What Triggers a FINRA Investigation?

The Financial Industry Regulatory Authority (FINRA) enforces compliance with numerous state and federal laws and regulations. As a self-regulatory organization (SRO), FINRA possesses authority to issue and enforce its own rules. While FINRA’s oversight focuses on specific financial services segments, its enforcement jurisdiction remains exceptionally broad, concentrating on identifying brokers’ and brokerage firms’ legal violations.

FINRA can impose substantial penalties for violations discovered during investigations. Beyond fines, penalties encompass suspensions, prohibitions, and other disciplinary measures. FINRA can also refer cases to the U.S. Securities and Exchange Commission (SEC), U.S. Department of Justice (DOJ), and other federal authorities for prosecution.

FINRA investigations pose significant risks for brokers and brokerage firms. These entities must treat investigations with appropriate seriousness and work toward resolving matters without prosecution when possible.

What Triggers a FINRA Investigation? 8 Examples

FINRA investigations can originate from numerous sources. The following examples illustrate scenarios where FINRA may initiate investigations:

1. FINRA Receives a Complaint from a Customer

Customer complaints represent one of the most common investigation triggers. FINRA actively encourages customers to report potential misconduct and frequently investigates complaints to assess whether enforcement action is justified.

Under FINRA’s customer complaint rule, brokerage firms must report information regarding written customer complaints involving allegations of theft, misappropriation of funds or securities, or forgery within 30 calendar days of receipt. Brokerage firms cannot circumvent FINRA investigations by declining to report complaints, as customers can contact FINRA directly.

2. FINRA Receives a Referral from the SEC or Another Regulatory Authority

FINRA conducts independent investigations while collaborating closely with federal and state authorities to enforce financial services industry compliance, including partnership with the SEC.

Financial regulators frequently exchange information when discovering potential statutory or regulatory violations. When the SEC identifies possible violations by brokers or brokerage firms falling within FINRA’s enforcement jurisdiction, it may refer this information to FINRA.

3. FINRA Receives a Whistleblower Complaint from an Employee

Employee whistleblower complaints can trigger FINRA investigations. Former or current brokerage firm employees suspecting firm or broker law violations can petition FINRA for investigation. FINRA will review every tip received and determine whether to refer the matter to other authorities or investigate the matter itself.

4. FINRA Receives a Referral from the Internal Revenue Service (IRS)

When the Internal Revenue Service discovers evidence suggesting broker or brokerage firm violations of the Internal Revenue Code, it may notify FINRA. This can result in IRS tax fraud audits and investigations, plus FINRA investigations requiring defense counsel communication with multiple authorities.

5. FINRA’s Surveillance Programs Uncover Evidence of Potential Non-Compliance

FINRA maintains massive proprietary surveillance programs monitoring brokers’ and brokerage firms’ market activity. Through these programs, FINRA identifies potential market abuses and gathers evidence for imposing fines and disciplinary action.

6. FINRA Conducts a Routine Cycle Examination

FINRA conducts routine cycle examinations assessing brokers’ and brokerage firms’ compliance. While intended as routine reviews, FINRA sometimes uses the cycle exam framework for investigating suspected violations.

7. FINRA Uncovers Issues During a Product Examination

FINRA conducts examinations assessing risks associated with specific financial products. When issues emerge, FINRA may investigate brokers and brokerage firms selling those products to customers.

8. FINRA Audits a Broker’s or Brokerage Firm’s Records

FINRA conducts record audits for various reasons, frequently uncovering non-compliance evidence. FINRA’s audit conduct indicates it seeks potential violation evidence.

When Should Brokers and Brokerage Firms Be Concerned About FINRA Investigations?

If experiencing scenarios mentioned above — whether FINRA conducts targeted investigations or audits/cycle exams potentially leading to investigations — extreme caution is warranted. Understanding both FINRA’s authority and available protective options is essential. Engaging experienced defense counsel immediately is necessary when brokerage firms face FINRA investigations.