A private credit investment is a loan or debt instrument that is originated and held outside the traditional public markets. These investments are not traded on a public exchange and are not issued by a bank through conventional syndicated lending channels.
In a typical private credit transaction, a non-bank lender (often a specialized fund managed by an investment adviser) provides financing directly to a borrower, usually a middle-market company that may not have ready access to public bond markets or traditional bank loans. The borrower receives capital, and the lender (or the fund’s investors) earns returns primarily through interest payments, origination fees, and other negotiated terms.
There are several key characteristics that distinguish private credit from public debt investments, including:
Illiquidity. Private credit investments generally cannot be easily bought or sold on a secondary market. Investors typically commit capital for extended lock-up periods and rely on the borrower’s repayment schedule rather than market trading to realize returns.
Valuation complexity. Because these loans do not trade on a public exchange, there is no readily observable market price. The fund manager must determine the “fair value” of the investment using internal models, assumptions, and judgment, which is one of the main issues drawing SEC scrutiny right now.
Negotiated terms. Unlike publicly traded bonds with standardized terms, private credit deals are individually negotiated between lender and borrower, often with customized covenants, interest rates, and repayment structures.
Limited transparency. Compared to public markets, there is less regulatory disclosure and less price transparency, which can create information asymmetries between fund managers and their investors.
Common examples include direct loans to private companies, mezzanine financing, distressed debt, and asset-backed lending. The asset class has grown dramatically in recent years, with institutional investors (pension funds, endowments, insurance companies) and, increasingly, retail investors allocating capital to private credit funds in search of higher yields than those available in traditional fixed-income markets.
Private credit has emerged as one of the fastest-growing corners of the financial markets, with assets under management now measured in the trillions. But rapid growth has attracted the attention of regulators. In recent months, the SEC has made clear that it is training significant enforcement and examination resources on how private credit investments are valued, distributed, and disclosed to investors. From enforcement settlements and high-profile roundtables to coordinated interagency investigations, the regulatory signals are converging on a single message: registered investment advisers, broker-dealers, and other financial professionals involved in offering, managing, or recommending private credit and illiquid alternative investments should expect heightened scrutiny of their valuation practices, potential conflicts of interest, and investor disclosures.
A Confluence of Regulatory Activity
The SEC’s focus on private credit and private market valuations has intensified through several channels simultaneously, and the implications extend well beyond the largest fund sponsors to reach any registered investment adviser or financial professional with exposure to these asset classes.
Enforcement. On February 25, 2026, the SEC announced a settled enforcement action against Madison Capital Funding LLC, an Illinois-based investment adviser, for selling loans to affiliated private fund clients during the early months of the COVID-19 pandemic without adequately accounting for market disruption in its fair value determinations. According to the SEC’s order, Madison Capital had originated senior loans for private equity sponsors and sold portions of those loans to its funds, typically valuing them at par less the unamortized loan fee — a methodology that may have been reasonable in ordinary market conditions but that the SEC found was not adjusted to reflect the significant disruptions of March through May 2020. Madison Capital agreed to a $900,000 civil penalty, a censure, and a cease-and-desist order. Notably, the SEC brought the case on a negligence theory — meaning the agency did not need to prove the adviser intended to defraud its investors.
The Private Markets Roundtable. One day after announcing the Madison Capital settlement, the SEC announced a public roundtable on private market valuations, which took place on March 4, 2026. SEC Chairman Paul Atkins opened the event by emphasizing the agency’s interest in “responsible retailization” of private market investments and the importance of consistent, reliable valuation practices. The roundtable’s second panel focused specifically on fund governance related to private market assets, including the SEC’s fund valuation rule (Rule 2a-5), and panelists discussed fair-value approaches, governance expectations, and emerging best practices.
Enforcement Leadership Statements. On May 13, 2026, newly installed SEC Enforcement Director David Woodcock delivered his first public remarks at the Managed Funds Association Legal & Compliance Conference. Woodcock announced a “back-to-basics” approach and specifically identified private funds and investment advisers as a priority area. He stated that the Enforcement Division would “remain active” in the private funds space and would continue to “pursue matters involving misappropriated client assets, inadequate safeguarding of assets; misleading strategy disclosures; undisclosed fees and expenses; fraudulent valuations and mismarking; prohibited trading practices; and undisclosed conflicts of interest.” As Reuters reported, Woodcock said the SEC is “attuned to potential risk relating to liquidity, fees, valuation and conflicts of interest, not only at the private fund adviser level, but throughout the distribution chain.” That reference to “throughout the distribution chain” is particularly significant for RIAs and broker-dealers who recommend or allocate client capital to private credit strategies, as it signals that regulatory exposure is not limited to the managers who originate these investments.
Coordinated Investigations. In April and May 2026, reports emerged that the SEC has opened multiple enforcement investigations into major private credit fund managers, with probes focused on how managers value the loan assets they hold and whether they are complying with the valuation policies disclosed to investors. SEC Chairman Atkins confirmed at the Milken Institute Global Conference in May 2026 that the SEC, in coordination with the U.S. Treasury Department, is investigating allegations of fraud in the private credit market. The U.S. Attorney’s Office for the Southern District of New York has also signaled a parallel focus. U.S. Attorney Jay Clayton publicly warned that the Department of Justice is scrutinizing private credit valuation practices, including the “mismarking” of assets to generate fees, and specifically flagged situations where firms move positions between affiliated funds at internally determined prices.
2026 Examination Priorities. The SEC’s Division of Examinations released its fiscal year 2026 examination priorities in November 2025, expressly listing managers with private credit strategies, private funds with extended investment lock-up periods, and valuation as areas of focus. The priorities signal that examiners will assess the methods and controls surrounding fair valuation of illiquid assets, especially during periods of market volatility, and will scrutinize side-by-side management conflicts where advisers manage both private funds and separately managed accounts. Importantly, the 2026 priorities also emphasize recommendations of alternative investments to retail investors and those saving for retirement — placing RIAs and broker-dealers who recommend these products squarely within the examination crosshairs.
What the SEC Is Scrutinizing
Taken together, these developments paint a clear picture of the types of conduct and practices that are drawing, and will continue to draw, regulatory attention. For registered investment advisers and other financial professionals, many of these risk areas arise not only in managing private credit assets but also in recommending, distributing, and overseeing them on behalf of clients:
Valuation Methodologies and Rigor. The Madison Capital case illustrates that the SEC expects advisers to apply valuation procedures that respond to changing market conditions. Relying on static approaches, such as valuing loans at par or at historical cost without accounting for shifts in credit markets, may be deemed a breach of fiduciary duty, even absent any intent to deceive. The SEC is examining whether firms have robust, well-documented processes for determining the fair value of illiquid assets, including whether those processes incorporate multiple data inputs and are subject to regular back-testing.
Conflicts of Interest. Advisers that engage in principal transactions, such as selling assets from their own accounts to affiliated funds, face particularly intense scrutiny. The SEC’s concern, echoed by the DOJ, is that when a firm can “name a price internally,” as U.S. Attorney Clayton put it, the opportunity to select a price that benefits the adviser over its investors is significant. Cross-fund transfers, seed investments, and inter-affiliate transactions are all areas where conflicts can arise and where regulators will expect meaningful safeguards.
Disclosures to Investors. The SEC is evaluating whether the valuation policies and procedures that advisers disclose to investors in offering documents, advisory agreements, and Form ADV filings accurately reflect what the adviser actually does in practice. Gaps between disclosed policies and actual practices, or failures to update disclosures when practices change, can form the basis for fraud charges under the Investment Advisers Act, as the Madison Capital case demonstrated.
Fraudulent Valuations and Mismarking. Director Woodcock specifically identified “fraudulent valuations and mismarking” among his enforcement priorities. This signals that the SEC will pursue cases where managers intentionally or recklessly inflate portfolio valuations to generate higher management fees, improve reported performance, or delay recognizing losses.
Retailization and Investor Protection. The SEC’s roundtable and examination priorities reflect a growing concern about what happens as private market investments become more accessible to retail investors, including through 401(k) plans, following the August 2025 Executive Order opening the door to alternative assets in retirement plans. With retail capital flowing into products backed by illiquid assets, the SEC is focused on ensuring that valuation governance is adequate to protect investors who may lack the sophistication or bargaining power of institutional allocators. For RIAs who recommend these products or allocate client portfolios to private credit strategies, this creates a distinct layer of regulatory risk: advisers must conduct adequate due diligence on the valuation practices of the funds they recommend and ensure that suitability and best-interest obligations are satisfied before placing clients in illiquid, hard-to-value investments.
Practical Implications for Registered Investment Advisers and Financial Professionals
For registered investment advisers, broker-dealers, compliance professionals, and others in the private credit distribution chain, the implications are many:
Review and Stress-Test Valuation Policies. Advisers who directly manage private credit portfolios should critically evaluate whether their existing valuation methodologies account for the full range of market conditions they may encounter, including periods of dislocation, illiquidity, or credit stress. Policies that were designed for and worked in calmer markets may not withstand scrutiny when conditions deteriorate. Back-testing valuation determinations against subsequent outcomes (such as actual sale prices) can help identify weaknesses. RIAs who allocate client assets to third-party private credit funds should, at a minimum, understand the fund’s valuation methodology and assess whether it is reasonable, appropriately documented, and subject to independent oversight.
Document Everything. The SEC’s examination priorities and enforcement actions consistently emphasize the importance of documentation. Firms should maintain clear, contemporaneous records of how valuations are determined, what inputs and assumptions are used, who is involved in the process, and how valuation committees reach their conclusions. Firms also should maintain clear, contemporaneous documentation of appropriate due diligence analysis and risk disclosure to investors.
Ensure Disclosures Match Practice. Advisers should conduct a thorough review of all investor- and client-facing disclosures—including Form ADV, advisory agreements, offering memoranda, and any marketing materials describing private credit strategies—to confirm that the valuation procedures, risk factors, and liquidity terms described in those documents accurately reflect current practices. Where discrepancies exist, they should be corrected promptly.
Manage and Disclose Conflicts of Interest. Advisers that engage in principal transactions, inter-fund transfers, or other transactions involving potential conflicts should ensure they have robust policies and procedures to manage those conflicts — and that they can demonstrate compliance with those policies. But conflicts are not limited to the fund management level. RIAs who receive revenue sharing, placement fees, or other compensation, including potential non-cash compensation, in connection with recommending private credit products must ensure those arrangements are fully disclosed and do not compromise their fiduciary obligations. Independent oversight, such as the involvement of a valuation committee with members who do not have a financial interest in the outcome, can provide an important additional safeguard.
Strengthen Due Diligence on Private Credit Offerings. RIAs and broker-dealers who recommend private credit investments to clients should ensure their due diligence processes are thorough and well-documented. This means going beyond marketing materials to evaluate a fund’s valuation governance, auditor independence, liquidity terms, track record, and the reasonableness of reported returns. Suitability and best-interest obligations under Regulation Best Interest and the Investment Advisers Act fiduciary standard require advisers to understand the products they recommend—and to be able to demonstrate that understanding to examiners.
Looking Ahead
Private credit has grown too large and too significant to the broader financial system to escape the kind of regulatory attention that public markets have long received. The SEC has moved beyond generalized warnings and is now actively deploying its enforcement resources to address the risks it perceives in this space, and it has made explicit that its focus extends beyond the largest fund sponsors to reach every participant in the distribution chain.
