How SEC Investigations Work: A Complete Overview.

The Securities and Exchange Commission’s (SEC) Division of Enforcement is responsible for conducting investigations into possible violations of federal securities laws. The Division of Enforcement conducts these investigations on behalf of the Commission. A “formal order” grants the Division of Enforcement authority to issue subpoenas during the investigative process.

SEC Rule of Practice 5(c) mandates that, once a formal order has been issued, any subsequently conducted investigative proceeding remains nonpublic. This makes it difficult for those facing scrutiny to ascertain the scope, status, and grounds for their involvement.

The Division of Enforcement is also authorized to expand its investigation as necessary to follow up on information acquired during the investigative process. This includes any potential evidence of other federal securities-law violations. It also grants the Division of Enforcement the authority to issue subpoenas to individuals and entities not originally identified as subjects of the investigation.

Leads for SEC investigations can stem from a broad range of sources, including:

• Tips, complaints, and referrals from the SEC’s Office of the Whistleblower
• Review of registration statements and other public filings
• Information from Examinations and Investigations, other federal and international authorities, self-regulatory organizations (SROs), and news reports
• Monitoring of trading data, social media, and other market surveillance techniques
• Review of previous SEC enforcement proceedings and other similar administrative proceedings

The SEC’s recently published data reports:

• 20,000+ tips, complaints, and referrals per year
• Close to 2,000 active investigations
• Investigations that take two to four years on average

The reported increase in the number of whistleblower complaints and active investigations raises concerns about the SEC’s enforcement priorities and policies. The reported duration of SEC investigations further reinforces the importance of obtaining a favorable, timely outcome, and if possible, avoiding enforcement action entirely.

What stages occur before the SEC files an enforcement action?

The Enforcement staff can issue a subpoena if the Commission issues a formal order. The Commission’s approval process for issuing a formal order varies depending on the circumstances involved, but it has been reported to take several weeks in some cases. The staff cannot obtain subpoena authority without prior Commission approval; since the SEC rescinded the Enforcement Director's delegated authority in March 2025, every formal order of investigation must be approved by a vote of the full Commission.

2. Is a formal investigation necessarily different from an informal inquiry?

Once formal authority is granted, the Enforcement staff can then request documents or testimonials by means of subpoena. While the staff can issue subpoenas once the Commission issues a formal order, the staff can still request information voluntarily.

An informal inquiry by the Enforcement staff does not have the same compulsory powers as a formal investigation. The Enforcement staff is authorized to request information and request testimony; however, the staff must do so voluntarily. A formal investigation is a different procedure that permits the Enforcement staff to issue subpoenas.

A formal investigation is also an investigative proceeding. In this sense, it does not establish that a person or company committed a violation. It only indicates that the Enforcement staff has reason to believe that such a violation may have occurred.

The nonpublic nature of formal investigations means that proceedings are conducted confidentially. However, this does not necessarily mean that the information obtained during an investigation will remain secret. If a formal investigation opens the door for the Enforcement staff to discover other allegations, the Enforcement staff may decide to file an enforcement action based on these new allegations.

3. What happens if the Enforcement staff closes an investigation without recommending charges?

The Enforcement staff can close an investigation without recommending charges by issuing a “closing letter” stating that the staff’s investigation did not support the filing of an enforcement action.

Receiving a closing letter from the Enforcement staff does not necessarily mean that no violation occurred. It could mean that the staff did not have enough evidence to prove that a violation occurred.

If a complaint or an order instituting proceedings is filed with the Commission, this officially starts the SEC’s enforcement action. With this, the SEC is essentially alleging that a violation occurred and that an enforcement action is necessary to protect the investing public.

While conducting an informal inquiry is more common, the Enforcement staff can seek a formal order without conducting an informal inquiry.

What should I do after receiving an SEC subpoena?

1. Do I need to respond to an SEC subpoena?

An SEC subpoena is not optional. Once the Enforcement staff obtains the authority to issue subpoenas, it is entitled to produce documents and testimony.

The subpoena requires the recipient to produce certain documents and/or provide sworn testimony. If a person or company fails to comply with a subpoena, the SEC must seek a federal court order to enforce the subpoena. If the federal court order is granted, the recipient must comply with the subpoena unless it is subject to a court order.

As with any subpoena, you have the right to seek legal advice and legal representation after being served with an SEC subpoena.

2. What is the first step when facing an SEC subpoena?

The first step in responding to an SEC subpoena is to find out what is at stake. You should reach out to a law firm experienced in handling SEC investigations. While your firm is facing scrutiny from the SEC, it does not necessarily mean that it did something wrong. Once the law firm gets in touch with the SEC, the attorney may be able to find out why your firm is under scrutiny.

Once your attorney gets in touch with the SEC, your attorney can request the governing formal order of investigation. This order lists the investigative authority, the scope of the investigation, and the SEC’s grounds for granting the investigative authority. The Enforcement staff must disclose this information before enforcing the subpoena.

