Understanding SEC Enforcement Process
How SEC Investigations Start
SEC investigations begin through multiple channels: tips, whistleblower complaints, market surveillance, filing review, and referrals. Understanding how investigations are initiated helps companies recognize early warning signs and respond appropriately when contacted by the SEC.
Sources of SEC Investigations
The SEC initiates investigations from multiple sources. The Division of Enforcement receives tips and complaints from investors, competitors, and former employees. The SEC's whistleblower program, established under Dodd-Frank, incentivizes individuals to report securities violations with the potential for financial awards. The Division of Corporation Finance refers matters when filing reviews identify potential disclosure violations. FINRA and stock exchanges refer suspicious trading patterns. The SEC's own market surveillance systems identify unusual trading activity around material corporate events.
The Investigation Process
SEC investigations typically begin with an informal inquiry. Staff attorneys and accountants review public filings, request documents voluntarily, and conduct informal interviews. If the staff determines that further investigation is warranted, it requests a formal order of investigation from the Commission, which grants subpoena power. Formal investigations involve compelled document production and sworn testimony. The investigation may last months or years. At its conclusion, the staff may recommend that the Commission take no action, negotiate a settlement, or file a civil enforcement action in federal court or before an administrative law judge.
What Companies Should Do
Companies that receive contact from the SEC, whether a phone call, letter, or subpoena, should immediately engage securities counsel with enforcement experience. The initial response sets the tone for the entire investigation. Counsel preserves relevant documents, coordinates the collection and production of responsive materials, prepares witnesses for testimony, and communicates with the SEC staff on behalf of the company. Early engagement of qualified counsel is the single most important step a company can take when faced with SEC scrutiny.
Frequently Asked Questions
What triggers an SEC investigation?
SEC investigations are triggered by a variety of sources including tips and complaints, whistleblower submissions, surveillance of market trading patterns, referrals from other SEC divisions or self-regulatory organizations, review of corporate filings, media reports, and referrals from other government agencies.
What is the difference between an informal inquiry and a formal investigation?
An informal inquiry involves voluntary requests for information and documents. The SEC cannot compel testimony or document production in an informal inquiry. A formal investigation involves a formal order of investigation issued by the Commission that grants subpoena power to compel testimony and document production.
Should a company respond to an SEC inquiry without counsel?
No. Even informal SEC inquiries should be handled by experienced securities counsel. The response to an initial inquiry can significantly affect whether the matter escalates. Securities counsel with enforcement experience understands how to respond in a manner that is cooperative while protecting the company's interests.
Questions about your specific situation?
Frederick M. Lehrer is a former SEC Enforcement Attorney with over 30 years of issuer-side securities law experience. All consultations are confidential. Flat-fee engagements.