FINRA vs. SEC Investigation

Last Updated on: 9th December 2025, 07:26 pm

FINRA vs. SEC Investigation

You’re not facing one investigation. You’re facing two. And the decisions you make in one can destroy you in the other. That’s the reality nobody explains when they receive that first letter – whether it’s a FINRA 8210 request or an SEC subpoena. These two regulators are not the same. They don’t have the same powers. They don’t offer you the same protections. But they share information constantly, and what you say to one flows directly to the other. Welcome to the two-front war you didn’t know you were fighting.

Welcome to Spodek Law Group – a premier, top rated, criminal defense law firm. Based out of NYC, we have over 50 years of combined experience helping people get the best outcomes possible when it comes to SEC investigations, and FINRA investigations.

FINRA is not a government agency. It’s a private nonprofit self-regulatory organization. That distinction sounds technical, but it determines whether you have constitutional rights or not. The SEC is the government – a federal agency empowered by Congress. When you’re dealing with the SEC, the Fifth Amendment applies. You can invoke your right against self-incrimination. When you’re dealing with FINRA, that right doesn’t exist. Invoke the Fifth at FINRA, and you’re automatically barred from the securities industry. No hearing. No appeal. Career over.

The irony is profound. The private organization – the one that isn’t the government – has more immediate power over your career than the actual government agency does. FINRA can end your ability to work in securities faster and with less due process than the SEC ever could. But FINRA can’t send you to prison. Only the SEC, working with the Department of Justice, can do that. So you need to understand exactly what you’re facing with each one, and how protecting yourself from one threat might expose you to the other.

The Fundamental Difference Nobody Explains

Heres the thing that changes everything. The SEC is a governmental agency empowered by Congress. It has broad power over the entire financial markets. It can investigate anyone – not just brokers, but companies, executives, accountants, lawyers, anyone involved in securities. When the SEC investigates you, your dealing with the federal goverment.

FINRA is completly different. Its a nonprofit self-regulatory organization that the SEC empowers to oversee broker-dealers and there registered representatives. FINRA’s power is narrower but more focused. If your a broker, FINRA has direct authority over your license to work. Thats the authority they gave you when you registered. And thats the authority they can take away.

This distinction creates a fundamental imbalance:

• When the SEC issues a subpoena, you can object. You can file a motion with a court to limit the scope. You can argue the request is overbroad. Theres a formal process with a neutral decision-maker – a federal judge. The SEC operates within the constitutional framework that limits goverment power.
• When FINRA sends an 8210 request, you cant object. Not formally. FINRA staff has what courts have called “almost unfettered discretion” to decide what does or dosent involve there investigation. They can demand virtually unlimited books and records. They can require you to provide written statements explaining your actions – something a subpoena cant even compel. And if you refuse to comply, your barred.

Thats the trap. The private organization operates with fewer constraints then the goverment.

Why the Fifth Amendment Trap Exists

This is were most people make the mistake that destroys them. You recieve an SEC subpoena for testimony. You also recieve a FINRA 8210 request. You consult with a lawyer who tells you the same conduct is being investigated by both regulators. What do you do?

If you invoke the Fifth Amendment with the SEC, your protected from self-incrimination in any criminal proceeding that might follow. Thats your constitutional right. But if you invoke the Fifth Amendment with FINRA – or if you refuse to answer there questions, or if you fail to cooperate in any way – FINRA will bar you from the securities industry. Automaticly. Permanantly. The Fifth Amendment dosent apply to FINRA becuase FINRA isnt the goverment.

So your choices are:

• Cooperate with FINRA and potentially incriminate yourself in the SEC investigation (which can refer matters to DOJ for criminal prosecution)
• Protect yourself at FINRA by invoking the Fifth, lose your career immediatly, and still face the SEC investigation anyway

The constitution protects you from the goverment but not from the private regulator. And the private regulator is the one who controls wheather you can work.

Ive seen this scenario destroy people. They take the Fifth at FINRA to protect themselves from criminal exposure. FINRA bars them. There career in securities is over. Then the SEC investigation continues anyway. Maybe it results in charges, maybe it dosent. But either way, theyve already lost everything. The bar is permanant. Its on BrokerCheck forever. There is no path back.