3. What should the next steps be in responding to an SEC subpoena?

After finding out why the SEC is targeting your company, the next step is to negotiate the scope, timing, and date of testimony.

The Enforcement staff is entitled to the testimony and documents that are within the scope of the subpoena. However, the Enforcement staff is often open to negotiations. Your legal counsel can negotiate the scope of the subpoena, timing, and date of the subpoena. This shows the SEC that you are cooperative and it may encourage a more favorable outcome.

4. How can attorney-client privilege and work-product protection apply to an SEC investigation?

During a formal investigation, recipients can invoke attorney-client privilege and the work-product doctrine. However, recipients should be cautious when it comes to producing documents and providing testimony.

Producing a document under the attorney-client privilege or the work-product doctrine can potentially waive the privilege. Additionally, this could potentially expose you to collateral litigation. When faced with an SEC subpoena, it is important that you make informed decisions about the privilege and work-product protection.

5. Can I challenge an SEC subpoena?

If it is necessary, you can challenge an SEC subpoena. The most common challenges are when the Enforcement staff seeks to enforce the subpoena. The subpoena’s authority, relevance, and definiteness are often among the reasons used to challenge the subpoena. The burden of compliance is also a common ground for challenging a subpoena.

If a federal court reviews an SEC subpoena, the court evaluates the Enforcement staff’s authority to request the documents and testimony. The court also evaluates the scope and definiteness of the request. Finally, the court evaluates the potential burden of compliance.

6. Can I dispose of the documents?

If a person or company willfully destroys records to obstruct a federal investigation, he or she can be charged under 18 U.S.C. §1519. Under this section, destruction, alteration, falsification, and concealment of documents and other records can lead to federal criminal charges.

What rights do I have during SEC questioning?

1. How is testimony obtained in SEC investigations?

The Enforcement staff can obtain testimony by means of deposition or at an SEC hearing. A witness is given the opportunity to testify under oath, and a deposition transcript is produced.

2. Can witnesses be represented by legal counsel during SEC investigative testimony?

Yes, witnesses can be represented by legal counsel during SEC investigative testimony. Counsel is present throughout the entire deposition, and counsel can ask questions about the scope of the investigation and other relevant issues.

3. Do witnesses have a right against self-incrimination?

The Fifth Amendment to the U.S. Constitution provides individuals the right against self-incrimination. This means individuals can invoke the Fifth Amendment when they are questioned under oath by the SEC. However, this does not necessarily mean the testimony given is admissible as evidence in court. This depends on the circumstances.

Business entities generally lack the Fifth Amendment privilege. If witnesses respond to SEC investigative testimony on behalf of their business entities, the business entity cannot invoke the Fifth Amendment privilege to refuse to answer or to decline to provide records.

4. What is SEC Rule of Practice 7?

Rule 7 of the SEC's Rules Relating to Investigations (17 C.F.R. § 203.7) sets out the rights of witnesses, including the right to be shown the Commission's order of investigation on request and the right to be accompanied, represented, and advised by counsel.

A witness who was questioned under oath can seek a court to protect the information disclosed to the SEC. The Enforcement staff may then, if they have enough evidence, choose to file an enforcement action with the SEC.

A corporate records custodian cannot invoke the Fifth Amendment privilege as he or she will not be in violation of the SEC’s rules. Instead, the company itself is expected to provide the information that the enforcement staff may then seek to use for the next stage of the investigative process.

5. What is a voluntary staff interview?

A voluntary staff interview is another way to gain information for an investigative process. During voluntary staff interviews, the Enforcement staff can obtain information without a subpoena. Voluntary staff interviews are also conducted without oaths. The Enforcement staff can request a witness to appear at their office. However, this is a voluntary appearance, and the witness is entitled to seek legal advice before giving testimony.

6. What is a proffer agreement?

A proffer agreement is a contract between the SEC and the individual. Under the terms of a proffer agreement, a person or company will provide information to the SEC. In exchange, the Enforcement staff agrees that these statements will only be used to the extent permitted in the proffer agreement. A proffer agreement helps a person or company to make informed decisions and to assess the potential outcomes of the investigation.

Todd Spodek and the attorneys at Spodek Law Group handle federal cases of this kind from New York, Brooklyn, Queens and Los Angeles.

1. Can an SEC investigation expose me to other cases?

Yes, SEC investigations can expose individuals and corporations to various other cases. The SEC can refer cases for criminal prosecution to the Department of Justice. This may happen if the investigation uncovers evidence of an intentional violation of federal securities laws that is punishable by fines, prison, or both.

The SEC can share information with the DOJ and other regulators such as the state attorney general’s office or the Commodity Futures Trading Commission (CFTC) in certain cases as well. Additionally, materials produced during the investigative process could become discoverable in private litigation.

