Criminal Defense Lawyers

Can I Still Trade During SEC Investigation

The short answer is: probably yes, legally. The practical answer is: probably no, realistically. There’s often no formal order prohibiting you from trading during an SEC investigation. The SEC doesn’t automatically freeze your accounts or suspend your trading privileges when they open an investigation. You might be technically free to trade.

But here’s what actually happens. Your prime broker learns about the investigation and terminates your relationship. Your compliance department restricts your trading pending internal review. Your investors redeem their capital, leaving nothing to manage. Your counterparties stop returning calls. You discover that “legally permitted to trade” and “practically able to trade” are completely different things.

The question isn’t whether the SEC will formally restrict you. The question is whether anyone will do business with you once they know you’re under investigation. And the answer, in most cases, is no.

The Formal Restrictions That Can Happen

Let’s start with what the SEC can actually do to restrict your trading, because this sets the baseline for understanding your situation.

The SEC has authority to suspend trading in any stock for up to 10 trading days. This happens when the Commission determines a suspension is “required in the public interest and for the protection of investors.” The SEC used this power to suspend trading in over two dozen companies during the 2021 meme stock volatility. But this suspends trading in a specific stock—it doesn’t directly target you personally.

What can directly target you is an asset freeze. The SEC can go to federal court and obtain a temporary restraining order freezing your assets. This happens in fraud cases where the SEC believes you might dissipate assets—transfer money offshore, spend it, hide it. The court order freezes your brokerage accounts, bank accounts, and potentially assets held in other names if the SEC can trace them.

Asset freezes can be obtained ex parte—meaning without notice to you. You wake up one morning, try to log into your brokerage account, and discover everything is frozen. Nobody called to warn you. The SEC went to court, convinced a judge there was risk of asset dissipation, and got an emergency order. Now you’re paralyzed.

The SEC regularly obtains these freezes in enforcement actions. A Pennsylvania investment adviser learned this when the SEC obtained an emergency freeze over $100 million in assets. A Boston hedge fund manager discovered it when his accounts and his fund’s accounts were simultaneously frozen. This isn’t theoretical—it’s standard SEC practice in cases involving suspected fraud.

The Practical Restrictions That Always Happen

Even without any court order, your trading ability will probably disappear the moment key parties learn about the investigation.

Start with your prime broker. Prime brokers are in the business of facilitating trading for hedge funds and investment managers. They provide leverage, securities lending, trade execution, custody. But they also have risk departments, compliance departments, and reputational concerns. When they learn you’re under SEC investigation, their risk calculus changes immediately.

Prime broker agreements have termination provisions. Most can terminate on 30 days’ notice for any reason. Many can terminate immediately for cause—and “subject to regulatory investigation” often counts as cause. Even if it doesn’t technically qualify, the prime broker can make your life so difficult that you effectively can’t operate.

Here’s what this looks like in practice. Your prime broker learns about the investigation—maybe from the SEC directly, maybe from news coverage, maybe from your own disclosure. Within days, they reduce your margin. Then they require you to post more collateral. Then they stop lending securities for short positions. Then they give formal notice of termination. Within 30 days, maybe sooner, you’re without a prime broker. No prime broker means no leverage, no short selling, no efficient trade execution. Your fund is effectively dead even though nobody formally restricted your trading.

Now consider your investors. They have redemption rights. When they learn you’re under investigation, they exercise those rights. The redemption requests flood in. You’re forced to liquidate positions to meet redemptions. If requests exceed your liquidity, you gate the fund—restrict redemptions because you can’t meet them. Now the SEC adds “mishandling redemptions” to the list of things they’re investigating.

Your banks, your administrators, your auditors, your lawyers—everyone reassesses their relationship. Nobody wants to be associated with an entity under SEC investigation. Nobody wants the reputational risk, the potential liability, the distraction.

The Material Non-Public Information Problem

Here’s something that should terrify anyone under SEC investigation who wants to continue trading: the investigation itself might be material non-public information.

Think about it. You’re a portfolio manager. You know the SEC is investigating your fund for potential securities violations. That investigation, if it becomes public, will almost certainly cause investors to redeem and the fund to collapse. That information—the existence of the investigation—affects the value of the fund.

If you trade based on that information before it’s public, is that insider trading? If you liquidate your personal holdings in the fund, is that trading on material non-public information? If you buy puts on stocks your fund holds because you know the forced liquidation is coming, is that market manipulation?

These questions don’t have simple answers. But they create paralysis. Every trade you make while under investigation can be examined through this lens. Every sale could be characterized as trading on knowledge of the investigation. Every position change could be scrutinized.

And remember: the SEC is already watching. They’re already collecting your trading records. Every trade you make from the moment the investigation opens becomes evidence. If you trade aggressively and the SEC later characterizes it as fleeing a sinking ship, that’s additional charges. If you trade normally and the SEC finds patterns that support their case, that’s additional evidence.

