What Triggers a FINRA or SEC investigation? - Transcript

FINRA and SEC investigations are initiated when regulatory authorities identify potential violations or misconduct within the securities industry. At Malecki Law, we guide financial professionals through these investigations, helping them navigate the complex regulatory landscape and protect their careers and reputations. We’ve successfully represented countless industry professionals and look forward to learning more about how we can aid in your defense.

Both FINRA and the SEC possess broad investigative powers to protect investors and maintain market integrity. These agencies can request documents, interview witnesses, and conduct on-site examinations to uncover potential misconduct. While their primary goal is to enforce compliance with securities laws and regulations, investigations can lead to severe consequences, including fines, sanctions, and even criminal referrals. It is essential for those under investigation to act promptly and engage experienced legal counsel to navigate the process effectively.

Several factors can lead to a FINRA investigation, including:

1. Customer Complaints or Arbitrations:
   • When a customer files a complaint or initiates arbitration, it is recorded on the broker’s Form U5, which is used to report terminations and disciplinary actions. Regulators monitor U5 filings closely, and any negative marks, known as “dings,” often prompt further review.
   • Every arbitration filed with FINRA Dispute Resolution Services is reviewed by FINRA’s regulatory arm to determine if the complaint reveals broader issues requiring investigation.
2. Employment Terminations:
   • A broker’s termination, especially if accompanied by adverse comments on their U5, can trigger regulatory scrutiny. FINRA may investigate to ensure compliance with industry rules and protect other investors from potential harm.
3. Industry Sweeps:
   • Regulatory sweeps occur when FINRA identifies industry-wide concerns that warrant further examination. A notable example involves brokers’ use of communication platforms like WhatsApp, which violated record-keeping requirements due to the ephemeral nature of the messages. Such sweeps can lead to investigations across multiple firms and individuals.

The SEC’s role extends beyond individual misconduct to systemic issues in the securities market. Investigations are often initiated by:

1. Whistleblower Tips:
   • The SEC’s whistleblower program allows individuals to report securities law violations confidentially. Credible tips can lead to investigations targeting firms or individuals.
   • If a whistleblower’s report pertains to broker-dealer misconduct, the SEC may refer the matter to FINRA for further action.
2. U5 Filings:
   • Similar to FINRA, the SEC reviews U5 filings for adverse comments or termination reasons, which may signal broader compliance issues.
3. Market-Wide Concerns:
   • The SEC frequently conducts sweeps or broad investigations into market practices, such as compliance with new regulations or concerns about systemic risk.

A notable example of a regulatory sweep involved brokers’ use of WhatsApp for business communications. Because WhatsApp messages are not easily archived, their use constituted a violation of books and records requirements. This issue prompted widespread investigations across firms and brokers, highlighting the importance of maintaining proper records in compliance with SEC and FINRA rules.

Facing a FINRA or SEC investigation can be overwhelming and may carry significant professional and financial consequences. At Malecki Law, we carefully review the circumstances leading to the investigation to understand the scope and potential risks. Our attorneys also work to protect your rights, minimize risks, and address regulatory concerns effectively. Whether negotiating with regulators or preparing for hearings, we are committed to achieving the best possible outcome for our clients.

If you are facing a FINRA or SEC investigation, contact Malecki Law at (212) 943-1233 or reach out online to schedule a consultation. We are here to guide you through the process, protect your rights, and safeguard your professional reputation.

Transcript:

So there are a number of things that trigger a FINRA or an SEC investigation the biggest one is likely a customer complaint or arbitration once a customer complaint is filed it goes on somebody’s u5 Regulators look at u5s whenever there’s what we call a ding on a u5 a mark and so if there’s some negative comments on a u5 about a customer complaint an investigation may start and it may not be limited just to that client every time an arbitration is filed at FINRA DIS FINRA dispute resolution FINRA regulatory the other arm of FINRA will review the arbitration that is filed to see whether there’s something to it that should be investigated whether maybe other customers are also harmed by it the SEC also gets tips through its whistleblower program and sometimes investigations are started through whistleblower tips and and if they think that it’s more of a thin rich issue they’re going to send it to FINRA there are sometimes marks on people’s u5 as a result of an employment termination that will start um a federal investigation or an SEC investigation as would a sweep in the industry sometimes Regulators think that there’s a sort of wrongful practice going across many firms a recent example of that is all the firms were investigated about broker’s use of the WhatsApp the problem being that those could not be maintained by a broker dealer because they disappear those WhatsApp messages and so that became a books and Records violation so that started a huge sweep that affected many many firms and many many investment professionals.