Can the SEC Ban Me From My Industry??

It is a very common misconception that the SEC is a law enforcement agency with a broad mandate to punish suspected violators by any means available. In reality, the SEC exists to enforce compliance with the federal securities laws through civil proceedings, only. This means that:

• The SEC does not have the authority to file criminal charges in federal court.
• Criminal prosecutions brought by the SEC are never the appropriate vehicle for initiating a defendant’s punishment.
• The SEC will, however, work closely with the DOJ to prosecute any targeted individuals and entities who have committed serious securities-related crimes.
• The SEC will routinely work closely with the DOJ in this respect, though the two agencies’ roles will always remain distinct from one another.
• The same is true of the SEC’s enforcement proceedings themselves, which cannot result in the sentencing of defendants to federal imprisonment.
• Instead, the SEC will pursue various types of relief against defendants, many of whom qualify as individuals, ranging from monetary disgorgement and civil penalties to industry bars.
• While an industry bar prevents you from continuing to work in certain capacities (e.g., as a broker, dealer, investment adviser, or in some other regulated capacity), it is not a total ban on employment in every occupation.
• For example, under the Exchange Act Section 15(b)(6), the SEC will have the authority to suspend an individual’s registration for up to twelve months.
• However, this provision also grants the SEC independent authority to seek a permanent ban, and neither provision permits the SEC to bypass the statute of limitations.
• The same is true under the Advisers Act Section 203(f), where the SEC will similarly be barred from imposing suspensions longer than twelve months and are otherwise bound by the statutory requirements governing permanent industry bans.

Which Securities Jobs Can the SEC Bar Me From?

The SEC will typically rely upon six statutes to seek the imposition of industry bans, and these statutes collectively authorize the SEC to pursue bars that:

• Restrict defendants from associating with individuals or entities that function as (i) registered broker-dealers, (ii) investment companies, (iii) investment advisers, (iv) transfer agents, (v) nationally recognized statistical rating organizations, and/or (vi) credit rating agencies, which function as financial institutions under various categories, all of which includes (but is not limited to) the following:
• Registered brokers, broker-dealers, exchange-registered brokers, investment advisers, investment advisor representatives, fund managers, principals, financial analysts, investment advisors, commodities-trading consultants, commodity-trading-registered consultants, registered representatives, and other financial industry roles that involve handling investor money.

Depending on which statute(s) the SEC invokes, these bans can be either total or partial in scope. For example, the Exchange Act Section 15(b)(6) authorizes the SEC to bar brokers from associating with registered broker-dealers. In contrast, the Advisers Act Section 203(f) authorizes the SEC to bar defendants from acting as investment advisers or “associating in any capacity” with any person or entity that is registered with the SEC. The SEC will similarly rely upon the Investment Company Act Section 9(b) when it wishes to prohibit defendants from acting in “any capacity” with registered broker-dealers, and Investment Company Act Section 48(d) when it wishes to prohibit defendants from acting in “any capacity” with a registered investment company.

Dodd-Frank also expanded the scope of the SEC’s authority to seek “collateral bars” in cases involving public companies, broker-dealers, investment advisors, and registered investment funds. Collateral bars under Dodd-Frank can prevent broker-dealers, investment advisers, and other financial professionals from working in regulated capacities at various other financial firms, too.

Notably, securities-industry bars can be temporary, conditional, or permanent. While many are permanent bars, the SEC frequently seeks conditional bans as well, i.e., bars that last for a particular number of years, that are contingent on satisfying certain conditions, or that apply within specific time frames. These are referred to as temporary bans, though the term “temporary” is not strictly accurate in all cases. Permanent bars, conversely, would be imposed indefinitely, with defendants forever barred from continuing in the profession.

What Must the SEC Prove Before Imposing an Industry Bar?

Under the Exchange Act, specifically Section 15(b)(6), in order to seek an industry bar or suspension that limits a defendant’s ability to associate with a registered broker-dealer, investment company, or investment adviser, the SEC must establish that the defendant has committed one of a set of “predicate grounds,” and then it must affirmatively find that barring the defendant from associating with registered broker-dealers (or “any other persons or entities whose activity is subject to SEC regulation”) is “in the public interest.” Predicates under the Exchange Act Section 15(b)(4) or (6) include:

• (i) having been convicted of a felony or misdemeanor involving any financial, securities, or investor-related fraud or other securities-related offenses;
• (ii) having been subject to a federal court’s permanent injunction, prohibition, or removal order; and,
• (iii) having been found to have committed a willful violation of the Exchange Act, the Investment Company Act, or the Investment Advisers Act.

