How Experience Inside the SEC Division of Enforcement Informs Compliance Counsel

What the SEC Division of Enforcement Does

The Division of Enforcement is the SEC's primary investigative and prosecutorial arm. It reviews tips, complaints, and referrals from other SEC divisions. It conducts informal and formal investigations. It recommends enforcement actions to the Commission, which can take the form of administrative proceedings, civil injunctive actions in federal court, or referrals to the Department of Justice for criminal prosecution. In fiscal year 2024, the Division filed over 780 enforcement actions resulting in over $8 billion in financial remedies.

The Division is organized into specialized units, including the Office of Internet Enforcement, the Asset Management Unit, the Market Abuse Unit, the FCPA Unit, and the Crypto Assets and Cyber Unit. Each unit focuses on specific types of violations, but all enforcement attorneys share a common analytical framework: they read filings looking for inconsistencies, omissions, and patterns that suggest potential violations of the anti-fraud provisions of the securities laws.

How Enforcement Attorneys Review Filings

Enforcement attorneys do not read filings the way investors or analysts read them. They read backward: they start with the most recent filing and compare it to prior filings, looking for changes, deletions, and inconsistencies. They cross-reference filed documents with press releases, investor presentations, social media posts, and third-party reporting. They look for what is missing as much as what is stated. They pay particular attention to risk factor disclosure, related party transactions, changes in auditors or directors, revenue recognition methods, and the timing of material event disclosures.

When enforcement attorneys identify a potential issue, they begin with informal inquiry, requesting documents and information from the company. If the informal inquiry raises additional concerns, the Division can obtain a formal order of investigation from the Commission, which gives it subpoena power. The progression from informal inquiry to formal investigation to enforcement action follows a well-established pattern that an attorney who has worked inside the Division can recognize and advise clients to avoid.

Common Disclosure Red Flags

The following patterns consistently attract enforcement attention. This list is educational and based on publicly available enforcement actions and SEC staff guidance. It is not exhaustive, and the significance of any individual pattern depends on the specific facts and circumstances:

• Risk factors that remain static across multiple reporting periods while the business undergoes material changes
• Press releases containing forward-looking statements not supported by or inconsistent with filed disclosure
• Late or missed filings, especially when accompanied by changes in auditors or officers
• Related party transactions disclosed only in financial statement footnotes rather than in the designated Item 404 section
• Revenue recognition changes or adjustments without adequate MD&A explanation
• Form 8-K filings that report triggering events significantly after they occurred
• Promotional language in SEC filings that reads more like marketing material than regulatory disclosure

How Enforcement Experience Informs Compliance Work

The value of enforcement experience in compliance counseling is not theoretical. It is the ability to read a client's filing and immediately identify the exact issues that would attract enforcement attention. It is the ability to draft risk factors that satisfy both the legal standard of materiality and the practical standard of what enforcement attorneys expect to see. It is understanding the difference between disclosure that technically satisfies the rules and disclosure that would withstand enforcement review.

Frederick M. Lehrer served as a Staff Attorney in the SEC Division of Enforcement and subsequently as a Special Assistant United States Attorney in the Southern District of Florida. This combination of regulatory and prosecutorial experience provides a unique perspective on securities compliance that over 30 years of subsequent private practice has refined into a practical methodology for issuer-side counsel.

Disclaimer: Frederick M. Lehrer, P.A. is a private law practice providing issuer-side securities counsel. The firm does not represent the SEC or any government agency. Information on this page is educational and does not constitute legal advice. No attorney-client relationship is created by reading this content.