The safest course is often to trade as little as possible during an investigation—maintain existing positions, avoid anything that could be characterized as trading on investigation-related information, and wait for the matter to resolve. But that advice conflicts with your fiduciary duty to manage investor capital actively.

The Asset Freeze Mechanics

Let me explain exactly how SEC asset freezes work, because understanding this helps you understand your real exposure.

The SEC files a complaint in federal court. Simultaneously, they file a motion for temporary restraining order and preliminary injunction, including an asset freeze. They argue that without immediate relief, assets will be dissipated and investors harmed.

For emergency relief, the SEC can proceed ex parte—without giving you notice or opportunity to respond. The judge reviews the SEC’s evidence, determines whether there appears to be fraud and risk of asset dissipation, and if persuaded, signs the TRO. This can happen in hours.

The TRO typically freezes all assets—not just trading accounts:

• Bank accounts
• Brokerage accounts
• Real estate
• Vehicles
• Anything of value

The order goes to banks and brokers, who immediately freeze the accounts. You find out when your debit card is declined or your wire transfer is rejected.

The freeze is designed to preserve assets for potential disgorgement and restitution. If you stole $50 million from investors, the SEC wants $50 million available to return to them. They don’t want you to have spent it, transferred it offshore, or hidden it before the case resolves.

Here’s the brutal part: the freeze can last for the entire duration of the litigation, which might be years. You can’t access frozen assets to pay lawyers, pay rent, pay for anything. You have to petition the court for releases of specific funds for specific purposes—and every release is fought by the SEC and examined by the judge.

The Trading-Creates-Evidence Problem

OK so let’s say no freeze happens. No prime broker termination. Investors stick around. You can actually trade. Should you?

Every trade you make during an SEC investigation becomes part of the investigation record. The SEC will subpoena your trading records. They will analyze every position, every entry, every exit, every modification. They’re looking for patterns that support their case.

If they’re investigating you for cherry-picking trades, they will examine whether the pattern continued during the investigation. If they’re investigating valuation fraud, they will examine how you marked positions. If they’re investigating disclosure violations, they will examine what information you acted on versus what you disclosed.

Your trading activity becomes a roadmap of your decision-making during a period when you knew you were under scrutiny. Prosecutors and SEC staff will ask: Why did you make this trade? What information did you have? Did your trading pattern change once you knew about the investigation? What does that change reveal?

Trading normally might be the right answer—it shows you’re confident in your compliance and not trying to flee. Trading differently might also be the right answer—it shows you’re being cautious and conservative. But either way, you have to be prepared to explain and defend every trading decision.

Many advisers under investigation effectively stop discretionary trading. They maintain existing positions, avoid new initiatives, let the portfolio run passively. This creates its own problems—you’re not managing actively, you’re not fulfilling your fiduciary duty, you’re potentially harming investors by not responding to market conditions. But it minimizes the evidence you create and the explanations you have to provide.

The Investor Relations Nightmare

Here’s something that affects your ability to trade even when nothing else restricts you: your investors finding out.

Investment management is a trust business. Investors give you their money because they trust you to manage it properly. When they learn you’re under SEC investigation, that trust evaporates. The first question they ask: should I redeem?

Most fund documents give investors redemption rights—quarterly, annual, sometimes monthly. When redemption requests come in, you have to meet them. That means selling positions. That means the trading you’re doing isn’t the trading you want to do—it’s forced liquidation to raise cash.

If redemption requests exceed your available liquidity, you face impossible choices. Gate the fund and restrict redemptions? That protects remaining investors but creates its own problems—the SEC will examine how you handled the gating decision, whether you treated investors fairly, whether some got out while others were trapped. Or you liquidate illiquid positions at distressed prices, harming everyone.

Here’s where it gets even worse. Some investors—especially institutional investors—have “key person” provisions or investigation triggers in their side letters. These provisions let them redeem immediately, without waiting for the normal redemption cycle, if certain events occur. An SEC investigation is often a trigger event. So the most sophisticated investors, the ones with the best side letters, can pull their money fastest—leaving less liquid investors holding positions that are being fire-saled.

The cascade looks like this:

• SEC investigation becomes known
• Institutional investors with triggers redeem immediately
• Fund sells most liquid positions to meet those redemptions
• Remaining portfolio is less liquid
• Other investors redeem at next opportunity
• More liquidation
• Fund becomes concentrated in hardest-to-sell positions
• NAV drops
• More redemptions
• Death spiral

You wanted to know if you can trade during an SEC investigation. Here’s the answer: you might be forced to trade more than you want, liquidating positions you would rather hold, at prices you would never accept, because your investors are fleeing and you have no choice.