For registered investment advisers and financial professionals, the takeaway is this: proactive preparation is far less costly than reactive defense. Firms that re-underwrite their valuation processes, strengthen due diligence on the private credit products they recommend, tighten conflict disclosures, and ensure that their compliance programs reflect current regulatory expectations will be far better positioned to weather scrutiny than those that wait for an SEC examination letter or enforcement inquiry to arrive.
Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes.
We represent many investment advisors, financial professionals, broker-dealers, registered representatives, investors and businesses.
Attorney George C. Miller can be reached in the firm’s San Diego office at (619) 696-9500.
The Securities and Exchange Commission (“SEC”) has begun reshaping its regulatory agenda for 2026 with several initiatives that could significantly affect investment advisers, broker-dealers, private fund advisers, and other participants in the financial services industry. While the Commission has signaled an interest in reducing unnecessary regulatory burdens in certain areas, it also continues to pursue enhanced transparency and reporting where it believes additional oversight is warranted. Three developments deserve particular attention: (1) the SEC’s proposed electronic delivery framework, (2) proposed amendments to Form PF, and (3) the Commission’s Spring 2026 Regulatory Flexibility Agenda and Unified Agenda. Although none of these initiatives are final, they provide valuable insight into the SEC’s current regulatory priorities and offer firms an opportunity to prepare before new requirements take effect.
1. Modernizing Investor Communications Through Electronic Delivery
One of the SEC’s most practical proposals seeks to modernize how regulated entities deliver required disclosures to investors. For decades, many provisions under the federal securities laws, including the Investment Advisers Act of 1940, as amended (the “Advisers Act”), have required firms to obtain affirmative consent – typically through contractual arrangements, before delivering certain required documents electronically. As investor communications have increasingly shifted to digital platforms, these requirements have become more burdensome without necessarily improving investor protection.[1]
The SEC has proposed establishing electronic delivery as the default method for delivering many required documents, while preserving an investor’s right to request paper delivery at any time. If adopted, the proposal would generally permit regulated entities to satisfy delivery obligations by transmitting documents electronically or providing notice that documents are available through an electronic platform, provided investors receive timely access and appropriate safeguards remain in place.
a. Why the Proposal Matters
For broker dealers, investment advisers, registered investment companies, and other financial institutions, a modernized delivery framework could produce meaningful operational efficiencies. Potential benefits include: reduced printing and mailing expenses; faster delivery of required disclosures; improved document retention and audit trails; more efficient supervisory procedures; and a more consistent experience for clients who already conduct most financial business electronically.
Although the proposal appears intended to reduce compliance costs, firms should not assume implementation will be automatic. Organizations should evaluate whether their existing policies adequately address electronic communications, cybersecurity controls, client notification procedures, record retention obligations, and supervisory review processes. The proposal remains subject to the SEC’s rulemaking process, and its final requirements may differ from the current proposal. Nevertheless, firms may wish to begin reviewing internal procedures now so they are positioned to respond efficiently if a final rule is adopted.
2. Proposed Form PF Amendments Continue the SEC’s Focus on Private Funds
The SEC has also proposed additional amendments to Form PF, continuing a multi-year effort to refine the confidential reporting obligations applicable to many SEC-registered private fund advisers.[2] Form PF serves as an important regulatory reporting tool used by the SEC and the Financial Stability Oversight Council to monitor potential risks within the private fund industry. Since its adoption, the form has been revised several times as regulators have sought more timely and standardized information regarding fund operations and market activity. The latest proposal would expand certain reporting requirements for Form PF filers by requesting additional information regarding matters such as:
fund operations;
leverage and financing arrangements;
portfolio exposures;
liquidity management;
investor concentration; and
other operational metrics designed to improve regulatory visibility into private fund activities.
Although the proposal does not fundamentally change the purpose of Form PF, it would require many advisers to collect and organize more detailed information than they currently report.
a. Practical Considerations for Private Fund Advisers
Firms engaged in investment management, fund formation, private investment funds, hedge funds, private equity funds, and other alternative investment strategies should carefully evaluate whether their current compliance and reporting systems capture the information contemplated by the proposal. In many organizations, Form PF preparation involves coordination among legal, compliance, operations, finance, and portfolio management personnel. Additional reporting requirements may therefore require enhancements to internal data collection procedures well before any compliance date arrives. Because the proposal remains open to public comment before final adoption, advisers should continue monitoring developments and consider whether submitting comments would be appropriate where operational concerns exist.
3. The Spring 2026 Regulatory Flexibility Agenda Signals the SEC’s Broader Priorities
Twice each year, the SEC publishes its Regulatory Flexibility Agenda, which identifies the rulemaking initiatives the Commission expects to consider during the upcoming regulatory cycle. Although the Agenda is not binding, it provides one of the clearest indicators of the Commission’s policy priorities and anticipated rulemaking activity.[3] Beyond electronic delivery and Form PF, the Spring 2026 Regulatory Flexibility Agenda identifies several initiatives that could substantially affect investment advisers, broker dealers, private funds, financial institutions, and participants throughout the capital markets.
a. Clarifying the Regulatory Status of Finders
One of the most anticipated items is a proposed rule addressing the regulatory status of finders under Section 15(a) of the Securities Exchange Act of 1934. For decades, market participants have operated without comprehensive regulatory guidance distinguishing permissible finder activities from conduct requiring registration as a broker-dealer. Businesses raising capital, private equity firms, venture capital sponsors, and participants in private placements have frequently relied upon SEC staff guidance, no-action letters, and judicial interpretations rather than formal Commission rules.
The inclusion of this proposal in the Agenda signals that the SEC is considering establishing a more predictable regulatory framework governing limited capital introduction activities. Although no proposed rule text has yet been released, additional clarity could reduce regulatory uncertainty surrounding referral arrangements and transaction-based compensation while assisting firms in evaluating whether particular activities require broker-dealer registration.[4]
b. Proposed Custody Rule Amendments
The Agenda also includes proposed amendments to the custody framework under both the Advisers Act and the Investment Company Act of 1940. Rather than continuing the Commission’s previously proposed Safeguarding Rule, which generated significant industry feedback and was ultimately withdrawn, the current Agenda indicates that the SEC intends to develop more targeted amendments designed to modernize the existing custody regime while addressing identified compliance burdens.[5]
Although the Commission has not yet published draft amendments, advisers should anticipate that the proposal may address evolving custody practices involving digital assets, privately offered securities, and other non-traditional asset classes. Changes could affect custodial arrangements, compliance testing, examination priorities, and operational controls for investment advisers, asset managers, registered investment companies, and other firms responsible for safeguarding client assets.
c. Enhancing Retail Exposure to Private Markets
Another notable initiative is the proposal entitled “Enhancing Retail Exposure to Private Markets.” Historically, participation in private funds and other private market investments has largely been limited to institutional investors and individuals meeting the accredited investor or qualified purchaser standards. The Commission is now evaluating whether broader retail participation can be facilitated through appropriately regulated investment vehicles while maintaining meaningful investor protections.[6]
According to the Agenda and accompanying public statements by SEC leadership, the Commission is considering amendments under both the Advisers Act and the Investment Company Act that could facilitate greater retail access to private market investments through registered investment products. The Commission is also evaluating whether to expand the categories of clients to whom investment advisers may charge performance-based compensation.[7]
If adopted, these initiatives could materially expand investor access to private equity funds, private investment funds, and other alternative investments, while creating new opportunities for investment management firms to develop innovative investment products. At the same time, advisers should expect continued emphasis on disclosure, valuation, liquidity management, and fiduciary obligations designed to protect retail investors participating in less liquid asset classes.
4. A Common Regulatory Theme
Viewed collectively, the Spring 2026 Regulatory Flexibility Agenda reflects a Commission focused on modernizing existing regulations, clarifying longstanding areas of uncertainty, facilitating capital formation, and reducing unnecessary compliance burdens where appropriate. Rather than simply increasing regulation, the Agenda suggests a more targeted approach that seeks to align existing regulatory frameworks with today’s financial markets while preserving core investor protection principles.
a. Preparing for What Comes Next
Although these initiatives remain in various stages of the rulemaking process, firms should not wait until final rules are adopted before evaluating their potential impact. For investment advisers, broker dealers, asset managers, financial professionals, and private equity firms, proactive preparation can reduce implementation costs and minimize compliance disruptions if the SEC moves forward with these proposals. Organizations should consider:
reviewing electronic communication policies and delivery procedures;
evaluating cybersecurity and record retention controls supporting electronic communications;
assessing whether existing Form PF reporting processes capture the information contemplated by the proposed amendments;
monitoring future SEC releases and public comment periods; and
consulting experienced securities counsel regarding the potential impact on existing compliance programs.
The SEC’s recent initiatives demonstrate that regulatory modernization is not synonymous with deregulation. Rather, the Commission appears focused on reducing administrative burdens where technology permits while expanding regulatory visibility into areas it views as presenting greater systemic or investor protection concerns. For firms operating under the Advisers Act, remaining informed about these developments will be critical as the SEC continues implementing its 2026 regulatory agenda.
Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes.
We represent many investment advisors, financial professionals, broker-dealers, registered representatives, investors and businesses.
Attorney Robert R. Boeche, II can be reached in the firm’s San Diego office at (619) 696-9500.
[1] Securities and Exchange Commission, Electronic Delivery of Certain Required Disclosures Under the Federal Securities Laws, Release No. 33-11468 (June 4, 2025), available at https://www.sec.gov
For nearly a decade, the Supreme Court has steadily reshaped the Securities and Exchange Commission’s authority to seek disgorgement. Beginning with Kokesh v. SEC, 581 U.S. 455 (2017) and continuing through Liu v. SEC, 591 U.S. 71 (2020), the Court imposed meaningful limits on a remedy that had become a central feature of SEC enforcement. Many expected the Court to continue narrowing disgorgement in Sripetch v. SEC, 608 U.S. ___, No. 25-466, slip op. at 13 (June 4, 2026). Instead, the Court unanimously preserved one of the SEC’s most important enforcement tools.
The case arose from SEC enforcement proceedings against Ongkaruck Sripetch, who participated in fraudulent penny-stock schemes involving more than twenty companies. After consenting to liability, Sripetch challenged the SEC’s request for more than $4 million in disgorgement. He argued that, under the Supreme Court’s decision in Liu v. SEC, the SEC could not obtain disgorgement unless it proved that investors suffered measurable financial losses.
The argument reflected a growing split among the federal circuits. The First and Ninth Circuits had concluded that proof of investor loss was unnecessary. The Second Circuit reached the opposite conclusion, reasoning that Liu’s requirement that disgorgement be “awarded for victims” necessarily required proof of pecuniary harm. The Supreme Court granted certiorari to resolve that conflict.
At argument, the Writing for a unanimous Court, Justice Gorsuch held that the SEC is not required to prove investors suffered financial loss before obtaining disgorgement.
The Court focused on traditional principles of equity rather than modern concepts of damages. Historically, equitable remedies required a wrongdoer to surrender unjust gains even where the victim’s monetary loss could not easily be established. An investor could qualify as a victim because the defendant interfered with legally protected interests, even if the investor ultimately suffered no measurable financial injury. As the Court explained, “a showing of pecuniary loss is not required before an investor may qualify as a victim of an offender’s wrongdoing entitled to compensation.”
