Strategic Defense Approach to SEC or FINRA Enforcement Actions

The U.S. Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”) continue to focus aggressively on the protection of investors. While there were fewer enforcement actions in 2024 compared to 2023, the financial penalties have surged, setting the stage for a record-breaking year in settlements.

To highlight the implication, the total of SEC enforcement penalties for 2023 was $4.95 billion, while FINRA imposed $85.5 million in fines. In 2024, the amount of civil penalties imposed has continued to escalate, reinforcing the regulator’s position to aggressively pursue and punish those who violate industry rules and regulations. This serves as a stark reminder for firms to prioritize compliance and closely monitor the evolving regulatory landscape. With the heightened commitment to curbing compliance violations and aggressive enforcement, firms and practitioners are advised to maintain a robust compliance program.

But what happens if a firm is faced with a regulatory inquiry or enforcement action?

What to do when faced with a Regulatory Formal Inquiry or Enforcement Action

There are several approaches a firm can take if they are faced with an investigation or potential enforcement action for failing to meet regulatory requirements. A firm’s approach to allegations involving securities rule violations will depend heavily on the firm’s existing culture, their history of documentation and recordkeeping, and their ability to demonstrate their commitment to compliance. Generally, we see three types of responses (including a combination thereof):

• Reactive Approach: The goal is to mitigate the consequences of the enforcement action through remediation. This focuses on commitment to remediation and transparency with regulators.
• Proactive Approach: To mitigate the consequences of the action through establishing a culture shift and proposing alternative internal controls to correct and prevent future rule violations. This focuses on proactivity, innovation, and collaboration.
• Defensive Approach: To challenge the enforcement action and negotiate for a more favorable resolution. This focuses on minimizing the penalties through minimizing the allegations.

A business’ defense strategy will depend on many factors and may benefit from combining all approaches to come to a more satisfactory resolution with the regulatory body. A firm will benefit from working with an experienced securities litigation attorney who can examine the allegations and the firm’s business (including its compliance program) to determine the best defense strategy. Regardless of how a firm decides to approach an enforcement action, it is imperative to:

• Hire experienced legal and compliance counsel;
• Launch a comprehensive internal review of the allegations to assess areas of concern;
• Understand the allegations and work through the business to mitigate, eliminate, and/or dispute the potentially violative conduct, and be aware of the depth of noncompliance (as applicable); and
• Take remediation steps and document how compliance gaps (if any) were addressed, by who, and when.

What to Expect in a Formal Inquiry

If a business is subject to a formal inquiry, they should engage legal counsel to guide them through the process. Furthermore, experienced legal counsel can undertake several key steps, such as:

• Launch an internal investigation to evaluate the area(s) of concern and determine if there is an issue
• Determine the best course of action, such as self-reporting, and a remedial action plan

A business’ response to a formal inquiry should in no way interfere with the SEC’ investigations and instead, should focus on identifying the area of concern and how to approach the inquiry.

Enforcement Proceedings

If the SEC finds a significant issue during their investigation, they will involve the SEC’s Division of Enforcement to determine:

• If investors were harmed
• If there was any fraud
• If the misconduct was intentional
• The degree and span of the misconduct
• If any profit was made from the activity
• If there were adequate supervisory procedures in place

The Division of Enforcement will review the cases and decide on whether to conduct a formal investigation, which can include subpoenas of witnesses, administration of oaths, document production, and more.

The SEC will determine the next course of action based on findings from the investigation and may consider bringing enforcement proceedings.

When to Settle and When to Proceed

If the SEC comes back with enforcement proceedings, it is best to work with your Securities legal counsel and litigator to customize the best defense strategy for your case.

Jacko Law Group will explore enforcement proceedings and best practices in more detail in upcoming content.

Author: Dharmi C. Mehta, Esq. is a Senior Attorney, at Jacko Law Group, PC (“JLG). She focuses her practice on representing the firm’s clients in enforcement actions, complex business disputes, and transactional matters for investment advisers, broker-dealers, financial professionals, and advisers to private funds.

JLG works extensively with investment advisers, broker-dealers, investment companies, private equity and hedge funds, banks and corporate clients on securities and corporate counsel matters. For more information, please visit https://www.jackolg.com/.

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