The Compliance and Supervisory Maze

If you’re not running your own shop—if you’re a portfolio manager at a larger firm, or a trader under supervision—the trading restrictions come from inside the house.

The moment compliance learns about an SEC investigation involving you, your trading authority changes. They might put you on administrative leave pending review. They might restrict your trading to liquidation only. They might require pre-approval for every trade. They might assign someone to co-manage or shadow your portfolio.

These aren’t SEC restrictions. These are your employer’s trying to protect themselves. The last thing a fund wants is their portfolio manager under SEC investigation making trades that become part of the SEC’s case—and by extension, part of potential firm liability.

And compliance has reasons beyond liability. They’re worried about supervision failures. The SEC will examine not just what you did, but whether proper supervision was in place to detect and prevent it. Every trade you make while under investigation is a trade that happened under whatever supervisory structure exists. If problems continue, supervision looks inadequate.

So even at firms where you technically retain trading authority, the practical reality is constant oversight, second-guessing, and slow-walking of anything that looks unusual. Your trading becomes constrained not by law but by layers of approval and review.

The Registration and Licensing Impact

Here’s another angle most people don’t consider: what happens to your registration and licensing during an investigation.

If you’re registered with the SEC as an investment adviser, or with FINRA as a broker-dealer representative, you have ongoing compliance obligations. You have to disclose the investigation. Form ADV, Form U4—these require disclosure of regulatory proceedings.

Once you disclose, the questions start. FINRA may reach out for additional information. State regulators may inquire. Your firm’s compliance department will have questions about whether you can continue in a registered capacity.

And think about what disclosure does to new business. Every prospective client, every prospective investor, every prospective employer can see that disclosure. “Yes, I’m under SEC investigation” is right there in your public record. Good luck raising capital with that on your ADV.

Some advisers consider letting their registration lapse to avoid disclosure. Bad idea. Lapsed registration doesn’t make the investigation go away—it just makes it harder to continue working in the industry even if the investigation resolves favorably. And FINRA and SEC track people who drop registration during pending matters.

The investigation creates a marking on your record that follows you regardless of how the matter resolves. Even if the SEC closes the investigation with no action, the disclosure obligation may have already triggered. You disclosed an investigation. That disclosure is permanent. The fact that it ended well doesn’t erase the disclosure.

The Career-Ending Reality

Here’s the truth that advisers under investigation don’t want to face: your trading career may effectively be over regardless of whether formal restrictions are imposed.

Once you’re under SEC investigation, your reputation in the industry is damaged. Other firms won’t hire you. Investors won’t allocate to you. Service providers won’t work with you. Even if the investigation ends with no charges, the taint remains. “Wasn’t he investigated by the SEC?” follows you forever.

This isn’t about formal restrictions. It’s about the practical reality that the investment management business depends on trust, and an SEC investigation destroys trust. Nobody wants to explain to their clients or board why they’re working with someone the SEC investigated.

The investigation might last two, three, four years. During that time, you’re in limbo. You can’t start a new fund—who would invest? You can’t join another firm—who would hire someone under investigation? You can’t get licensed by FINRA if you try to move to a different role—they’re not going to approve someone with an open SEC matter.

By the time the investigation concludes—even favorably—years have passed. Your contacts have moved on. Your track record is stale. Your capital relationships have dissolved. “Yes, I was cleared” is cold comfort when your career is already over.

What You Should Actually Do

Stop thinking about trading. Start thinking about the investigation.

The moment you learn you’re under SEC investigation, your priorities shift. Your primary concern is no longer portfolio performance. It’s survival. Everything else is secondary to resolving the investigation with your career, your assets, and your freedom intact.

Hire securities enforcement defense counsel immediately. Not next week. Today. You need someone who has handled SEC investigations, who knows the enforcement staff, who understands how these matters resolve. This is not the time for your regular business lawyer.

Notify your professional liability insurance carrier. Coverage questions aside, late notice can void coverage entirely. Report the investigation immediately and let the insurer determine what, if anything, is covered.

Understand your disclosure obligations. If you’re registered, you probably have to disclose the investigation on your Form ADV. Failure to disclose can create additional violations. But disclosure will trigger the redemptions and relationship terminations described above.

Talk to your prime broker before they hear about it elsewhere. Proactive disclosure might—might—preserve the relationship longer than finding out from news reports. At minimum, it buys you time to find alternative arrangements.

Consider wind-down options. If the investigation is serious and your business depends on reputation, starting an orderly wind-down may be better than a chaotic collapse. Returning capital to investors while you can is better than having it frozen and distributed by a receiver.

And yes, minimize your trading. Every trade is evidence. Every position change will be analyzed. Unless you have a compelling investment reason to act, inaction is often the safer choice during an investigation.

The question isn’t “can I trade during SEC investigation.” The question is whether your trading career survives the investigation at all.