How Information Flows Between Regulators

Heres a connection nobody talks about. FINRA Rule 8210(b) allows FINRA to enter into agreements with other federal regulators to share information. What this means in practice is that everything you give FINRA – every document, every written statement, every word of your OTR testimony – can flow directly to the SEC.

The information sharing is essentialy one-way:

• FINRA can share with the SEC
• But the SEC generaly cannot share your information with other govermental agencies

So FINRA feeds information to the SEC, and the SEC keeps it confidential from other regulators. This creates a pipeline were your cooperation with FINRA builds the evidence file that the SEC uses against you.

And the coordination goes beyond just sharing documents. FINRA regularly coordinates investigations and enforcement actions with the SEC. They run parallel investigations. They share staff resources. They time there actions. A deficiency identified during a FINRA exam can trigger a full SEC investigation. A suspicious trading pattern FINRA’s surveillance systems detect gets referred to the SEC within days.

The Tyler Loudon case shows exactly how this works. FINRA detected suspicious trading in TravelCenters Inc. stock through there surveillance systems. Within a few days – not weeks, not months, days – FINRA referred the case to the SEC and FBI. Loudon eventualy pled guilty to securities fraud and forfeited $1.7 million. Both the SEC and FBI acknowledged FINRA’s assistance in there press releases. What started as a FINRA surveillance alert ended with a federal criminal conviction.

The Referral Machine

FINRA provided over 450 referrals in 2023 alone. Four hundred fifty cases that FINRA identified and sent to criminal and civil authorities. Many of the insider trading actions brought by the SEC and law enforcement start on the desk of a FINRA investigator or stem from FINRA investigations.

This is what nobody tells you when you recieve that 8210 letter. FINRA cant send you to prison directly. They can only revoke what they gave you – your registration, your ability to work as a broker. But FINRA is essentialy a feeding mechanism for federal prosecution. They detect. They investigate. They gather documents and testimony. Then they hand the package to the SEC and DOJ. The same testimony you gave to FINRA – the testimony you had to give becuase you couldnt invoke the Fifth – becomes evidence in your criminal trial.

The referral process is seamless:

• FINRA and SEC staff coordinate regularly
• There are formal channels for information sharing
• FINRA’s enforcement department works closely with SEC and DOJ
• When FINRA investigators discover evidence of conduct that might violate federal securities laws or criminal statutes, they share that information

Your regulatory problem becomes a criminal problem without you ever knowing the referral happened.

Think about the Loudon case again. FINRA detected the trading. Within days, federal authorities had the case. Loudon probly didnt even know FINRA had flagged him before the FBI showed up. The surveillance systems work faster then the notification systems. By the time you learn theres an investigation, the referral may already have been made.

Timeline Differences That Matter

FINRA moves fast. SEC moves slow. Both can destroy you, but on completly different timescales.

A FINRA investigation can result in sanctions within months. They send the 8210, you respond, they conduct an OTR, they issue a Wells Notice, you negotiate or fight, they impose sanctions. The process can be remarkably quick when FINRA wants it to be. And FINRA has less procedural protection to slow things down – no formal objection process, no court oversight, limited discovery rights. Speed works in there favor.

SEC investigations take years. The average SEC investigation spans two to four years. The median time from opening an investigation to filing charges is about 21 months. Complex cases take longer – financial fraud investigations average 34 months. The SEC has more procedural requirements, more oversight, more resources but also more demands on those resources. Cases sit on desks. Investigations drag on. You might wait years to learn wheather the SEC is going to charge you.

This timeline difference creates a strategic problem. FINRA might bar you from the industry while the SEC investigation is still ongoing. Your career is already over by the time the SEC decides what to do. Or the opposite – the SEC might take so long that you think the matter is resolved, only to recieve charges years after the conduct occured.

Both FINRA and the SEC face challenges like understaffing, which can prolong investigations even further. You might be in regulatory limbo for years – not cleared, not charged, just waiting. Your career hangs in suspense while bureaucratic timelines determine your fate.

The Parallel Investigation Reality

Heres an uncomfortable truth nobody warns you about. You might be facing three or four investigations simultaneously without even knowing it.

FINRA, the SEC, and state securities regulators often have parallel jurisdiction over the same conduct. They can all investigate you at the same time. Each agency follows its own procedures and timelines. You might be responding to a FINRA 8210 while the SEC is conducting an informal investigation you dont know about while a state regulator is reviewing the same transactions. They share information, but they dont always tell you they exist.