Under the Advisers Act, specifically Section 203(f), in order for the SEC to bar a defendant from associating as an investment adviser, the defendant must first be found to have committed one of a set of similar “predicate grounds.” Once this is established, the SEC then must find that imposing a bar (either for a certain period of time or permanently) is “in the public interest.” Predicates under the Advisers Act Section 203(e) or (f) include:

• (i) having been convicted of a felony or misdemeanor involving any securities-related offenses;
• (ii) having been subject to a federal court’s permanent injunction, prohibition, or removal order; and,
• (iii) having been found to have committed a willful violation of the Securities Act, Investment Company Act, or Exchange Act.

Under the Investment Company Act, specifically Section 9(b), in order for the SEC to deny, suspend, or revoke a registration, or to prohibit a defendant from acting as a director, officer, or employee of a registered investment company, the defendant must be afforded the opportunity to appear in an SEC enforcement proceeding, receive proper notice, have an opportunity to present an initial plea, an opportunity to present evidence, and an opportunity to present arguments. As in cases involving the Exchange Act and the Advisers Act, the SEC must also make a finding that denying or revoking the registration, or denying a defendant the ability to act as an officer, director, or employee, is “in the public interest.” Predicates under Investment Company Act Section 9(b) include:

• (i) having been convicted of a felony or misdemeanor;
• (ii) having been subject to a federal court’s injunction, prohibition, or other court order;
• (iii) having made a false statement or willful misrepresentation to the SEC; and,
• (iv) having been found to have willfully violated any securities law.

Are Industry Bars Different from Officer-Director Bars and Professional Practice Bars?

Yes. While industry bars, officer-director bars, and professional practice sanctions all affect a defendant’s professional employment to some extent, they each are different in different respect.

I. Officer-Director Bars

Under the Exchange Act, specifically Section 21(d)(2), the SEC may also seek to impose what are commonly referred to as officer-director bars. The provision authorizes the SEC to seek the imposition of such bars in cases involving public companies, and these bars generally limit the ability of the affected individual to serve as a director or officer of a public company, though not necessarily to engage in professional employment within the securities industry more generally. Under the Exchange Act, an officer-director bar will generally only be imposed (i) if the defendant is found to have committed a violation under Section 10(b), and, (ii) if the defendant is found to be “unfit to serve as an officer or director.”

II. Professional Practice Sanctions

Under SEC Rule 102(e), the SEC may also seek to suspend or bar accountants and lawyers from practicing or appearing before the Commission. While Rule 102(e) sanctions may prohibit accountants and lawyers from serving as an auditor or lawyer for certain types of public companies, registered broker-dealers, or other entities that are subject to SEC oversight, these sanctions do not generally prohibit professional employment with any type of employer or within any other professional capacity. Under Rule 102(e), accountants, lawyers, and other professionals can be disciplined for deficient qualifications, unethical conduct, and willful violations of federal securities laws, among other things. In these cases, they will be at risk of facing temporary suspensions or permanent bars from practicing or appearing before the Commission.

Spodek Law Group, led by managing partner Todd Spodek, defends clients in federal criminal and white collar matters.

Can the SEC Prosecute Me, or Impose Penalties, Without a Jury?

The Justice Department (DOJ) is responsible for prosecuting criminal violations of federal securities laws. If the SEC uncovers evidence that suggests criminal charges are warranted, it will refer the case to the DOJ, which will then independently determine whether prosecution is appropriate.

Although the DOJ is the primary enforcement agency in criminal cases, the SEC may frequently conduct its own investigations alongside the DOJ’s. The DOJ may also frequently work alongside the SEC in these cases, although the two agencies’ investigations and proceedings will remain entirely distinct.

The SEC has two main enforcement vehicles. In some cases, the SEC will file a lawsuit in federal district court. In other cases, it will institute an administrative proceeding in the SEC’s own Office of Administrative Law Judge. The SEC can seek various remedies in either case, including disgorgement, prejudgment interest, penalties, injunctions (which prohibit defendants from continuing to violate federal securities laws in the future), and industry bars.

