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What to Do If You’re Under Securities Investigation: 10 Tips from a Securities Lawyer

sec investigations and enforcement actions

As a financial advisor, receiving a notice or phone call indicating that you are the subject of an investigation by securities regulators can be an alarming experience, triggering feelings of panic and uncertainty. Numerous questions may race through your mind regarding potential consequences.

You might wonder whether your license is at risk, the possibility of facing substantial fines, the potential for a criminal record, and how your employer and clients will perceive the situation. Dealing with such circumstances is undoubtedly challenging. However, there are proactive steps you can take to protect yourself and your interests if you find yourself facing a securities investigation. By following these steps, you can navigate the process with greater confidence and safeguard your professional standing.

Here are 10 tips from veteran securities lawyer Leila Shaver on navigating the investigation process.

1. Immediately Hire an Experienced Securities Attorney

The first and most critical thing you should do upon learning you are under investigation is to quickly hire a qualified securities attorney to represent you. Do not try to handle responding to the investigation alone without legal counsel. The regulators and investigators who are looking into your case are experienced attorneys themselves. You need someone knowledgeable about securities law in your corner to advocate for you.

A good securities lawyer can help manage the flow of requests from regulators, advise you on responding appropriately to information requests, sit in on testimony to object to inappropriate questions, and negotiate with regulators on your behalf. Having a legal expert guide you through the investigation can make all the difference in achieving the best possible outcome.

2. Expect Multiple Requests for Documents and Information

In the initial notice of investigation, regulators will likely request information and documentation from you. But don’t think it ends there. Be prepared for several rounds of requests coming your way. It’s common for regulators to send follow-up requests after receiving your first batch of responses, as your answers will spur additional questions and document needs.

You may feel annoyed by repeatedly having to track down documents and provide information. However, it’s important to fully comply with each request. Having an attorney help prepare your responses can ensure you are providing what is asked for without offering up unnecessary extra details. Be cooperative but strategic.

3. Know That You May Have to Provide Testimony Under Oath

Regulators often exercise their right to compel those under investigation to provide formal testimony under oath. This can be an anxiety-provoking prospect. The interrogation-style questioning can easily trip up those who go in unprepared.

Don’t make the mistake of thinking you can handle testifying on your own without counsel present. Schedule the testimony for a time when your attorney can attend with you. They will be able to raise objections to inappropriate questions that venture into irrelevant territory or unfairly twist your words. Your lawyer serves as your buffer and defender.

4. Remember the Investigation Involves More Than Just You

It’s not just your responses that the regulators are relying on to conduct their investigation. They are also reaching out to other parties and sources to gather pertinent information and documents.

The regulators may contact your current firm, previous employers, other advisors you’ve worked with, clients (past or present), banks, custodians, etc. They will leave no stone unturned.

Knowing that regulators have a bigger web of information to draw from beyond your own disclosures means you need to take extra care to be honest, forthcoming, and accurate in all of your responses. Even the smallest inconsistencies could raise red flags when compared to other records.

5. An Investigation is Not Yet an Enforcement Action

At this stage, being under investigation does not guarantee the regulator will pursue formal enforcement actions and penalties against you. The investigation phase is more of a fact-finding mission. The regulators first have to dig deeper to determine whether misconduct actually occurred before deciding how to proceed.

In some cases, an investigation concludes with a warning letter to the individual telling them not to repeat the concerning behaviors. Or the regulator may determine no real wrongdoing transpired after completing the investigation.

However, investigations based on serious suspected violations can escalate to enforcement actions involving sanctions. Tread carefully and be proactive now to avoid landing in hot water down the road.

6. Investigations Often Originate from Routine Compliance Exams

You may be wondering how you ended up under the microscope to begin with. Frequently, investigations grow out of routine compliance examinations of advisory firms. Examiners notice some red flags or concerns, which then transform into a wider probe.

Paying diligent attention to compliance and risk management practices at your firm is wise. Identify and fix any weaknesses in your procedures and internal controls to avoid raising issues that could lead to an investigation. An ounce of prevention is worth a pound of cure when it comes to steering clear of regulator scrutiny.

7. The Investigation and Response Process Takes Time

One of the hardest parts of being under investigation is the seemingly endless waiting game. After the initial document request, you may go months without hearing a peep from the regulators. Then, suddenly, they will resurface, seeking more information.

The regulators have multiple active investigations, so expect some lag time between responses. Be patient and let your lawyer handle interfacing with the regulators and fielding status inquiries. Don’t let the lulls lull you into a false sense of security, though. Stay vigilant until the case is officially closed.

8. Investigations Are Not Reportable Events…Yet

Here is a small silver lining—while you are only at the investigation stage and have not been formally charged, it is not considered an official reportable disclosure event that would need to be recorded on your Form U4.

This means clients and potential employers searching your record would not see any mention of an investigation in progress. However, if the investigation escalates to formal charges being filed against you, then it becomes reportable and disclosable.

9. Disclosure Can’t Be Expunged from your Record

If the investigation does, unfortunately, culminate in regulatory enforcement actions and formal charges against you, then it becomes a permanent part of your Form U4 record.

These disclosures cannot later be expunged or erased. This black mark on your securities record can hinder your job prospects and ability to maintain licenses in other states down the road.

10. Charges Make Continuing Your Career More Difficult

Beyond just having to disclose charges publicly on your record, being found guilty of violations makes it much harder to work in the securities industry overall.

Firms will be more reluctant to hire an advisor with recent findings of misconduct on their track record. Many clients also hesitate to trust advisors with disciplinary history. And getting registered in new jurisdictions becomes more challenging with charges in your past.

Dealing with enforcement actions and penalties head-on can be extremely stressful and detrimental to your career. It’s best to avoid reaching this point if possible. Diligent cooperation during the initial investigation phase can help mitigate the chances of formal charges.

Contact My RIA Lawyer Today

Being under investigation by the SEC, FINRA, or other securities regulators is daunting. Anxiety and uncertainty about the future are natural reactions. But taking proactive steps like promptly hiring legal counsel and heeding their guidance can help you navigate this difficult situation. Don’t go it alone—reach out to My RIA Lawyer to advocate for you from start to finish. Handled correctly, even regulatory investigations can reach favorable conclusions.

Contact us now to get started.

Author Bio

Leila Shaver is the Founder of My RIA Lawyer, a law firm that provides compliance and legal consulting for financial institutions. With extensive experience as a securities attorney and compliance expert, she has served as Chief Compliance Officer and General Counsel to RIAs, BDs, and TAMPs with billions in assets under management.

Leila understands the challenges RIAs face and is committed to helping RIAs streamline their processes, mitigate risks, and ensure compliance with regulatory requirements. She received her Juris Doctor from Atlanta’s John Marshall Law School and is a West Georgia Young Lawyers’ Association member. Leila has received numerous accolades for her work, including the Carroll County Bar Association’s Outstanding Young Lawyer Award in 2017.

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