From an enforcement perspective, the decision removes a potentially powerful defense. Many securities violations do not produce readily measurable investor losses. Insider trading may generate unlawful profits without identifiable investor victims. Market manipulation may distort trading prices while making individual losses difficult to quantify. Registration violations may involve unlawful gains despite investors ultimately earning positive returns.
Had the Court required proof of pecuniary loss, defendants could have challenged disgorgement in many of these cases. Sripetch eliminates that argument.
The SEC therefore retains broad authority to seek recovery of ill-gotten gains, provided it continues to satisfy Liu’s remaining equitable limitations. Enforcement staff will likely view the decision as confirmation that disgorgement remains a viable remedy despite the Court’s earlier skepticism toward expansive SEC enforcement powers.
More interesting questions loom, especially in light of Justice Gorsuch’s recent concurrence in Trump v. Slaughter, 609 U.S. ___, No. 25-332, slip op. at 13 (Gorsuch, J., concurring) (June 29, 2026). In that concurrence, Gorsuch suggested that the Court would need to pair its move to limit agency independence with a more robust reading of the non-delegation doctrine. This may call into question whether Congress would have granted such expansive powers to previously independent agencies like the FTC and SEC had they known that their leadership would be subject to at-will removal by the executive.
Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many investment advisors, financial professionals, broker-dealers, registered representatives, investors and businesses. Attorney William M. Moore can be reached in the firm’s San Diego office at (619) 696-9500.
Understanding the Proposed Financial Exploitation Prevention Act (H.R. 2478) and What It Means for Investors, Families, Financial Professionals, Broker-Dealers, RIAs, and Compliance Officers
Financial exploitation of older Americans has become one of the most serious investor-protection problems in the United States. Criminals increasingly target retirement accounts, brokerage accounts, mutual fund holdings, bank accounts, annuities, trust assets, and other accumulated savings using fraud, coercion, social engineering, impersonation, artificial intelligence, romance scams, cryptocurrency schemes, and abuse of positions of trust.
The proposed Financial Exploitation Prevention Act of 2025, H.R. 2478, is Congress’s latest effort to give financial institutions additional tools to intervene before suspicious redemptions and transfers become irreversible. As of the date of this article, H.R. 2478 remains proposed legislation. It has been introduced, reported favorably by the House Financial Services Committee, and placed on the House Union Calendar, but it has not become law. [1]
The bill would amend the Investment Company Act of 1940 to permit registered open-end investment companies and transfer agents to delay payment on certain redemptions when they reasonably believe that the redemption involves financial exploitation of a specified adult. The bill is narrower than many popular summaries suggest: it focuses on redemptions of securities issued by open-end investment companies, such as mutual funds, serviced through transfer agents, and is designed to complement, not replace, existing FINRA, state, and federal protections. [2]
For investors and families, the lesson is practical. Do not wait until money has vanished. Suspicious liquidation requests, sudden wire transfers, cryptocurrency transactions, new online relationships, caregiver pressure, changes in powers of attorney, or abrupt deviations from long-established investment patterns should be investigated immediately. For broker-dealers, RIAs, mutual fund companies, transfer agents, supervisors, and compliance personnel, H.R. 2478 is another indication that regulators and Congress expect earlier detection, better documentation, stronger escalation procedures, and effective training.
This article explains what H.R. 2478 would do, why Congress introduced it, how it fits within existing law, and what investors, families, financial professionals, and financial institutions should do now to prevent elder investment fraud and preserve legal rights when fraud is suspected.
I. America’s Growing Crisis of Elder Financial Exploitation
For millions of Americans, retirement represents the culmination of decades of work, saving, investing, and financial discipline. Those assets are supposed to provide independence, medical security, family stability, and dignity. Increasingly, however, older investors are being targeted precisely because they have accumulated assets and can authorize transactions quickly.
The FBI’s 2024 Internet Crime Report illustrates the scale of the problem. IC3 reported 859,532 complaints and $16.6 billion in losses in 2024, a 33 percent increase in reported losses from 2023. Individuals over age 60 submitted 147,127 complaints and reported $4.8 billion in losses, the highest loss total of any age group. [3]
Investment fraud was the largest reported loss category in the FBI’s 2024 data, accounting for more than $6.57 billion in reported losses. The report also identified cryptocurrency as a major descriptor, associated with more than $9.32 billion in reported losses across relevant complaint categories. [4] Cyber-enabled fraud accounted for approximately 83 percent of all reported IC3 losses in 2024. [5]
These figures almost certainly understate the actual magnitude of the problem. Many victims never report fraud because they are embarrassed, fear loss of independence, do not know where to report, or believe recovery is impossible. The CFPB has likewise reported that financial institutions filed more than 180,000 suspicious activity reports involving elder financial exploitation between 2013 and 2017, involving more than $6 billion. [6]
Congress has cited estimates that elder financial exploitation costs seniors more than $28 billion annually. [7] Whether measured by FBI complaints, CFPB suspicious activity reports, state regulatory data, or private research, the trend is unmistakable: older adults are losing life savings to increasingly sophisticated schemes.
Key Takeaway
Elder financial exploitation is not limited to isolated scams. It is a national investor-protection issue involving organized criminal networks, online fraud, cryptocurrency schemes, misuse of authority, and, in some cases, misconduct or supervisory failures within the financial services industry.
II. Why Congress Introduced H.R. 2478
H.R. 2478 did not arise in a vacuum. It is part of a broader legislative and regulatory progression that began with state elder-protection statutes, continued through FINRA’s trusted-contact and temporary-hold rules, and expanded through federal efforts to encourage reporting of suspected exploitation.
The Senior Safe Act, enacted as part of the Economic Growth, Regulatory Relief, and Consumer Protection Act, created immunity from liability for certain trained financial institution personnel who, in good faith and with reasonable care, disclose suspected exploitation of a senior citizen to a regulatory or law-enforcement agency. [8] The Senior Safe Act addressed reporting; it did not create a broad redemption-delay framework for mutual fund redemptions processed through transfer agents.
FINRA then adopted important rules applicable to broker-dealers. FINRA Rule 4512 requires member firms to make reasonable efforts to obtain the name and contact information of a trusted contact person for non-institutional accounts. [9] FINRA Rule 2165 permits member firms, in defined circumstances, to place temporary holds on disbursements or transactions involving accounts of specified adults when the firm reasonably believes financial exploitation has occurred, is occurring, has been attempted, or will be attempted. [10]
State securities regulators also acted. NASAA’s Model Act to Protect Vulnerable Adults from Financial Exploitation, adopted in 2016, encourages reporting to state securities regulators and adult protective services, authorizes limited third-party disclosures, permits delayed disbursements in appropriate circumstances, and provides immunity for good-faith compliance. [11] Many jurisdictions, including California, have enacted legislation or regulations based on or related to the NASAA model.
H.R. 2478 is the next step in that progression. The House Financial Services Committee described the bill as authorizing registered open-end investment companies and their transfer agents to delay redemptions when they reasonably believe financial exploitation is occurring or has been attempted. [12] In short, the legislation seeks to fill a practical gap in the protection of investors who hold mutual fund shares directly at the fund level or through transfer-agent relationships rather than in traditional brokerage accounts.
Legislative History
Representative Ann Wagner introduced H.R. 2478 on March 27, 2025. The bill was referred to the House Committee on Financial Services. The Committee reported the bill favorably, with an amendment, and recommended that it pass. [13] As of the date of this article, Congress.gov reflects that the bill was placed on the House Union Calendar on November 4, 2025, and has not become law. [1]
The bill has a prior legislative history. In the 118th Congress, Representative Wagner introduced H.R. 500, an earlier version of the Financial Exploitation Prevention Act. That bill passed the House under suspension of the rules by a vote of 419-0, was received in the Senate, and was referred to the Senate Committee on Banking, Housing, and Urban Affairs, but no further action occurred before the end of the 118th Congress. [14]
During the 119th Congress, the House Financial Services Committee considered H.R. 2478 in open session on September 16, 2025, adopted an amendment in the nature of a substitute by voice vote, and ordered the bill reported favorably by a recorded vote of 50-0. [15] That unanimous committee vote is significant. Protecting older investors from financial exploitation has generated bipartisan support because the problem is not ideological. It affects retirees, families, and financial institutions in every state.
III. What H.R. 2478 Would Do
H.R. 2478 is narrower, more technical, and more targeted than many readers may assume. It would amend Section 22 of the Investment Company Act of 1940 to address delayed payment or satisfaction upon redemption of certain securities in cases involving suspected exploitation of specified adults. The bill applies to registered open-end investment companies and certain transfer agents that elect to comply with the statute’s procedures. [2]
The core concept is straightforward. If an open-end investment company or transfer agent reasonably believes that a redemption involves financial exploitation of a specified adult, the company may delay redemption payment. The bill defines the protected population to include individuals age 65 or older and adults age 18 or older who are unable to protect their own interests because of a mental or physical impairment. [2]
The bill contemplates an initial delay of up to 15 days. If the company determines that exploitation has occurred, the delay may be extended for an additional 10 days. A state regulator, administrative agency, or court may extend the period further. Amounts subject to the delayed redemption must be held in a demand deposit account, and the bill establishes notification requirements
The bill also requires registered open-end investment companies and transfer agents that elect to use these procedures to notify the SEC. In addition, the SEC must report recommendations to Congress regarding regulatory or legislative changes needed to address financial exploitation of specified adults, after consulting with agencies and organizations including the CFTC, CFPB, FINRA, NASAA, the Federal Reserve, the OCC, and the FDIC. [16]
The bill does not authorize financial institutions to second-guess investment decisions simply because a customer is old, conservative, aggressive, or making an investment decision the firm considers unwise. The relevant trigger is reasonable belief of financial exploitation. That distinction is essential. Older adults do not lose autonomy because they age. Protective intervention must be based on objective evidence of fraud, coercion, deception, undue influence, or inability to protect one’s own interests.
What H.R. 2478 Is – and Is Not
H.R. 2478 is proposed federal legislation. It is not yet law.
It focuses on redemptions of certain open-end investment company securities serviced by transfer agents.
It would permit limited redemption delays when financial exploitation is reasonably suspected.
It is not a general license for financial institutions to block transactions simply because they disagree with an investor’s judgment.
IV. FINRA Rules 4512 and 2165: The Existing Framework
H.R. 2478 should be understood against the backdrop of FINRA Rules 4512 and 2165. Those rules remain central to broker-dealer elder-protection practices.
