documents show, and what the rules say. That substantive defense is obviously critical. But Flesche, like Southeast before it, underscores that the procedural integrity of the case is just as important.

Identifying and litigating fairness issues in real time—delays, discovery failures, shifting theories, opaque internal processes, potential conflicts of interest—is part of a robust defense strategy. When raised effectively and preserved in the record, these issues can be outcome-determinative, even in cases where FINRA believes it has strong facts on its side.

At AMW Law PLLC, my practice focuses on securities arbitration, regulatory enforcement, and FINRA defense. Before founding the firm, I served as Senior Counsel in FINRA Enforcement in New York, litigated financial and securities disputes at a major international law firm, and worked in-house in Legal & Compliance at a large broker-dealer. That 360-degree perspective, regulator, defense counsel, in-house compliance, and now defense and claimants’ counsel, shapes how I evaluate both the substance and the fairness of FINRA proceedings, including unusual decisions like Flesche where the system itself becomes part of the problem.

If you or your firm is under investigation or facing a FINRA complaint, and you have concerns about delay, discovery, bias, or the overall fairness of the process, I am available to review your matter and discuss your options.