The Financial Industry Regulatory Authority (FINRA) reported a total of 2,179 complaints in 2022. Many of these complaints may be directed toward Registered Investment Advisors (RIAs) across the United States, potentially affecting their operations for many years to come. In order to approach FINRA complaints efficiently, an RIA may choose to work alongside a qualified RIA regulatory defense lawyer. Choose the Altitude Securities Law Office to discuss this matter further, and call (405) 534-4914 to receive further guidance.
Defining FINRA Complaints
What Is FINRA?
FINRA is a private organization that regulates brokerage firms and exchange markets in the United States. Its central mandates include investor protection, facilitating active capital markets, and ensuring market integrity. Although FINRA is not a government agency, it has been authorized by the United States to oversee all broker-dealers across the nation.
Does FINRA Regulate RIAs?
RIAs are primarily subject to regulation by the Securities and Exchange Commission (SEC). “Hybrid RIAs” that operate both as broker-dealers and as RIAs, however, may fall under the purview of FINRA. Registration with FINRA may also be necessary if an RIA has over $100 million in assets under management (AUM). The SEC states that the vast majority of brokers-dealers join a “self-regulatory organization”––effectively making FINRA membership a compliance requirement for all broker-dealers. For the most up-to-date information regarding FINRA regulations and RIAs, consider a more detailed discussion at the Altitude Securities Law Office.
What Is a FINRA Complaint?
If a customer or client experiences an issue while dealing with a brokerage firm, they may complain to FINRA. After receiving a complaint, the agency will typically take steps to investigate. If the investigators find the complaint to have merit, FINRA may also take certain disciplinary actions. These may include suspension, revocation, or cancellation of FINRA membership. While a customer or client may file a FINRA complaint for any reason, only legitimate violations may lead to disciplinary action.
How Does FINRA Handle Complaints Against RIAs?
The manner in which FINRA handles complaints depends on various factors. These include the reason given for the complaint, the status of the organization that received the complaint, and the nature of supporting documentation.
Complaint Forwarding Requirements for RIAs
After receiving a complaint, FINRA will only take further investigative action if the RIA is registered with FINRA. FINRA regulations may also require RIAs to self-report customer complaints––even if the customer does not come directly to FINRA. For example, a hybrid RIA might notice a new complaint on a third-party platform such as BrokerCheck. Even if these complaints are demonstrably false and without merit, the RIA may be legally required to bring them to the attention of FINRA. If a customer sends a written complaint to a hybrid RIA or an RIA with over $1 million in AUM, the RIA must also forward these complaints to FINRA.
Information-Sharing and FINRA Complaints
If the RIA is not registered with FINRA, a FINRA complaint will accomplish very little in the immediate sense. However, FINRA may still respond and direct the customer toward the SEC or relevant state security regulators. They may also forward these complaints directly to the SEC, the Commodity Futures Trading Commission, the National Futures Association, and any other regulators they deem appropriate. Even if FINRA does not have the authority to regulate RIAs, FINRA complaints may still affect RIAs who are not also brokers due to streamlined cooperation between regulatory agencies.
The FINRA Investigation Process Explained
As a first step, if an RIA is registered with FINRA then the agency will typically attempt to determine whether the complaint is legitimate. If the complaint does not highlight a valid violation, they will not investigate it further. Simply losing money is not a valid reason to file a complaint, and there is no penalty for recommending poorly performing investments. According to the FINRA Investor Complaint Program, investigations will move forward if the complaint alleges any of the following violations:
- Recommending an investment that is not in the best interests of the client
- Purchasing or selling securities with a customer account without permission
- Moving customer investments to a different mutual fund without valid reason
- Misrepresenting or failing to disclose facts
- Removing funds from a customer account without permission
- Executing certain private securities transactions without permission
- “Trading ahead”
- Failing to display a customer limit order
- Failing to execute a customer order at the best possible price
- Insider trading
- Any “deceptive, manipulative, or fraudulent methods”
What Happens After FINRA Contacts an RIA?
The initial stage of an RIA’s FINRA investigation begins when FINRA requests information and documents from the RIA. While FINRA Conduct Rules stipulate that an RIA must cooperate fully with these requests, the organization lacks the necessary subpoena power to force cooperation. An RIA facing a FINRA investigation may wish to consult with an experienced regulatory defense attorney to consider the best course of action.
FINRA may also reach out to the customer who issued the complaint and request supporting documentation. In some cases, customers must testify at FINRA hearings in order to ensure consequences for the accused.
Who Holds FINRA Accountable?
While FINRA has no direct ties with the United States government, it still falls under the regulatory authority of the SEC. All security-related organizations are regulated by the SEC, including FINRA. Often, there is confusion over overlapping responsibilities between these two organizations. Past public statements suggest that, from the mid-2010s, the general trend has been toward the SEC taking a more active role in regulating RIAs, while FINRA has been stepping back from attempts to include RIA activity under its official umbrella.
FINRA members may hold FINRA accountable by appealing incorrect or unfair decisions. With help from an experienced regulatory defense attorney, an RIA or broker-dealer may provide documentation, testimony, and information that encourages FINRA to review a previous decision. This strategy may help RIAs and broker-dealers respond effectively to issues like suspensions and revocations.
Should RIAs Work With Clients Who Have FINRA Complaints?
While RIAs may receive FINRA complaints, they may also encounter customers who have received complaints themselves. Many RIAs have informal or formal policies that prevent clients with questionable backgrounds from opening accounts. For example, a client may have received FINRA complaints while working at a brokerage firm in the past. They may have also faced accusations of fraud, SEC violations, and similar behavior. Although RIAs are not legally required to turn these investors away, the risk of working alongside them may outweigh any potential benefits.
Consult With an RIA Regulatory Defense Attorney Today
While a FINRA complaint can be problematic, RIAs have a number of options for addressing this issue in an efficient manner alongside an experienced regulatory defense lawyer. The Altitude Securities Law Office has assisted numerous RIAs with targeted regulatory defense strategies. To learn more about how to handle clients with FINRA complaints, reach out today at (405) 534-4914.