FINRA Announces Probe Of Broker-Dealers' Small-Cap Foreign Activity

• The Financial Industry Regulatory Authority (FINRA) recently announced a targeted probe of broker-dealers that have helped small companies in foreign jurisdictions to go public between January 2023 and September 2025, signaling that it is looking into possible stock manipulation in connection with the firms' work.
• FINRA will be reviewing firm practices regarding both private and public offerings of small-cap exchange-listed issuers with business operations in foreign jurisdictions such as China.
• FINRA's announcement comes a month after the U.S. Securities and Exchange Commission (SEC) announced its Cross-Border Task Force to combat fraud, suggesting increased regulatory scrutiny of foreign activity.

FINRA's Targeted Probe of Small-Cap Foreign Activity

On October 23, FINRA announced that it is investigating broker-dealers that have helped small companies based in China and other foreign jurisdictions to go public, signaling that it is looking into possible stock manipulation such as pump-and-dump schemes in connection with the firms' work. Specifically, FINRA is reviewing certain member firms that have been involved in multiple small-cap offerings as an underwriter, bookrunner, syndicate member, selling group member or placement agent, as well as certain member firms that have participated in initial and/or secondary market trading related to small-cap offerings, including firms with omnibus accounts trading in these securities.¹ In its announcement, FINRA defines these small-cap offerings as initial public offerings that raise $25 million or less and are priced between $4.00 and $8.00, as well as follow-on offerings and private placements involving those issuers.

The notice requests firms that have participated in small-cap offerings to submit documents for review, including written supervisory procedures relevant to small-cap offerings; compliance policies and training materials; written supervisory procedures and compliance policies relevant to Regulation M; and a list of every small-cap offering in which the firm participated noting the number of investors, total amount raised, total compensation received by the firm and names of individuals involved, among other requests. For firms that have participated in initial allocation and/or secondary market trading related to small-cap offerings, FINRA requests additional documents including all versions of the firm's written anti-money laundering compliance program and written supervisory procedures relevant to securities trading, among other requests.

Although the notice did not list a reason for the review, it follows the SEC's newly launched task force on cross-border fraud further signaling a heightened regulatory scrutiny within the small-cap market as well as an overall compliance and regulatory focus on cross-border transparency and control.²

SEC's Cross-Border Task Force to Combat Fraud

In September, the SEC announced the formation of a task force focused on cross-border fraud and related securities law violations in jurisdictions "where governmental control and other factors pose unique investor risks." Much like FINRA's announcement, the SEC specifically cites to China as a potential jurisdiction of interest.

Reading FINRA's and the SEC's recent announcements in conjunction with one another suggests a heightened scrutiny of foreign activity and a continued focus on regulatory and compliance tools as a way to identify and enforce securities fraud violations, regardless of where they originate.

Now is a good time to review internal compliance and securities trading materials as well as written supervisory procedures to ensure compliance is in lockstep with the fast-changing regulatory landscape and the heightened focus on foreign jurisdictions. Please feel free to contact any of our experienced professionals if you have questions about this alert, responding to a FINRA request, or ensuring compliance materials are in accordance with current regulatory requirements.

The BakerHostetler White Collar, Investigations and Securities Enforcement and Litigation team is composed of dozens of experienced individuals, including attorneys who have served in the Department of Justice and at the SEC. Our attorneys include former unit chiefs as well as partners who have served in the SEC's Division of Enforcement and Office of the General Counsel, former U.S. attorneys, former assistant U.S. attorneys and attorneys with extensive experience in regulatory investigations, litigation and enterprise compliance counseling.

Footnotes

1. FINRA,Small-Capitalization Offerings (Oct. 2025),https://www.finra.org/rules-guidance/guidance/targeted-examination-letters/small-cap-offerings-oct2025.

2. Press Release 2025-113, SEC Announces Formation of Cross-Border Task Force to Combat Fraud (Sept. 5, 2025), https://www.sec.gov/newsroom/press-releases/2025-113-sec-announces-formation-cross-border-task-force-combat-fraud.

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