A target or witness can be subject to parallel proceedings between:

• SEC
• FINRA
• State securities regulators
• DOJ
• US Postal Fraud Unit
• IRS
• CFTC

The parallel proceedings can be both civil and criminal. They need to be carefully coordinated by your defense team – if you even know all the investigations exist.

The AIG cases illustrate this perfectly. In 2006, the SEC filed charges against an AIG executive. One week later, another SEC action against AIG itself. Then in 2009, actions against two more executives and a seperate action against the outside accountant. In 2010, another action against a different financial firm. Five seperate civil actions from one underlying scheme, spread over four years. If you were involved in that conduct, you were living under investigation for half a decade, never knowing when the next shoe would drop.

Penalties: What Each Can Actually Do To You

FINRA and the SEC have different weapons. Understanding the differences is critical to understanding your exposure.

FINRA’s Powers:

• Bar you from the securities industry. Permanantly. This means you cannot work as a broker, cannot associate with any FINRA member firm, cannot do the work you built your career around.
• Suspend you for shorter periods
• Impose fines – in 2023, FINRA imposed $89 million in total fines, up 63% from the prior year. Some fines run into the millions for larger firms.

But FINRA cannot send you to prison. FINRA lacks criminal enforcement authority. The worst FINRA can do directly is end your career and take your money. Thats devastating, but its not prison.

The SEC’s Powers:

• Civil enforcement actions with significant financial penalties – were talking millions in fines, plus disgorgement of profits, plus interest. The Terraform Labs case alone resulted in a $4.5 billion award – 56% of the SEC’s total monetary relief for 2024.
• Refer cases to the Department of Justice for criminal prosecution

When DOJ gets involved, your facing federal felony charges. Wire fraud. Securities fraud. Conspiracy. These charges carry potential prison sentences of twenty years or more per count. The stakes escalate from career destruction to actual incarceration. This is why the SEC investigation, despite being slower and offering more procedural protections, can be far more dangerous in the long run.

And heres the connection that ties it all together: FINRA’s 450+ annual referrals often end up at DOJ through the SEC. The private regulator that cant imprison you is feeding the pipeline that leads to prison. Your FINRA cooperation becomes your criminal conviction.

Strategic Implications

So what do you actualy do when your facing both regulators?

First: understand that there is no single right answer. Every decision involves tradeoffs between FINRA exposure, SEC exposure, and criminal exposure. Protecting yourself in one arena may harm you in another. You need counsel who understands all three arenas, not just securities law.

Second: recognize that cooperation with FINRA is mandatory but dangerous. You cant invoke the Fifth. You have to respond to 8210 requests. But everything you say flows to the SEC. Your responses must be truthful, complete enough to satisfy the cooperation requirement, and strategic enough not to create criminal exposure. This is an incrediably narrow corridor.

Third: assume your facing multiple investigations even if you only know about one. If FINRA has contacted you, theres a reasonable posibility the SEC knows. If the SEC has subpoenaed you, FINRA may have referred the matter. If either has acted, state regulators may be watching. You dont get the luxury of assuming only one front exists.

Fourth: timeline matters for strategy. FINRA moves faster, so FINRA issues may resolve – for better or worse – before SEC issues crystalize. This can sometimes be used strategicly. Sometimes it cant. Your counsel needs to understand both timelines and how they interact.

Fifth: document preservation applies to all investigations simultaniously. The moment you recieve notice from any regulator, you have obligations that extend across all potential investigations. Destruction of evidence is obstruction wheather the requesting agency is FINRA, SEC, or DOJ.

The Alpine Securities case shows what happens when you try to fight the system directly. That company spent nine years in litigation across four federal circuits, challenging FINRA’s constitutionality. They had resources to fight. Most individuals dont. Even Alpine eventualy lost.

Your not facing one investigation. Your facing a system of interconnected regulators who share information, coordinate actions, and feed cases to each other. FINRA can end your career in months. The SEC can end your freedom in years. And cooperation with either one can provide the evidence the other needs to act.

Understanding this reality is the first step to surviving it.

If you’re under investigation by either FINRA or the SEC, contact counsel who understands both regulatory frameworks and their interaction with criminal exposure. The decisions you make with one regulator directly affect your position with the other.