In SEC v. Jarkesy, a recent Supreme Court case involving claims for civil penalties for securities fraud, the Court found that the SEC must proceed to trial before a jury. While the Court’s 2024 decision grounded this requirement in the Seventh Amendment to the U.S. Constitution, it is important to understand that Jarkesy is a narrow case. It only addresses the SEC’s ability to seek civil penalties for fraud, and it does not prohibit the agency from instituting other administrative proceedings.

Who Can the SEC Investigate for Securities-Law Violations?

The SEC shares some oversight duties with FINRA, a self-regulatory organization (SRO). However, FINRA is not a government agency, and the SEC maintains full oversight over all aspects of the securities industry. This includes the authority to investigate not only FINRA-registered firms and individuals, but also any other entity or individual, regardless of registered status, suspected of violating the Securities Act or the Exchange Act.

In most cases, the SEC will target its enforcement actions against companies’ corporate officers, directors, employees, and outside professionals who are suspected of having committed unlawful acts. These include unregistered individuals, as well as those individuals who are registered with FINRA or the SEC, if the allegations involve substantive and not merely procedural securities-law violations. In federal securities-law violations cases, the SEC has the authority to target a wide range of securities-related activities under statutes like:

• The Securities Act Section 17(a), which targets fraud, misrepresentations, and other deceptive devices in relation to the offer or sale of securities that involve the use of “any means or instrumentality of interstate commerce,” the “mails,” or any other fraudulent means or devices;
• The Exchange Act Section 10(b), which targets the use of manipulative or deceptive devices in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, as well as any securities-based swap agreement.

If you learn that you are the subject of an SEC investigation, it may be because the SEC has issued a formal investigation order. Once a formal order has been issued, SEC staff members may then have the authority to issue subpoenas and demand records, information, or other communications in both written and testimonial form. Like many other administrative investigations, SEC investigations generally remain confidential unless the SEC files public charges, unless the subject of the investigation chooses to speak publicly or otherwise disclose the investigation through some means other than filing public charges.

How Long Does the SEC Have to Bring a Case?

Generally speaking, the SEC is subject to various procedural and time limitations in its enforcement proceedings. For example, the SEC may be bound by a five-year limitations period when pursuing monetary penalties under 28 U.S.C. § 2462, a federal statute that governs federal agencies’ ability to initiate actions to collect financial penalties. Limitations periods like this generally constrain the types of remedies that the SEC can pursue, not the agency’s investigative authority, though.

I. Disgorgement

In cases that involve scienter, i.e., cases involving allegations of intentional misconduct, the SEC can seek disgorgement over a 10-year limitations period under the Exchange Act Section 21(d)(8). Where an SEC investigation will focus upon a set of non-scienter-based allegations, it will likely be subject to a five-year limitations period under 28 U.S.C. § 2462.

II. Equitable Remedies

The SEC may also pursue equitable remedies such as restitution and industry bans under the Exchange Act Section 21(d)(8). Under this provision, the SEC will also have up to ten years to seek these remedies, though it is important to note that this provision does not apply to disgorgement of proceeds in cases involving the sale of derivatives.

Notably, under Section 21(d)(8) and other applicable provisions of federal law, time spent by a defendant outside of the United States will generally pause the running of the applicable limitations period(s).

How Often Does the SEC Bring Enforcement Actions?

The SEC has never been subject to a fixed annual budget, so its enforcement totals fluctuate over time. In its fiscal year 2024 Report of Enforcement, the SEC stated that it brought a total of 583 enforcement actions last year, of which:

• 431 involved standalone investigations;
• 93 were “follow-on” administrative proceedings involving parties who were previously named in an enforcement action;
• 59 were administrative proceedings that were initiated when companies and individuals failed to file required periodic reports.

As reported in its Fiscal Year 2024 Report of Enforcement, these actions collectively produced approximately $8.2 billion in final orders. The report notes that “approximately 33% of the orders finalized these cases, involving $3.7 billion in sanctions total.” Among the cases that did not result in final orders, the SEC achieved “approximately $3.5 billion in sanctions” in cases resolved in litigation or by settlement (and “another $1.0 billion” from non-final settlements).

Talk to Spodek Law Group

Every case turns on its own facts, and general information is no substitute for advice about yours. Todd Spodek, managing partner of Spodek Law Group, and the firm's attorneys defend federal criminal and white collar matters nationwide. Reach the firm at 212-300-5196.