Rule 4512 requires broker-dealers to make reasonable efforts to obtain the name and contact information of a trusted contact person for a customer’s account, subject to specified limitations.[9] A trusted contact does not become a co-owner, agent, trustee, or power of attorney. The trusted contact has no authority to trade, withdraw funds, or make investment decisions. The purpose is narrower: the brokerage firm may contact that person in limited circumstances to address possible financial exploitation, confirm contact information, health status, or the identity of a legal guardian, executor, trustee, or power-of-attorney holder. [17]
Rule 2165 permits a member firm to place a temporary hold on a disbursement or transaction in an account of a specified adult if the firm reasonably believes financial exploitation has occurred, is occurring, has been attempted, or will be attempted. The rule defines a specified adult as a natural person age 65 or older, or an adult age 18 or older whom the firm reasonably believes has a mental or physical impairment rendering the person unable to protect his or her own interests. [10]
Rule 2165 also imposes procedural safeguards. The firm must provide notification, unless the person to be notified is unavailable or suspected of involvement in the exploitation; it must immediately initiate an internal review; it must limit the hold period unless extended as permitted; it must maintain written supervisory procedures; and it must keep records supporting its decision. [18]
The SEC, FINRA, and NASAA have continued to encourage trusted contacts as a practical investor-protection device. In 2025, their updated Investor Bulletin explained that a trusted contact is similar to an emergency contact and does not receive authority to make decisions or execute transactions in the investor’s account. [19]
V. How Elder Investment Fraud Occurs
The common denominator in most elder financial exploitation cases is not lack of intelligence by the victim. Victims include physicians, attorneys, accountants, professors, business owners, engineers, executives, and sophisticated investors. The common denominator is manipulation. Modern fraudsters understand psychology, technology, and timing.
Many schemes begin slowly. The victim receives a call, text, email, social-media message, or online introduction. The communication appears legitimate or emotionally compelling. The fraudster builds trust over days, weeks, or months. Eventually, the victim is encouraged to transfer money, liquidate securities, purchase cryptocurrency, change beneficiaries, grant account access, or keep the matter secret.
Artificial intelligence has increased the risk. Fraudsters can now generate polished emails, realistic voice recordings, forged documents, synthetic images, and personalized messages based on publicly available information. What once looked like obvious spam may now appear to come from a legitimate financial institution, government agency, family member, or trusted advisor.
Cryptocurrency scams are particularly dangerous because transactions can move quickly and recovery can be difficult. The FBI’s 2024 report described cryptocurrency investment fraud, often referred to as pig butchering, as a confidence-based scam in which criminals build an online relationship before introducing a fraudulent cryptocurrency investment platform. In Operation Level Up, the FBI notified 4,323 potential victims of cryptocurrency investment fraud; 76 percent were unaware they were being scammed, and estimated savings exceeded $285 million. [20]
Romance scams operate similarly. The initial request is rarely for money. The fraudster first creates emotional reliance. Eventually, an emergency, investment opportunity, travel problem, medical crisis, or business issue arises. The victim liquidates investments, withdraws retirement funds, wires money, or buys cryptocurrency because the request appears to come from someone who cares about them.
Other cases involve exploitation by family members, caregivers, trustees, or agents under powers of attorney. These cases can be harder to detect because the wrongdoer may already have access to the investor’s finances or may appear to be helping. Misuse of powers of attorney, improper beneficiary changes, self-dealing transfers, unauthorized loans, and pressure to execute estate-planning documents can all constitute financial exploitation.
Finally, some cases involve misconduct within the financial services industry itself. Unsuitable recommendations, unauthorized trading, excessive trading, selling away, misrepresentations, illiquid private placements, Ponzi schemes, and failures to supervise registered representatives may all cause recoverable losses. Not every investment loss is actionable, but losses caused by violations of legal or regulatory duties should be investigated.
Ten Warning Signs of Elder Financial Exploitation
Sudden liquidation of long-held investments.
Repeated or unusually large wire-transfer requests.
New interest in cryptocurrency without prior experience.
A new friend, romantic contact, caregiver, or relative directing financial decisions.
Requests for secrecy or instructions not to contact family members.
Unexplained beneficiary, address, or account-access changes.
Confusion about transactions supposedly authorized by the investor.
Pressure to act immediately.
Investment decisions inconsistent with decades of prior objectives.
Fear, anxiety, or reluctance when asked routine financial questions.
VI. Practical Guidance for Investors and Families
Prevention remains the best protection. Families should discuss financial safeguards before a crisis occurs. That discussion should respect independence while recognizing that fraud can affect anyone.
Investors should designate trusted contacts on brokerage accounts where available, review monthly statements promptly, verify significant transfer requests independently, use strong account-security practices, and pause before making urgent decisions. Any request to keep a transaction secret from family, counsel, accountants, or trusted advisors should be treated as a serious warning sign.
Adult children and other family members should look for changes in behavior, not merely changes in account values. Sudden secrecy, new relationships involving money, anxiety when discussing finances, unexplained withdrawals, or abrupt changes in estate planning may warrant closer review. The goal is not to take control of a parent’s finances. The goal is to ensure that decisions are being made freely, knowingly, and without coercion or deception.
When suspicious activity is detected, time matters. Contact the financial institution immediately. Ask whether transfers can be delayed, whether a fraud department can review the transaction, and whether additional account controls are available. Preserve emails, texts, voicemails, account statements, confirmations, transfer instructions, and names of everyone involved. Do not delete messages out of embarrassment.
Why Early Intervention Changes Outcomes
The practical difference between early and late intervention can be decisive. A pending wire transfer may be stopped. A recent transfer may sometimes be recalled. A suspicious redemption may be delayed if the institution has legal authority and adequate procedures. A cryptocurrency transfer, by contrast, may become effectively unrecoverable once the assets move through multiple wallets controlled by criminals.
Early intervention also preserves choices. Families may be able to involve trusted contacts before a victim becomes isolated. Counsel may be able to send preservation demands before emails, telephone recordings, account notes, CRM entries, and surveillance materials are destroyed in the ordinary course. Financial institutions may be able to conduct an internal review while employees still remember the relevant conversations. Law enforcement may be able to trace funds before they are layered through additional accounts.
Delay has the opposite effect. Victims often wait because they are embarrassed, because they trust the person asking for money, or because they hope the situation can be resolved privately. In family exploitation cases, delay may result from understandable reluctance to accuse a relative or caregiver. In romance scams, victims may continue believing the relationship is genuine even after objective evidence suggests fraud. In investment schemes, victims may be told that withdrawals are delayed only because of administrative problems or taxes.
For investors and families, the most practical rule is simple: investigate first and apologize later. Asking questions is not disrespectful. A legitimate advisor, fiduciary, family member, caregiver, or investment sponsor should be able to explain the transaction, provide documents, and allow reasonable time for review. A person who insists on secrecy, urgency, or isolation is creating a red flag that should not be ignored.
Immediate Steps If Fraud Is Suspected
Contact the financial institution immediately and ask for the fraud or compliance department.
Request review or delay of pending transfers where legally available.
Preserve all emails, texts, voicemails, account statements, wire instructions, and screenshots.
Change passwords and enable multi-factor authentication if account access may be compromised.
Report criminal conduct to law enforcement or the FBI’s IC3 portal where appropriate.
Consult experienced securities counsel promptly before additional assets are transferred.
VII. Guidance for Broker-Dealers, RIAs, Mutual Fund Companies, Transfer Agents, and Compliance Departments
For financial institutions, H.R. 2478 should be viewed as more than proposed legislation. It reflects evolving expectations. Regulators, courts, arbitration panels, and customers increasingly expect firms to recognize patterns of exploitation, train personnel, escalate concerns, and document their decisions.
Broker-dealers should evaluate whether their Rule 4512 trusted-contact processes are effective in practice, not merely on paper. Firms should ask whether trusted contacts are obtained, updated, and used appropriately. They should also review whether Rule 2165 procedures identify who may place or extend a hold, when legal or compliance review is required, how notifications are documented, and how suspicious activity is escalated.
RIAs should consider comparable policies even where FINRA rules do not directly apply. Advisers owe fiduciary duties and often maintain long-standing relationships with clients. They may be well positioned to identify sudden changes in behavior, unusual instructions, or third-party influence. Investment adviser representatives should be trained to escalate concerns rather than informally resolving them in isolation.
Mutual fund companies and transfer agents should pay particular attention to H.R. 2478 because the bill is directed to open-end investment company redemptions and transfer-agent relationships. Firms that could elect to rely on the proposed procedures should begin considering how they would document reasonable belief, notify appropriate parties, hold redemption amounts, and coordinate with regulators if the bill is enacted.
Compliance departments should create multidisciplinary protocols involving legal, supervision, operations, fraud, technology, and client-facing personnel. A customer-service employee may see a change of address; operations may see a new ACH instruction; the advisor may see a liquidation request; compliance may see a suspicious pattern. The system must connect those observations before assets leave the institution.
Compliance Checklist for Financial Institutions
Do written supervisory procedures address elder financial exploitation directly?
Are trusted contacts obtained and updated consistently?
Are employees trained on AI scams, romance scams, crypto fraud, caregiver exploitation, and powers of attorney?
Does the firm have clear escalation procedures for suspicious disbursements and redemptions?
Are temporary holds documented with objective facts and supervisory approval?
Can the firm aggregate warnings across departments?
Are incident files sufficient for review by regulators, courts, or FINRA arbitration panels?
VIII. Legal Remedies Available Today
Investors do not need to wait for H.R. 2478 to become law before seeking legal advice. Existing remedies may be available under federal securities laws, state securities statutes, FINRA arbitration rules, fiduciary-duty principles, negligence law, contract law, elder financial abuse statutes, and common-law fraud theories.
Many disputes involving broker-dealers and registered representatives are resolved in FINRA arbitration. Potential claims include unsuitable recommendations, unauthorized trading, excessive trading, misrepresentation, omission of material facts, breach of fiduciary duty, negligence, failure to supervise, selling away, and breach of contract. FINRA arbitration is a specialized forum, and effective representation requires knowledge of securities law, industry practices, supervision, discovery, damages, and expert testimony.
California investors may also have remedies under California elder abuse law. California Welfare and Institutions Code section 15610.30 defines financial abuse of an elder or dependent adult to include taking, secreting, appropriating, obtaining, or retaining property for wrongful use or with intent to defraud, assisting such conduct, or taking property by undue influence. [21] Depending on the facts, California elder-abuse remedies may materially affect strategy and recovery.
Claims may exist not only against the immediate wrongdoer but also against broker-dealers, RIAs, supervisors, trustees, attorneys-in-fact, caregivers, family members, promoters, or financial institutions whose misconduct, negligence, breach of fiduciary duty, or failure to supervise contributed to the loss. Identifying all potentially responsible parties is often critical.
Prompt legal action matters. Electronic records can be deleted, account notes overwritten, recordings purged, witnesses lost, cryptocurrency moved through wallets, and bank wires dispersed. Preservation letters, emergency communications with financial institutions, reports to law enforcement, and early factual investigation can materially affect the ability to recover funds or prove liability.
IX. Why Experienced Securities Counsel Matters
Elder financial exploitation cases often sit at the intersection of securities law, fiduciary duty, elder abuse, banking procedures, cybersecurity, arbitration, regulatory compliance, and family dynamics. A narrow approach can miss important claims. A lawyer who sees only a family dispute may overlook broker-dealer supervision. A lawyer who sees only an investment loss may overlook undue influence. A lawyer who sees only fraud by an outsider may overlook whether a financial institution ignored red flags.
Experienced securities counsel can analyze account records, identify suspicious transactions, preserve evidence, evaluate statutes of limitation, determine whether FINRA arbitration applies, assess supervisory failures, coordinate with forensic experts where needed, and pursue recovery from responsible parties. Counsel can also advise financial professionals, broker-dealers, RIAs, and compliance personnel on policies, internal investigations, remediation, and regulatory exposure.
