This article discusses SEC Investigative process. SEC Enforcement Staff is charged with investigating federal securities laws violations. SEC also initiates enforcement actions against private individuals and companies who SEC believes violate securities laws.
At the onset of the investigation, SEC may request the target company or individual to disclose financial reports for several years. It is not unusual for an enforcement investigation to create a significant burden on the target even if in the end SEC does not find any evidence of violations. A typical SEC investigation may result in huge number of overtime hours as well as significant additional financial burdens, including legal and accounting fees. The mere fact that the company is being investigated by SEC can impact the staff morale. It can effectively alter the company operating plans and in some instances simply bring them to a complete halt until the investigation is completed.
SEC investigations are conducted confidentially and SEC does not disclose any information related to ongoing investigation to the public but it will obviously monitor the media and all other sources for any information it can use to prosecute the case. This is why it is extremely important for target companies to avoid any sort of public disclosure of any financial or accounting information. Additionally, any disclosures of this nature, even made before SEC finds any violations, can have serious effect on the company’s business and result in shareholders’ litigation.
It is important for businesses and private individuals who may come into contact with SEC to understand the SEC offices involved. The Division of Corporation Finance and the Office of Compliance Inspections and Examinations generally act as regulators charged with helping the registrant or regulated business improve its compliance with the federal securities laws. On the other hand, the Enforcement Staff is a law enforcement agency whose job is to bring enforcement actions and refer cases for criminal prosecutions to the Department of Justice.
How SEC Investigations Start
Many issues can trigger a SEC enforcement investigation. SEC may receive referrals from other SEC divisions or offices, or the media. Speaking of the media, SEC regularly monitors media reports, including newspapers, magazines, and the Internet. Many SEC investigations and enforcement actions were triggered by reports in major media publications that raised questions of accounting or disclosure violations, FCPA violations, and similar issues. In these situations, SEC is extremely likely to react by launching an investigation of these reports.
SEC will investigate violations of federal securities laws when the company self-reports to the SEC.
Another common trigger involves complaints from short-sellers, shareholders, employees and competitors. Since 2010, the Dodd-Frank Act, has authorized the SEC to award significant sums of money to whistleblowers who provide information to the SEC that leads to enforcement action.
SEC receives a number of referrals from other federal agencies, both regulatory and law enforcement.
If the Enforcement Staff receives a lead of a potential violation of the federal securities laws, it will initiate an informal inquiry or “matter under inquiry”.
At some point a matter under inquiry may become an official investigation, usually within 2 months, if the agency determines that the situation warrants it. When this happens, the Enforcement Staff will normally collect information from various sources including public filings, the Internet; news reports, and market surveillance trading data. The agency will conduct a thorough analysis of all available data and decide on how to proceed from that time on. If the SEC decides to move ahead with the investigation, the Enforcement Staff will obtain a Formal Order of Investigation which will allow it to issue subpoenas and compel witness testimony.
The NYC based law firm of Norman Spencer Law Group has the resources and experience representing clients in complex SEC investigations and related white-collar federal criminal matters. If you or your company have been approached by SEC investigators or if you believe that you may be in violation of federal securities laws and would like to discuss your legal options with an experienced SEC defense attorneys, then you should contact us today to set up a confidential consultation with one of our SEC lawyers.