FINRA plays a significant role in alerting the SEC to insider trading infractions. As an industry watchdog, the regulatory group gathers information on firms even beyond their broker-dealer scope to assess whether trading activity is suspicious. Particularly when unusual trading activity occurs, letters of inquiry will be sent to all firms involved.
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If your firm receives an inquiry letter
, it’s best not to ignore it or to consider it routine. The information sought includes what was known at the firm and by whom before the trading activity occurred. Both FINRA and the SEC keep historical trading data on various issuers and markets, looking for patterns that may alert them to suspect activity.
After the letter is sent and your firm responds, you’re likely to get a second letter seeking any connection within your firm to the list of individuals and entities they have identified as being involved in that particular trading activity. Broker-dealers are mandated to respond to FINRA inquiries but other firms may be put on a watch list or have their names sent to the SEC if FINRA feels a firm is not cooperating.
The best action is to respond, be cooperative, and to maintain a good relationship with FINRA. Not responding can result in an SEC subpoena. Responding to a subpoena can be much more involved than responding to a letter of inquiry from FINRA, even though FINRA technically has no jurisdiction over firms other than broker-dealers. It may be a good idea to get a lawyer’s advice in responding to an inquiry letter. This can guarantee that an appropriate response is given and that all required documentation is submitted. Time-consuming though it may be, responding to such a letter will likely be much better than taking a chance by ignoring the request.