Shustak Reynolds & Partners represents investors, financial professionals, broker-dealers, registered investment advisers, hedge funds, and businesses in FINRA arbitrations, securities litigation, SEC and FINRA investigations, broker transition disputes, investment fraud matters, fiduciary-duty claims, and complex commercial disputes. Erwin J. Shustak, George C. Miller, and Joseph C. Mellano handle securities litigation, FINRA arbitration, broker misconduct, regulatory investigations, and financial services disputes. Robert Boeche advises broker-dealers, RIAs, private funds, and financial industry participants on regulatory, compliance, and enforcement issues.
That breadth matters. Elder investment fraud can present both investor-recovery issues and industry-compliance issues. The same fact pattern may require urgent evidence preservation, FINRA arbitration analysis, SEC or FINRA regulatory assessment, review of supervisory procedures, and practical judgment concerning family, fiduciary, and reputational considerations.
Frequently Asked Questions
No. As of the date of this article, H.R. 2478 remains proposed legislation. It has been introduced, reported favorably by the House Financial Services Committee, and placed on the House Union Calendar, but it has not become law. [1]
Does H.R. 2478 apply to every brokerage transaction?
No. The bill focuses on redemptions of certain securities issued by registered open-end investment companies and serviced by transfer agents. Existing FINRA rules and state laws may apply in different circumstances.
Does naming a trusted contact give that person control over my account?
No. A trusted contact does not receive authority to trade, withdraw money, or make decisions. The designation allows the firm to contact that person in limited circumstances, such as suspected financial exploitation or difficulty reaching the customer. [19]
Can investors recover money lost to elder financial exploitation?
Sometimes. Recovery depends on the facts, the defendants, the available evidence, applicable limitations periods, and whether a responsible party violated a legal duty. Prompt investigation materially improves the ability to evaluate recovery options.
Conclusion
H.R. 2478 reflects a broader national recognition that elder financial exploitation is a serious, growing, and increasingly sophisticated threat. Whether the bill is enacted in its present form, modified, or delayed, its policy message is clear: financial institutions must be prepared to identify suspected exploitation before retirement assets disappear, and investors and families must act quickly when warning signs appear.
Financial exploitation is no longer limited to crude scams or obvious misconduct. It now includes AI-enabled impersonation, cryptocurrency fraud, romance scams, caregiver pressure, misuse of powers of attorney, unsuitable investment recommendations, unauthorized trading, Ponzi schemes, and failures of supervision. The legal response must be equally sophisticated.
If you or a family member has sustained losses through suspected elder investment fraud, broker misconduct, unauthorized trading, unsuitable investments, financial exploitation, misuse of a power of attorney, or suspicious account activity, contact Shustak Reynolds & Partners promptly. Early legal intervention can help preserve evidence, identify responsible parties, evaluate claims, and protect remaining assets.
For broker-dealers, RIAs, mutual fund companies, transfer agents, supervisors, and compliance officers, H.R. 2478 is an opportunity to review policies before the next crisis. Effective procedures, training, documentation, and escalation are not merely regulatory obligations; they are essential tools for protecting clients and reducing legal and reputational risk.
This article is for informational purposes only and does not constitute legal advice. Every matter depends on its own facts, and readers should consult qualified counsel regarding their specific circumstances.
Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many investment advisors, financial professionals, broker-dealers, registered representatives, investors and businesses. Attorney Erwin J. Shustak can be reached in the firm’s San Diego office at (619) 696-9500.
2. Congress.gov, H.R. 2478 summary, describing the bill as establishing procedures for delaying redemption of certain securities when an investment company or agent believes an older individual or impaired adult has been financially exploited, https://www.congress.gov/bill/119th-congress/house-bill/2478.
3. Federal Bureau of Investigation, Internet Crime Complaint Center, 2024 IC3 Annual Report, pp. 3, 7-8, reporting 859,532 complaints, $16.6 billion in losses, and $4.8 billion in losses reported by individuals age 60 and older, [PDF DOWNLOAD] https://www.ic3.gov/AnnualReport/Reports/2024_IC3Report.pdf.
4. FBI IC3, 2024 Annual Report, pp. 9-10, reporting investment-fraud losses of $6,570,639,864 and cryptocurrency-nexus losses of $9,322,335,911.
5. FBI IC3, 2024 Annual Report, p. 11, reporting that cyber-enabled fraud accounted for almost 83 percent of IC3-reported losses in 2024.
7. H. Rept. 119-361, Financial Exploitation Prevention Act of 2025, Background and Need for Legislation, citing AARP Public Policy Institute estimates that financial exploitation costs seniors more than $28 billion annually, https://www.congress.gov/committee-report/119th-congress/house-report/361/1.
8. Congress.gov, H.R. 3758 – Senior Safe Act of 2017, summary describing immunity for trained financial institution personnel who disclose suspected senior exploitation in good faith and with reasonable care, https://www.congress.gov/bill/115th-congress/house-bill/3758.
12. H. Rept. 119-361, Purpose and Summary, describing H.R. 2478 as allowing registered open-end investment companies and transfer agents to implement safeguards delaying redemptions where financial exploitation is reasonably suspected.
13. H. Rept. 119-361, Committee report language noting introduction of H.R. 2478 by Representative Ann Wagner on March 27, 2025, referral to House Financial Services, and favorable report with amendment.
14. H. Rept. 119-361, Committee Consideration, 118th Congress history of H.R. 500 and House passage by vote of 419 yeas and 0 nays.
15. H. Rept. 119-361, Committee Votes, noting that on September 16, 2025, the Committee ordered H.R. 2478, as amended, to be reported favorably by recorded vote of 50 yeas and 0 nays.
16. H.R. 2478, as reported, Section 2(b), requiring the SEC to report recommendations to Congress after consulting with the CFTC, CFPB, FINRA, NASAA, Federal Reserve, OCC, and FDIC.
18. FINRA Regulatory Notice 17-11, SEC Approves Rules Relating to Financial Exploitation of Seniors (Mar. 30, 2017), discussing Rules 2165 and 4512, temporary holds, trusted contacts, notification, recordkeeping, supervision, and training, https://www.finra.org/rules-guidance/notices/17-11.
19. SEC/FINRA/NASAA Investor Bulletin on Trusted Contacts, explaining that naming a trusted contact does not give the person authority to execute trades, make decisions, or act as power of attorney.
20. FBI IC3, 2024 Annual Report, Operation Level Up discussion, reporting notifications to 4,323 cryptocurrency investment-fraud victims, 76 percent of whom were unaware they were being scammed, and estimated savings exceeding $285 million.
You open your mailbox and find an envelope from the Securities and Exchange Commission. Inside is a subpoena directing you to appear for sworn testimony. Your heart races. What does this mean? Are you in trouble? What should you do next?
If you are an individual investor, a financial advisor, or any financial professional who has received a notice from the SEC, you are not alone. SEC investigations touch thousands of people each year, including many who are witnesses rather than targets. This blog post explains what to expect during an SEC on-the-record testimony or deposition and offers practical tips to help you prepare for your appearance.
What Is SEC On-the-Record Testimony?
SEC on-the-record testimony (often called an “OTR”) is sworn, recorded testimony taken during a formal SEC investigation. A court reporter transcribes everything said, creating an official record. Staff from the Division of Enforcement—typically attorneys, accountants, or investigators—ask questions under oath.
How does this differ from a deposition in a civil lawsuit? There are several important distinctions:
No opposing counsel. In a typical deposition, lawyers for all parties ask questions. In an OTR, only SEC staff conduct the questioning.
The SEC controls the record. The reporter will only go on or off the record at SEC staff’s direction—not at the request of the witness or counsel.
Nonpublic proceedings. The testimony is generally nonpublic unless the Securities and Exchange Commission orders otherwise.
How the SEC Compels Testimony
The SEC does not simply call and demand you appear. There is a formal legal process grounded in federal securities laws, including the Exchange Act of 1934.
Informal Inquiries vs. Formal Orders
Many SEC investigations begin informally, with staff asking for voluntary cooperation. At this stage, the SEC does not have subpoena power. However, once the Commission issues a Formal Order of Investigation, things change. This order:
Describes the nature of the investigation
Designates specific staff members as officers empowered to administer oaths, subpoena witnesses, compel attendance, and require production of documents
Grants the Division of Enforcement full subpoena authority under the relevant statutes
Subpoenas
Once a formal order is in place, the SEC can issue subpoenas requiring your testimony or demanding documents. Whether you received a voluntary request or a formal subpoena, you should take the matter seriously and consult with experienced securities litigation counsel immediately.
What to Expect Before, During, and After Your Testimony
Before the Testimony
The SEC typically sends a subpoena package that includes a notice of your rights and how your testimony may be used. You may also receive a Background Questionnaire asking about your employment history, education, and brokerage accounts. While labeled “voluntary,” SEC staff often question witnesses about their answers.
This is the time to retain qualified legal representation. An experienced lawyer specializing in securities litigation and white collar defense can help you:
Understand the scope and subject of the investigation
Review relevant documents and correspondence
Prepare for likely areas of questioning
Anticipate how your testimony fits within the broader investigation
During the Testimony
The session begins with a procedural overview—SEC staff will explain the Formal Order, ground rules, and your counsel’s role. Once on the record, interviewers will ask about your background, role in relevant transactions, thought processes, opinions, communications, and duties. Sessions can last several hours or stretch across multiple days.
Your counsel has the right to be present, advise you throughout, and ask brief clarifying questions at the conclusion to correct any misstatements.
After the Testimony
Once complete, you can request, and purchase, a copy of the transcript. The investigation may continue for months or years. Possible outcomes include:
The investigation is closed without action—the best outcome.
The SEC issues a Wells Notice, indicating staff has preliminarily determined to recommend an enforcement action against you.
A formal SEC enforcement action is filed, alleging securities law violations.
Why You Need Experienced Securities Litigation Counsel
Some witnesses wonder whether they truly need an attorney. The answer is an emphatic yes:
The SEC process is complex. Securities regulators operate under rules that differ significantly from traditional litigation. Without counsel experienced in SEC and FINRA matters, you may inadvertently waive rights or make damaging admissions.
Your words become a permanent record. Everything you say under oath can be used in future enforcement actions, referrals to the Department of Justice, or parallel proceedings in federal court.
Preparation is everything. An attorney with a broad range of experience assisting clients in SEC investigations knows how to prepare you for the types of questions staff will ask.
Strategic guidance. A seasoned fraud attorney or white collar defense lawyer can assess whether you are a witness, subject, or target—and advise you accordingly.
Key Dos and Don’ts for Witnesses
Do:
Tell the truth. Always. Providing false testimony to the SEC is a federal crime.
Listen carefully to each question. Answer only the specific question asked.
Review relevant documents in advance with your counsel.
Say “I don’t recall” if you genuinely do not remember. Guessing is dangerous.
Take your time. Pausing to think is not only acceptable, but also wise.
Remain calm and professional throughout, no matter how the questioning feels.
Don’t:
Don’t guess or speculate. If you do not know, say so.
Don’t volunteer information beyond what is asked.
Don’t be combative or argumentative with SEC staff.
Don’t testify without counsel present.
Don’t discuss your testimony with other witnesses.
Don’t destroy or alter any documents after receiving a subpoena.
What Happens After Your Testimony
After your testimony, the Division of Enforcement will review it alongside other evidence. Here are the key things to know:
Wells Notices: If staff decide to recommend an enforcement action, you will typically receive a Wells Notice identifying the specific securities law violations the SEC intends to allege. You will have the opportunity to submit a written response—known as a Wells submission—making your case for why the Commission should not proceed.
