What Triggers a FINRA Investigation?
Learn About the Legal Issues that Can Lead to Investigations by the Financial Industry Regulatory Authority (FINRA)
The Financial Industry Regulatory Authority (FINRA) enforces compliance with a multitude of state and federal laws and regulations. As a self-regulatory organization (SRO), FINRA also has the authority to issue and enforce its own rules. While FINRA’s oversight is limited to certain segments of the financial services industry, its enforcement jurisdiction is still extremely broad, and it is keenly focused on uncovering brokers’ and brokerage firms’ legal violations.
FINRA has the authority to impose substantial penalties for legal violations uncovered during its investigations. Along with fines, penalties can include suspensions, prohibitions, and other disciplinary action. In some cases, FINRA can also refer cases to the U.S. Securities and Exchange Commission (SEC), the U.S. Department of Justice (DOJ), and other federal authorities for prosecution.
As a result, FINRA investigations present substantial risks for brokers and brokerage firms. Brokers and firms need to take these investigations very seriously, and they need to focus their efforts on resolving the investigations without prosecution if at all possible.
But, when do brokers and brokerage firms need to be concerned about facing FINRA investigations? Here’s what you need to know about what triggers a FINRA investigation:
What Triggers a FINRA Investigation? 8 Examples
FINRA investigations can have numerous triggers. Here are just some examples of scenarios in which FINRA may decide to launch an investigation:
1. FINRA Receives a Complaint from a Customer
One of the most common triggers for FINRA investigations is customer complaints. FINRA encourages customers to report potential misconduct, and it often investigates complaints to determine if enforcement action is warranted.
Under FINRA’s customer complaint rule, brokerage firms must “report information relating to any written customer complaint involving allegations of theft, misappropriation of funds or securities or forgery . . . within 30 calendar days of receipt of the complaint or of becoming aware of the event.” This means that brokerage firms cannot avoid FINRA investigations simply by declining to report customer complaints (though customers can also contact FINRA directly, so this is not a viable option regardless). Not only can failing to report customer complaints trigger FINRA investigations, but it can also be a separate violation of FINRA’s rules.
2. FINRA Receives a Referral from the SEC or Another Regulatory Authority
FINRA can investigate brokers and brokerage firms on its own; but, it also works closely with other federal and state authorities to enforce compliance in the financial services industry. This includes the SEC.
Financial industry regulators will often share information when they uncover evidence of potential statutory or regulatory compliance violations. If the SEC determines that a broker or brokerage firm may have violated a law or regulation that falls within FINRA’s enforcement jurisdiction, it may provide this information to FINRA for enforcement. In these cases, FINRA will often launch an investigation to determine if disciplinary action is warranted.
3. FINRA Receives a Whistleblower Complaint from an Employee
Whistleblower complaints from employees can also lead to FINRA investigations. If a former or current employee of a brokerage firm suspects that the firm or one of its brokers is violating the law, the individual can petition FINRA to investigate.
As FINRA explains, it “will review every tip received and determine whether to refer the matter to other authorities or investigate the matter itself.” Even if a whistleblower’s complaint does not trigger a FINRA investigation, it could still lead to an investigation and prosecution by the SEC or the DOJ.
4. FINRA Receives a Referral from the irs.gov/">Internal Revenue Service (IRS)
If the Internal Revenue Service (IRS) uncovers evidence suggesting that a broker or brokerage firm is in violation of the Internal Revenue Code, it may notify FINRA. Not only can this lead to IRS tax fraud audits and investigations, but it can also lead to FINRA investigations and the need for defense counsel to communicate with multiple authorities.
5. FINRA’s Surveillance Programs Uncover Evidence of Potential Non-Compliance
FINRA maintains “massive proprietary surveillance programs” that it uses to monitor brokers’ and brokerage firms’ market activity. Through these programs, FINRA can identify potential market abuses, and it can use its investigative powers to gather the evidence it needs to impose fines and other disciplinary action.
When facing FINRA investigations triggered by the SRO’s surveillance programs, brokers and brokerage firms must be extremely careful, as FINRA may be in possession of evidence that they are not aware of. As a result, before responding to FINRA’s inquiry, it is imperative to engage experienced defense counsel to conduct a preliminary assessment and evaluate the options that are available.
6. FINRA Conducts a Routine Cycle Examination
Along with its surveillance programs, FINRA also conducts routine cycle examinations to assess brokers’ and brokerage firms’ compliance. While these cycle exams are supposed to be routine, in some cases FINRA will use the cycle exam framework for investigating suspected violations.
If your brokerage firm is facing a cycle exam that has the potential to lead to an investigation, you need to be very careful. In this scenario, the examiners will be looking for anything that could potentially justify disciplinary action, and you could find yourself facing a high-risk scenario if you are not careful.
