Impact of COVID-19 on Regulatory Investigations

Summary of Keypoints

• The article argues that COVID-19 is likely to trigger a significant increase in regulatory investigations involving FINRA brokers and Investment Advisor Representatives, based on historical patterns following major market crashes.
• It cites prior downturns (1987, 2001, and 2008) as examples where investor litigation rose sharply, leading to heightened regulatory scrutiny and more investigations.
• The article warns that misconduct tied to third parties—such as other financial professionals, investment funds, fixed funds, and alternative products—can draw regulatory attention to individuals who may not have known about wrongdoing.
• It advises that advisors should be prepared for investigative requests such as FINRA Rule 8210 letters or state regulator inquiry letters, and states that advisors should not speak with regulators about ongoing investigations without legal representation.
• Recommended steps if under investigation include hiring outside counsel instead of in-house firm lawyers, staying calm and requesting extensions if needed, not ignoring deadlines, and notifying an employer as required by firm compliance policies.

As a FINRA Associated Person (“Broker”) or an Investment Advisor Representative (“IAR”), you know about COVID-19 and the impact it has had in the world. COVID-19 has impacted almost every sector of the finance world, from your most aggressive trading to a conservative bond fund. However, how will COVID-19 impact regulatory investigations?

The number of Regulatory Investigations will likely increase dramatically considering COVID-19.

            If history is any indicator of what is to come after the dust of COVID-19 settles, all we must do is look back to the recent large collapses in the market. A review of the historic crashes in the market that resulted in 1987, 2001, and 2008, show us two things: dramatic increase in litigation by investors, which in turn, increases regulatory scrutiny.

Third Parties, other financial professionals, Investment funds, Fixed Funds, and Alternative Products can be implicated by one person doing the wrong thing.

            Some may argue the longest bull market has come to an end considering COVID-19. Similar to 2008 and other big crashes, profits and growing money hide unsavory practices by the corrupt few. However, when the money and profits stop, the problems are exposed. Ponzi schemes are exposed. Auditing practices of balance sheets turn out to be skewed. When it comes to FINRA, SEC, State Regulators, or any other regulator, anyone involved will be investigated.

Likely, you are one of the individuals that had no knowledge of bad conduct, but if you are not careful, you will be hit with a regulatory investigation.

            As we begin to see which products and practices are exposed after COVID-19, you need to be prepared if you receive the 8210 Letter by FINRA. You need to be prepared if you see the letter by a State Regulator opening an investigation. If you know that you truly did nothing wrong, you can still be hit with a regulatory disclosure, if you are not careful. Never speak with a regulator about an ongoing investigation without legal representation.

What do I do if I am being investigated?

1.     Seek outside legal counsel, do not use an in-house lawyer. Remember, your firm has their own interest to protect.

2.     Do not panic. Most investigations come with a deadline, you can always reach out to the regulator for an extension because you are seeking outside counsel.

3.     Do not ignore the investigation.

4.     Inform your employer in compliance with your employer’s policy on reporting investigations. Most firms require you disclose the investigation the second you are aware of it.

Call (720) 845-1251, if you are under investigation for a free consultation.