Enforcement Actions: If the SEC ultimately files an enforcement action, it may seek penalties, disgorgement of profits, injunctions, or industry bars. The consequences can be severe for broker dealers, investment advisors, and other financial professionals in the securities industry.
Referrals: In cases involving suspected securities fraud, the SEC may refer the matter to the Department of Justice for potential criminal prosecution.
No Action: In many cases, the investigation concludes without action—the ideal outcome, though the uncertainty of waiting can be stressful.
Practical Tips to Stay Calm and Prepared
1. Prepare thoroughly with counsel. Schedule multiple preparation sessions. Walk through likely questions and practice answering clearly and concisely.
2. Get a good night’s sleep. Testimony requires focus. Arrive well-rested.
3. Dress professionally. Treat the appearance as seriously as a court proceeding.
4. Bring water and stay hydrated. Sessions can be long. Your attorney can request breaks.
5. Remember you have rights. You have the right to counsel and the right to review the Formal Order.
6. Stay in your lane. Answer only what you personally know. Do not theorize about what others did or thought.
7. Trust your preparation. If you have worked with experienced counsel, trust the process. You are ready.
Conclusion
Receiving an SEC subpoena is a serious legal matter—but it does not have to be overwhelming. With the right preparation and the right legal representation, you can walk into that room feeling confident, composed, and ready.
The most important step you can take right now is to contact experienced securities litigation counsel. Whether you are an individual investor, a financial advisor, or a financial professional facing compliance matters or an SEC investigation, our law firm stands ready to represent clients across a broad range of securities matters. With decades of experience in securities litigation, SEC enforcement actions, we can help you navigate this process and protect your rights.
Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many investment advisors, financial professionals, broker-dealers, registered representatives, investors and businesses. Attorney Mahdi M. Ibrahim can be reached in the firm’s San Diego office at (619) 696-9500.
The FINRA arbitration forum remains the primary venue for resolving disputes between investors and the broker-dealers and investment advisers who serve them. Over the past twelve months, the forum has produced several landmark awards that captured the attention of the financial services industry, while simultaneously launching the most comprehensive review of its arbitration rules in decades. For broker-dealers and investment advisers navigating this environment, understanding the current state of play is essential to managing risk, evaluating litigation exposure, and preparing for a regulatory landscape that may look markedly different by the end of 2027.
This article surveys the key trends in FINRA arbitration filings, award outcomes, and regulatory developments over the past year and offers informed projections for the period ahead.
Case Filing Volumes and Resolution Trends
FINRA’s Dispute Resolution Services operates one of the largest securities arbitration forums in the world, drawing on more than 8,000 arbitrators to resolve customer, industry, and employment disputes. According to FINRA’s own Dispute Resolution Statistics, 3,607 total arbitration and mediation cases closed in 2024, with 84 percent of customer arbitration cases resolved through settlement or dismissal prior to final hearings. The average case closed in 12.5 months.
Filing volumes, however, have declined, perhaps due in part to a generally well-performing stock market. FINRA’s published filing data show that total new case filings fell to approximately 2,469 in 2024, well below the historical annual range of 3,000 to 4,000. Early 2025 filings remained relatively low, consistent with the trend FINRA has noted in The Neutral Corner, its quarterly newsletter for arbitrators and mediators. Filings rounding out 2025 generally matched 2024, suggesting that the post-pandemic spike that motivated a surge in filings has subsided.
Resolution timelines remain a central consideration for any firm evaluating arbitration exposure. FINRA reports that written-submission (paper) cases close in approximately 7.1 months, while merits-hearing cases average 16.6 months, and the average case overall closed in 12.5 months in 2024. Under FINRA Rules 12303, 12401, 12600, and 12602, claims of $50,000 or less proceed on written submissions alone; claims between $50,001 and $100,000 are decided by a single arbitrator following an in-person hearing; and claims exceeding $100,000 are heard by a three-arbitrator panel.
Claim Types, Damages Awarded, and Notable Outcomes
Customer win rates have fluctuated in recent years. FINRA’s published results for customer claimant award cases show that the share of cases in which customers recover has generally ranged from 30 to 40 percent over the long term, dipping below 30 percent earlier in this decade before recovering toward 30 percent more recently. The rate at which customers prevail continues to draw close attention from firms and investors alike, and it shapes how both sides assess settlement value. Notably, FINRA considers a “win” a case in which the claimant recovers any money, regardless of the total alleged losses at issue in the claim.
FINRA’s Regulatory Notice 26-06 provides additional granularity. In 2025, 140 customer arbitration cases decided by three-arbitrator panels closed by award. Of the 109 cases decided by all-public panels, customers received damages in 35 percent (38 cases). Of the 31 cases decided by majority-public panels, customers received damages in 29 percent (9 cases).
Two awards from 2025 stood out for their size and their implications for the broader punitive damages debate. In February 2025, a FINRA panel ordered UBS Financial Services and broker Andrew Burish to pay $92.2 million to nine investors who alleged he promoted an unsuitable, aggressive short-selling strategy involving Tesla stock. As reported by AdvisorHub and confirmed by court filings, the award comprised $23.1 million in compensatory damages and $69.1 million in punitive damages. U.S. District Judge Stephanie M. Rose subsequently rejected UBS’s effort to vacate the award, finding the panel did not exceed its authority. The claimants are entitled to 6.13 percent post-judgment interest from February 28, 2025.
In March 2025, a FINRA panel ordered Stifel, Nicolaus & Co. to pay $133 million in connection with former broker Chuck Roberts’s handling of the Jannetti family’s investments. As reported by AdvisorHub and WealthManagement.com, the panel found Stifel had “actual knowledge of the wrongfulness of the conduct.” A federal court in the Southern District of Florida confirmed the award in 2026, finding the panel had not exceeded its authority; Stifel has stated it will appeal. The firm continues to face additional Roberts-related cases seeking at least $40 million in aggregate.
The Punitive Damages Debate
These outlier awards have intensified an industry debate over the role of punitive damages in securities arbitration. FINRA reports that arbitrators have awarded punitive damages in only about 3 percent of all awards rendered from March 1988 through December 2025. FINRA rules do not permit pre-dispute customer arbitration agreements to limit arbitrators’ ability to award punitive damages where governing law otherwise authorizes them.
Stifel has led advocacy for reform. SIFMA similarly has recommended that FINRA modify its rules to permit firms and customers to agree contractually to limit punitive damages, even where state law would allow such awards, in the interest of promoting consistency and predictability given the limited appellate rights available in arbitration. Investor advocates have pushed back vigorously. The Public Investors Arbitration Bar Association, known as “PIABA,” has argued that investors already win fewer than 30 percent of decided cases and that further limiting available remedies would tilt the forum against claimants.
Anticipated Developments: Regulatory Notice 26-06 and FINRA Forward
On March 2, 2026, FINRA issued Regulatory Notice 26-06, a sweeping request for public comment on modernizing its arbitration rules, guidance, and processes. The Notice forms part of the broader “FINRA Forward” modernization initiative. Comments were due by May 1, 2026, and the comment period has now closed.
The scope of Notice 26-06 is broad. As set out in the Notice itself and reported by Global Banking & Finance, FINRA puts nearly every core feature of the arbitration forum on the table for potential revision. Topics include forum selection (whether parties may contractually opt out of FINRA arbitration for certain high-value or institutional claims), the six-year eligibility rule under Rule 12206, dispositive motion practice, arbitrator qualifications and selection, discovery management, hearing management, punitive damages, award publication, unpaid awards, and certain employment-related claims.
On punitive damages specifically, FINRA asked whether additional safeguards are appropriate, including bifurcation of liability and damages phases, heightened evidentiary standards, mandatory explained decisions, enhanced arbitrator qualifications for cases involving punitive claims, or the creation of an internal appellate process. These questions reflect FINRA’s awareness that the UBS and Stifel awards have generated calls for structural reform.
SIFMA’s comment letter supports permitting agreements to resolve narrow categories of claims outside the FINRA forum, including high-value, institutional, and intra-industry disputes. If adopted, such a change could substantially alter the calculus for broker-dealers evaluating arbitration risk in large-dollar matters.
FINRA has already taken steps to strengthen other aspects of the forum. The organization has enhanced its customer-dispute expungement process under Rule 2080, which, for disclosures involving customer complaints and other investment-related conduct, requires proof of factual impossibility, lack of involvement, or falsity. It has also reinforced rules governing the payment of awards; under FINRA rules, a respondent must pay a monetary award within 30 days. Unpaid awards remain a concern, though FINRA’s statistics indicate that most unpaid customer awards involve inactive firms or brokers, and claimants bear the burden of collecting awards themselves, as with court judgments.
Looking Ahead
The coming year will prove pivotal for the FINRA arbitration forum. As FINRA evaluates the comments received in response to Notice 26-06, broker-dealers and investment advisers should anticipate proposed rule changes that could alter forum selection options, punitive damages exposure, discovery obligations, and eligibility timeframes. Firms that proactively assess how these potential changes interact with their existing customer agreements, compliance frameworks, and litigation strategies will be best positioned to adapt.
In this evolving landscape, experienced counsel who understand both the procedural mechanics of FINRA arbitration and the strategic implications of regulatory change can provide meaningful advantages. Whether the challenge involves defending a high-stakes customer claim, navigating punitive damages exposure, pursuing or opposing expungement, or preparing for the structural reforms that FINRA Forward may bring, thoughtful legal guidance remains indispensable for broker-dealers and investment advisers committed to protecting their interests and their clients’ trust.
Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many investment advisors, financial professionals, broker-dealers, registered representatives, investors and businesses. Attorney George C. Miller can be reached in the firm’s San Diego office at (619) 696-9500.
The International Chamber of Commerce (ICC) remains the world’s leading institution for the administration of international commercial arbitrations. On June 1, 2026, the ICC’s revised Arbitration Rules took effect. While many of the revisions codify practices that had already developed in ICC proceedings, several changes are significant and will affect the strategy, cost, and efficiency of future arbitrations.
For businesses engaged in international commerce, and for lawyers who draft arbitration clauses or litigate cross-border disputes, understanding these changes is essential. The revisions are designed to improve efficiency, enhance transparency, and increase confidence in the arbitral process while maintaining the flexibility that has long distinguished ICC arbitration from traditional court litigation.
Why the 2026 Revisions Matter
The ICC’s revisions reflect broader trends affecting international dispute resolution. Corporate clients increasingly demand faster resolutions, lower costs, greater transparency, and more active case management. International arbitration institutions worldwide have responded by introducing expedited procedures, technology-driven case administration, and stronger disclosure requirements.
The ICC’s new rules seek to balance efficiency with procedural fairness. The revisions are particularly important because they will likely influence practice not only before the ICC but also before other leading institutions, including AAA-ICDR, JAMS, FINRA, SIAC, LCIA, HKIAC, and similar forums.
Elimination of Mandatory Terms of Reference
For decades, the Terms of Reference represented a unique feature of ICC arbitration. The process required parties and tribunals to prepare a document defining the claims, defenses, issues, and procedural framework of the dispute.