7. FINRA Uncovers Issues During a Product Examination
FINRA also conducts examinations to assess the risks associated with specific financial products. If it identifies an issue with a particular product, it may investigate the brokers and brokerage firms that sold the product to their customers.
Product-based examinations often involve investigations into brokers’ and brokerage firms’ sales practices. If brokers or firms failed to adequately inform their customers of the risks associated with a particular product, they can face discipline from FINRA even if the product itself is legal.
8. FINRA Audits a Broker’s or Brokerage Firm’s Records
In some cases, FINRA will audit a broker’s or brokerage firm’s records. FINRA can conduct audits for various reasons, and these audits often uncover evidence of non-compliance.
Here, too, the fact that FINRA is conducting an audit means that it is looking for evidence of potential violations. As a result, brokers and brokerage firms need to be extremely careful, and they must ensure that they have a clear understanding of both the relevant legal and regulatory standards and the specific records that FINRA will be reviewing.
When Should Brokers and Brokerage Firms Be Concerned About FINRA Investigations?
While this isn’t a comprehensive list, if you are a broker or brokerage firm and you find yourself in any of the above scenarios, you need to be extremely careful. Whether FINRA is already conducting a targeted investigation or it is conducting an audit or cycle exam that could lead to an investigation, you need to have a clear understanding of both (i) what FINRA has the authority to do, and (ii) what you can—and should—do to protect yourself.
FAQs: Responding to a FINRA Investigation
What Should I Do if I Am Under FINRA Investigation?
If your brokerage firm is under investigation by FINRA, you need to engage experienced defense counsel promptly. FINRA’s investigations can lead to severe consequences, including significant fines, suspensions, prohibitions, and referrals to the SEC or DOJ. At Spodek Law Group, we have extensive experience handling FINRA investigations on behalf of brokerage firms nationwide. Our legal team knows how to develop and execute tailored strategies to resolve investigations efficiently and effectively. We will work to protect your firm’s reputation and avoid unnecessary consequences. Contact us today to discuss your situation and learn how we can help.
How Can I Protect My Firm During a FINRA Investigation?
Protecting your brokerage firm during a FINRA investigation requires careful planning and proactive measures. First, engage experienced legal counsel immediately. At Spodek Law Group, our legal team will work with you to ensure that your firm responds appropriately to FINRA’s information requests and inquiries. We will guide you through the process, helping you to maintain control of the investigation and avoid self-incrimination. Additionally, we will help you develop and implement corrective measures as necessary to demonstrate your firm’s commitment to compliance. Our goal is to resolve the investigation favorably while minimizing disruption to your operations.
What Types of FINRA Investigations Require Legal Representation?
All FINRA investigations warrant legal representation. Whether the investigation is triggered by a customer complaint, a whistleblower allegation, or FINRA’s own surveillance programs, the stakes are high. FINRA has the authority to impose a range of penalties, and the consequences of missteps during the investigative process can be severe. At Spodek Law Group, our attorneys have extensive experience representing brokerage firms and brokers in FINRA investigations, arbitrations, and enforcement proceedings. We will ensure that you are informed about your rights, obligations, and options, and we will work tirelessly to protect your interests.
How Can I Avoid FINRA Investigations in the Future?
Avoiding FINRA investigations requires a proactive and comprehensive approach to compliance. At Spodek Law Group, we assist brokerage firms in developing and implementing robust compliance programs tailored to their specific risks and regulatory obligations. Our attorneys will work with you to identify potential areas of exposure, update your policies and procedures, and train your personnel on compliance best practices. By maintaining a strong compliance program and fostering a culture of compliance within your firm, you can significantly reduce the likelihood of triggering FINRA investigations in the future.
What Are the Potential Consequences of a FINRA Investigation?
The potential consequences of a FINRA investigation can be severe and far-reaching. FINRA has the authority to impose substantial fines, suspensions, prohibitions, and other disciplinary actions on brokers and brokerage firms. In addition to these penalties, FINRA can refer cases to the SEC or DOJ for criminal prosecution, which can lead to further legal exposure. At Spodek Law Group, we understand the high stakes involved in FINRA investigations, and we will work diligently to help you avoid or mitigate these consequences. Our experienced legal team will guide you through the process, protect your rights, and develop a strategic defense tailored to your specific situation.
Speak with a Senior FINRA Defense Lawyer at Spodek Law Group
Is your brokerage firm facing a cycle exam, audit, or investigation, or have you been contacted by FINRA as a broker? If so, we encourage you to contact us promptly for more information. To speak with a senior FINRA defense lawyer at Spodek Law Group in confidence, please call 212-300-5196 or request a complimentary consultation online today.