Although the Terms of Reference often served a useful purpose, many practitioners viewed the process as expensive and time-consuming. Under the 2026 Rules, the mandatory requirement has been eliminated. Tribunals instead conduct an early Case Management Conference.
The practical impact is likely to be substantial. Cases should move more quickly from initiation to substantive proceedings. Businesses can expect lower front-end costs and fewer procedural delays. Counsel, however, must ensure that pleadings are drafted carefully because the initial submissions will now play an even more important role in defining the scope of the arbitration.
Early Determination Procedure
One of the most important innovations is the formal adoption of an early determination procedure. Tribunals now possess explicit authority to dispose of claims or defenses that are manifestly without merit or outside the tribunal’s jurisdiction.
This development addresses a common criticism of arbitration—that weak claims sometimes survive longer than they would in court litigation. The new procedure gives parties a mechanism to eliminate legally deficient claims before substantial resources are expended on document production, expert testimony, and evidentiary hearings.
Businesses should view this change favorably. Early determination can significantly reduce costs and shorten the life cycle of a dispute.
Expanded Expedited Arbitration
The ICC has expanded the availability of expedited arbitration procedures by increasing the monetary threshold applicable to those procedures.
Expedited arbitration typically involves a sole arbitrator, streamlined submissions, fewer procedural steps, and accelerated timelines. For disputes of moderate value, these procedures may provide a highly cost-effective alternative to traditional arbitration.
Companies negotiating international contracts should evaluate whether expedited procedures align with their business objectives and risk tolerance.
Highly Expedited Arbitration
Perhaps the most innovative feature of the 2026 Rules is the introduction of a highly expedited arbitration process. The objective is simple: provide a binding and enforceable award within an extremely compressed timeframe.
For disputes involving supply chain disruptions, licensing agreements, technology contracts, and ongoing business relationships, speed may be nearly as important as the outcome itself. A procedure capable of delivering a final decision within months rather than years may create substantial commercial value.
Emergency Arbitrator Enhancements
The revised Rules strengthen emergency arbitrator procedures and expand available interim remedies. Businesses frequently face situations requiring immediate relief, including preservation of evidence, protection of trade secrets, prevention of asset transfers, or maintenance of the status quo.
The enhanced emergency arbitrator provisions provide additional flexibility and strengthen the effectiveness of interim relief mechanisms available under ICC arbitration.
Arbitrator Independence and Disclosure
Confidence in the neutrality of arbitrators remains central to the legitimacy of international arbitration. The revised Rules impose enhanced disclosure obligations and encourage arbitrators to disclose potential conflicts whenever doubt exists.
This approach promotes transparency and reduces the risk of later challenges to arbitrator appointments. It is particularly important in modern commerce, where complex corporate structures often create relationships that may not be immediately apparent.
Confidentiality and Technology
The 2026 Rules continue the trend toward digital proceedings. Electronic filings, virtual hearings, and hybrid proceedings are now fully integrated into modern arbitration practice.
The revisions also strengthen confidentiality obligations applicable to arbitrators. While parties remain free to share information when necessary for business, regulatory, or legal purposes, tribunals retain broad authority to issue confidentiality protections tailored to specific disputes.
Lessons for Businesses and Contract Drafters
The new Rules present an opportunity for companies to review existing arbitration clauses. Issues deserving attention include the choice of arbitral institution, seat of arbitration, governing law, number of arbitrators, language provisions, confidentiality requirements, and emergency relief mechanisms.
Sophisticated arbitration clauses frequently determine the efficiency and cost of future dispute resolution long before any dispute arises.
How the ICC Changes Compare to Other Arbitration Forums
Many of the ICC’s revisions mirror developments that have occurred elsewhere. AAA-ICDR has emphasized case management and expedited procedures. JAMS continues to market efficiency and flexibility. FINRA arbitration has adopted procedural mechanisms designed to streamline securities disputes.
The ICC’s revisions demonstrate a global trend toward efficiency while preserving procedural fairness. Businesses should view the changes as part of a broader evolution in international dispute resolution rather than an isolated institutional development.
Our Firm’s Arbitration Practice
Our firm represents businesses, executives, investors, professionals, and institutions in complex domestic and international arbitrations. We regularly advise clients concerning arbitration agreements, dispute avoidance strategies, and proceedings before the ICC, AAA, ICDR, JAMS, FINRA, and other leading arbitral institutions.
Our experience spans commercial disputes, partnership and shareholder conflicts, securities matters, international business transactions, professional services disputes, and cross-border enforcement proceedings. We assist clients from contract drafting through final award enforcement, providing strategic and practical advice designed to achieve business objectives while controlling cost and risk.
As arbitration continues to evolve, sophisticated counsel can make a substantial difference in both outcome and efficiency. Understanding the implications of the 2026 ICC Rules is an important step for any company engaged in international commerce.
Conclusion
The 2026 ICC Arbitration Rules represent a meaningful modernization of international arbitration practice. By eliminating mandatory Terms of Reference, introducing formal early determination procedures, expanding expedited arbitration options, strengthening disclosure requirements, and enhancing emergency relief mechanisms, the ICC has responded to the needs of modern businesses and dispute resolution professionals.
Companies involved in international commerce should review their existing arbitration provisions and evaluate how the new Rules may affect future disputes. Attorneys advising those companies must understand not only the text of the revisions but also the strategic implications they create. The firms and practitioners who master these changes will be best positioned to help clients navigate the increasingly complex world of international arbitration.
Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many investment advisors, financial professionals, broker-dealers, registered representatives, investors and businesses. Attorney Erwin J. Shustak can be reached in the firm’s San Diego office at (619) 696-9500.
The Securities and Exchange Commission’s recent review of the investment adviser registration threshold could have significant consequences for thousands of registered investment advisers (“RIAs”). If the SEC ultimately raises the assets-under-management (“AUM”) threshold required for federal registration, many advisers currently registered with the SEC could be required to withdraw their federal registrations and return to state regulation.
Although no formal rule proposal has yet been issued, SEC leadership has publicly questioned whether the current registration framework—largely unchanged since 2012—continues to reflect the division of regulatory authority contemplated by Congress.[1] For mid-sized advisers, the possibility of a higher registration threshold presents substantial compliance, operational, and business risks.
Under Section 203A of the Investment Advisers Act of 1940, advisers generally are prohibited from registering with the SEC unless they manage sufficient regulatory assets under management or otherwise qualify for an exemption. Following the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress shifted many mid-sized advisers from federal oversight to state regulation by increasing the registration threshold from $25 million to $100 million in AUM.[2]
Today, advisers generally become eligible for SEC registration at approximately $100 million in regulatory assets under management and are generally required to register with the SEC once they reach approximately $110 million.[3] Advisers below those levels typically are regulated by one or more state securities regulators.
Why the SEC Is Reconsidering the Threshold
On April 8, 2025, then-Acting SEC Chairman Mark Uyeda announced that SEC staff had been directed to evaluate whether the current registration threshold remains appropriate.[4] Uyeda observed that the number of SEC-registered investment advisers has grown dramatically since the threshold was last adjusted in 2012 and suggested that the balance between federal and state oversight may warrant reconsideration.[5]
The rationale behind a potential increase is straightforward. The SEC’s examination and enforcement resources are finite, and federal regulators may conclude that those resources should be focused on larger advisers with broader national operations, while smaller and mid-sized firms are supervised primarily by state securities regulators.[6] While the SEC has not identified a specific replacement threshold, industry observers have speculated that any increase could be substantial.[7]
History Suggests the Impact Could Be Significant
The last major shift in adviser registration occurred following Dodd-Frank. When Congress increased the federal registration threshold from $25 million to $100 million in AUM, thousands of advisers were required to transition from SEC oversight to state regulation. SEC estimates at the time indicated that more than 3,000 advisers would move from federal to state registration.[8] Importantly, advisers generally were not permitted to remain SEC-registered simply because they had previously qualified for federal registration. Firms that no longer met the applicable threshold were required to withdraw their SEC registrations and register with the appropriate states.[9] If the SEC adopts a higher threshold today, many currently SEC-registered advisers could face a similar transition.
1. Multiple State Registration Obligations
One of the principal benefits of SEC registration is the ability to operate under a largely uniform federal regulatory regime. Advisers that lose eligibility for SEC registration may find themselves subject to registration, examination, and reporting requirements in multiple states.
Although NASAA and state regulators have worked to harmonize certain requirements, significant differences remain among state regulatory programs, filing requirements, examination practices, and enforcement priorities.[10] For firms serving clients across numerous jurisdictions, managing multiple state registrations can create substantial administrative burdens and increased compliance costs.
Many SEC-registered advisers have built compliance programs around federal rules, SEC examination priorities, and SEC guidance. A transition to state regulation may require firms to reevaluate compliance policies, procedures, and disclosure practices to address varying state requirements.
State regulators may also place different emphasis on advertising practices, custody arrangements, books-and-records requirements, and supervisory procedures. Maintaining compliance across multiple jurisdictions often requires additional legal and compliance resources.
A large-scale transition from SEC registration to state registration would likely involve significant operational expenses, including but not limited to:
· Preparation and filing of Form ADV amendments; · Withdrawal of SEC registration; · State registration filings and fees; · Revisions to compliance manuals and supervisory procedures; · Updates to client disclosure documents; and · Personnel training regarding state-specific requirements.
For firms operating in numerous states, these costs could be substantial.
Perhaps the most immediate challenge is uncertainty itself. Advisers currently have little guidance regarding what threshold the SEC may ultimately consider or whether any future rule would include transition periods, exemptions, or grandfathering provisions.
Recent SEC regulatory initiatives[11] also suggest that the Commission may be increasingly willing to revisit longstanding assumptions regarding the regulatory treatment of smaller entities. For example, the SEC recently proposed amendments to its rules implementing the Regulatory Flexibility Act (“RFA”), which would significantly expand the number of entities classified as “small entities” for purposes of SEC rulemaking analyses. The proposal acknowledges that many of the Commission’s existing size standards have not been updated for decades and no longer accurately reflect the modern financial services industry.
Although the RFA proposal is unrelated to investment adviser registration, it reflects a broader willingness by the Commission to reconsider regulatory thresholds that have remained largely unchanged over time. That same policy rationale could support a reevaluation of the investment adviser registration threshold established in 2012. Indeed, some industry observers have suggested that if the SEC concludes that its examination and enforcement resources should be concentrated on the largest market participants, the Commission could ultimately consider a threshold as high as $1 billion in regulatory assets under management, effectively returning a substantial segment of today’s SEC-registered advisers to state oversight.
To be clear, the SEC has not proposed a $1 billion registration threshold, and no formal rulemaking has been initiated. Nevertheless, the Commission’s ongoing review of the federal-state division of regulatory authority, coupled with its broader reassessment of regulatory size standards under the RFA, may signal an increased openness to significant structural changes in adviser regulation. As a result, firms near any plausible future threshold face difficulty predicting their long-term regulatory status.
Although no formal rulemaking proposal has been released, advisers should begin evaluating the potential impact of a higher registration threshold. Firms should consider:
· Current and projected regulatory assets under management; · States in which registration would be required if SEC registration were unavailable; · Existing state-law exemptions that may apply; · Potential transition and compliance costs; and · Whether current compliance systems are capable of supporting multi-state regulation.
Advisers near any potential future threshold should also closely monitor SEC developments and consider discussing contingency planning with experienced securities counsel.
The SEC’s review of the investment adviser registration threshold represents one of the most consequential potential regulatory developments affecting mid-sized advisory firms in more than a decade. While the Commission has not yet proposed a rule, the possibility that thousands of advisers could once again be shifted from federal oversight to state regulation is a realistic scenario.
For advisers that have spent years operating under a federal regulatory framework, a return to state registration could bring increased compliance obligations, higher operating costs, and greater regulatory complexity. Firms that begin evaluating these risks now will be better positioned to respond if the SEC ultimately decides to raise the registration threshold.
Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many investment advisors, financial professionals, broker-dealers, registered representatives, investors and businesses. Attorney Robert R. Boeche can be reached in the firm’s San Diego office at (619) 696-9500.
1. Mark T. Uyeda, Remarks at the Annual Conference on Federal and State Securities Cooperation (Apr. 8, 2025).
2. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 410, 124 Stat. 1376 (2010).
Regulatory inquiries from FINRA, the SEC, the DFPI, or the California Department of Insurance often raise an uncomfortable question for financial-services firms and their personnel: who pays for the employee’s lawyer? Under California Labor Code section 2802, employers must indemnify employees for necessary expenses incurred as a direct consequence of performing their job duties. In Grissom v. Vons Companies, Inc., the California Court of Appeal held that this obligation can include reimbursement of attorney’s fees incurred by an employee who reasonably retains independent counsel in connection with matters arising from the course and scope of employment.
That does not mean employees automatically get to hire any lawyer they want and send the bill to the company. California courts have emphasized that reimbursement turns on whether the expense was “necessary” under the circumstances. Factors may include whether the employer timely offered competent counsel, whether conflicts of interest exist, and whether the employee reasonably believed separate representation was needed. In other words, if the firm provides qualified, conflict-free counsel, reimbursement for separate counsel may not be required.
While no California court appears to have squarely addressed section 2802 in the context of FINRA, SEC, DFPI, or Department of Insurance investigations, the reasoning of Grissom is highly relevant. Regulatory matters frequently create tension between a firm’s interests and those of its personnel, particularly where regulators are examining both an individual’s conduct and the adequacy of the firm’s supervision. In those circumstances, an employee may argue that independent counsel was reasonably necessary and therefore reimbursable under section 2802.
The lesson for broker-dealers, investment advisers, insurance agencies, and other regulated firms is simple: reimbursement issues should be considered early, before a regulatory inquiry becomes a separate dispute. When regulators start asking questions, firms should evaluate potential conflicts and indemnification obligations before deciding who will represent whom. If your firm is facing these issues, the attorneys at Shustak Reynolds & Partners regularly advise financial-services firms and industry professionals on regulatory investigations, indemnification obligations, and employment-related disputes.
Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many investment advisors, financial professionals, broker-dealers, registered representatives, investors and businesses. Attorney Joseph M. Mellano can be reached in the firm’s San Diego office at (619) 696-9500.
Social Media Has Changed How Investment Fraud Reaches Investors
Social media has become a major source of investment information. Investors now encounter stock tips, options strategies, crypto promotions, private placements, alternative investment products, and claims about financial markets on TikTok, Instagram, YouTube, Reddit, Discord, Telegram, WhatsApp, X, and other platforms. While some of this content educates investors, much of it does not. When online personalities promote securities, exaggerate returns, hide compensation, impersonate registered professionals, or pressure investors into risky trades, social media content can become investment fraud, securities fraud, or market manipulation.
FINRA reported in December 2025 that it had seen a significant spike in investor complaints involving fraudulent investment groups promoted through social media, including encrypted group chats. The SEC likewise warned investors in February 2026 not to make investment decisions based solely on social media platforms or apps. FINRA also noted that online resources are especially common among younger investors, with most investors under 35 citing social media or other online sources for investment information. See FINRA guidance on investing and social media.
For potential clients who lost money after following a finfluencer, online investment group, or social media stock tip, the key question is not whether the communication appeared polished or popular. The key question is whether someone made a material misrepresentation, omitted important facts, failed to disclose a conflict of interest, manipulated a security, or breached duties owed by a broker dealer, investment adviser, brokerage firm, fund manager, or other financial professional.
What Is a Finfluencer, and When Does Online Commentary Cross the Line?
A “finfluencer” is generally a person who uses social media to discuss finance, investing, securities offerings, crypto assets, private funds, investment management, or trading strategies. A finfluencer does not violate securities laws merely by offering general education or expressing an opinion. The legal risk increases when the person recommends a specific security or investment strategy, claims special expertise, touts guaranteed results, or promotes an investment because someone paid them to do so.
Paid promotion presents one of the clearest danger zones. Section 17(b) of the Securities Act generally prohibits a person from promoting a security for compensation without fully disclosing the receipt and amount of that compensation. The SEC Investor Advisory Committee has described this rule as a protection against opinions that appear unbiased but are actually bought and paid for. In other words, a post that looks like independent research may become unlawful touting if the promoter fails to disclose that an issuer, sponsor, investment bank, fund sponsor, or marketing intermediary paid for it.
A finfluencer may also cross the line by spreading false information, omitting material risks, using fake testimonials, claiming access to inside information, or encouraging coordinated trading in thinly traded securities. Those facts can support claims under federal securities laws, state securities laws, the Exchange Act of 1934, the Investment Advisers Act of 1940, FINRA rules, and common-law fraud theories. Depending on the parties involved, they may also lead to SEC investigations, FINRA enforcement actions, Department of Justice inquiries, or private securities litigation.
How Social Media Investment Scams Commonly Work
Many social media scams follow a familiar pattern. A fraudster posts an advertisement or direct message promising exclusive investment advice. The investor clicks the link and gets added to a group chat. The person leading the group may claim to be a registered investment adviser, financial advisor, analyst, senior executive, or assistant to a well-known market figure. Other members of the group may appear to praise the strategy, post screenshots of profits, or urge quick action.
The scam often starts with recommendations involving well-known stocks to build trust. After the investor sees what appears to be early success, the promoter shifts the investor toward a low-priced, low-volume stock, a crypto asset, a private placement, or a trading platform the investor cannot independently verify. FINRA has warned that scammers may instruct investors to open accounts at specific broker dealers, buy shares at particular times and prices, and send screenshots of trades. The activity may push prices up temporarily before the price collapses and investors cannot exit their positions. See FINRA investment group imposter scams alert.
These schemes often resemble pump-and-dump or ramp-and-dump conduct. Promoters create hype, use misleading statements to encourage buying, and then sell into the artificial price increase. Investors who bought after the hype may suffer substantial losses when the market recognizes the truth. The same basic strategy can work in reverse when bad actors spread negative rumors to drive a price down and profit from the decline.
Red Flags Investors Should Not Ignore
A stranger adds you to an investment group chat. Be especially cautious with WhatsApp, Telegram, Discord, encrypted messaging, or unsolicited text messages.
The promoter promises high returns with little or no risk. Legitimate financial professionals discuss risk, liquidity, costs, and downside scenarios.
The person claims to be registered but will not verify identity through official records. Fraudsters often impersonate broker dealers, investment advisers, securities regulators, or well-known financial professionals.
The investment involves urgency, secrecy, or pressure. A demand to act immediately before an opportunity disappears is a classic investment fraud warning sign.
The promoter discourages outside advice. Be wary if someone tells you not to speak with your existing financial advisor, attorney, CPA, or family.
You cannot withdraw money without paying more fees. Advance-fee demands, fake taxes, or recovery fees often signal a fraudulent platform or impersonation scam.
The SEC has also warned that fraudsters may impersonate SEC staff or other government officials through social media or text messages, including by using the SEC seal, real names, or links that appear official. Investors should independently verify any person or firm before sending funds, opening accounts, or following stock tips.
Broker-Dealer and Investment Adviser Liability
Not every case involves an anonymous criminal. Some disputes involve financial services companies, brokerage firms, broker dealers registered with FINRA, asset managers, investment advisers, or fund sponsors that use influencers to acquire clients or promote financial products. In those cases, compliance issues can become central to the legal matter.
FINRA Rule 2210 requires member communications with the public to be fair and balanced and prohibits false, exaggerated, unwarranted, promissory, or misleading statements. FINRA has also taken the position that third-party social media posts can become a firm’s own retail communications when the firm pays for, becomes entangled with, or adopts the content.
The M1 Finance matter illustrates the risk. FINRA found in a 2024 Letter of Acceptance, Waiver, and Consent that M1 Finance paid influencers to promote the firm, that certain posts were not fair and balanced or contained exaggerated and promissory statements, and that the firm failed to review and retain influencer communications. FINRA imposed a censure, an $850,000 fine, and an undertaking requiring remediation. The SEC has brought related enforcement actions in the influencer context, including a 2024 action against Van Eck Associates involving undisclosed influencer-related facts in connection with an ETF launch.
For investors, these actions show why the investigation should not stop with the online personality. A securities litigation attorney may need to determine who paid the promoter, who approved the message, who benefited from the trades, whether a registered financial professional participated, and whether a broker dealer or investment adviser failed to supervise the activity.
What Investors Should Do After Suspecting Social Media Investment Fraud
Investors should act quickly. First, preserve evidence before the promoter deletes it. Save screenshots of posts, advertisements, profile pages, direct messages, group chats, websites, trade instructions, payment instructions, wallet addresses, and withdrawal demands. Preserve URLs, usernames, phone numbers, email addresses, account numbers, and the names of all purported financial professionals.
Second, gather financial records. Brokerage statements, trade confirmations, wire records, bank statements, crypto wallet activity, subscription receipts, tax records, and communications with the platform can help a forensic accountant or lawyer trace funds and calculate losses.
Third, verify registration through official sources such as FINRA BrokerCheck, investor.gov, and state securities regulators. Do not rely on links or documents sent by the promoter.
Fourth, report suspected fraud to the SEC, FINRA, the FBI Internet Crime Complaint Center, and state securities regulators where appropriate. Reporting does not replace a private recovery strategy, but it can help regulators identify patterns and protect other investors.
Finally, consult counsel promptly. Deadlines matter. Statutes of limitation, statutes of repose, FINRA eligibility rules, account agreements, arbitration provisions, and forum-selection clauses can affect whether and how an investor may pursue recovery. A FINRA lawyer or securities litigation attorney can evaluate whether the losses resulted only from market risk or from actionable misconduct by a finfluencer, financial advisor, brokerage firm, investment adviser, fund manager, or other participant in the financial services industry.
Conclusion
Social media can make financial education more accessible, but it can also give fraud a professional appearance and an enormous audience. Finfluencers cross the line when they move from education or opinion into misleading promotion, undisclosed compensation, impersonation, market manipulation, unsuitable recommendations, or other securities law violations.
Investors who lost money after following social media stock tips, paid promotions, investment group chats, or finfluencer recommendations should preserve evidence and seek advice promptly. A law firm with experience representing investors in investment fraud, securities fraud cases, FINRA arbitration, securities arbitration, mediation and arbitration, and related securities litigation, such as Shustak Reynolds & Partners, P.C., can help identify responsible parties, assess claims, and pursue available dispute resolution options.
Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many investment advisors, financial professionals, broker-dealers, registered representatives, investors and businesses. Attorney Mahdi M. Ibrahim can be reached in the firm’s San Diego office at (619) 696-9500.