2. What is a parallel investigation?

A parallel investigation is one conducted by the SEC’s Enforcement staff and the DOJ. While the SEC pursues civil sanctions, the DOJ is looking for grounds for criminal charges. This creates a risk of inconsistent testimony and leads to shared evidence between both authorities, which can increase the risk of civil and criminal liability for individuals and companies.

3. Does company counsel represent an individual during SEC investigations?

Generally, company counsel represents only the corporation. Individuals can hire their own legal counsel to handle their defense. However, company counsel may be able to represent the corporation and the individual if the individual’s interest aligns with the corporate entity’s interest.

However, in several circumstances, the interests of the corporate entity and the individual may diverge. This can happen during testimony, cooperation with the SEC, or when pursuing a settlement.

4. Does attorney-client privilege apply during SEC investigations?

The attorney-client privilege protects confidential communications between a client and their attorney. However, during an SEC investigation, the corporate entity owns the privilege over communications made with its lawyers. The privilege can be waived at the discretion of the company.

If the Enforcement staff asks for documents that are subject to the attorney-client privilege or the work-product doctrine, the individual or company must object by informing the SEC. With this, the company may then seek a court order to protect the information disclosed.

If the attorney-client privilege is waived, the disclosed information can then be used to conduct the investigation. The SEC can then determine whether the disclosed information supports an enforcement action.

5. What is an Upjohn Warning?

An Upjohn warning is given to a company employee who is about to provide information or testimony during an internal investigation. With this, corporate counsel will inform the employee that the counsel represents the company and not the employee. Counsel will also explain that the company owns the attorney-client privilege and that the corporation can choose to waive this privilege at its discretion.

6. Do materials produced during investigations become discoverable?

Yes, materials that a person or company produced to the SEC can be discoverable in private litigation. For example, private litigants may subpoena documents that the SEC has obtained and use them as evidence in court.

1. What is a Wells Notice?

A Wells notice is a document issued by the Enforcement staff to inform an individual or corporation that they are suspected of violating federal securities laws and the staff intends to recommend enforcement action against them.

The Enforcement staff issues a Wells notice near the conclusion of its investigation. The notice gives the Enforcement staff the opportunity to persuade the Commission to pursue the recommended charges. While issuing a Wells notice can lead to enforcement action, the Enforcement staff does not issue Wells notices in every investigation.

2. Does receiving a Wells Notice mean that I will be charged by the SEC?

Receiving a Wells notice means that the SEC’s Enforcement staff believes that a violation occurred. This is a critical stage in the investigative process. With the receipt of a Wells notice, the Enforcement staff typically presents its proposed charges.

A Wells notice is not a filed charge and it is not a finding of liability. It is only the preliminary intent of the Enforcement staff to recommend charges to the Commission.

3. What should I do after receiving a Wells Notice?

Individuals and companies have the opportunity to respond to the Enforcement staff’s proposed charges by submitting a “Wells submission.” A Wells submission can be an oral or written statement explaining why the Enforcement staff’s proposed charges are not warranted. In some cases, the Enforcement staff may even allow companies and individuals to intervene in the commission's proceedings.

A Wells submission is a part of the investigative record and a statement made in a Wells submission can become evidence during subsequent proceedings. This is why it is important to obtain advice from legal counsel when preparing and sending a Wells submission.

4. Do I need to publicly disclose the receipt of a Wells notice?

Publicly disclosing the receipt of a Wells notice can depend on several factors including materiality and circumstances involved. Publicly listed companies may be required to publicly disclose receipt of a Wells notice if it is considered material for shareholders. In this case, the SEC will not publish a notice in its news release.

5. Does a Wells notice open or authorize a formal investigation?

A Wells notice does not open or authorize a formal investigation. The Wells notice indicates that the investigation has nearly reached its conclusion. If the Enforcement staff finds grounds to pursue a formal investigation, it will file a formal request to the SEC.

Who decides whether the SEC files charges or settles?

1. Who decides if the SEC should pursue a civil or administrative case?

While Enforcement staff investigates violations on behalf of the SEC, the final decision to file an enforcement action belongs to the Commission. The Commission makes the final decision regarding whether to file an enforcement action. While Enforcement staff provides recommendations, the Commission decides whether a court order or administrative order is warranted. With its approval, the staff can then file for litigation in federal court or initiate an administrative proceeding.

In the administrative proceeding, the individual is subject to an Administrative Law Judge’s presiding or Administrative Law Judge’s trial. With the Commission’s authorization, the Enforcement staff will litigate the case.

2. What is the SEC’s Enforcement Authority?

Recent court cases have limited the SEC’s enforcement authority. For example, the U.S. Supreme Court decided in SEC v. Jarkesy that the SEC cannot seek civil penalties for securities-fraud claims in administrative proceedings. This means that the Enforcement staff must seek a jury trial to impose civil penalties for fraud under a statute.

The SEC can obtain disgorgement but cannot exceed the defendant’s net profits. In Liu v. SEC, the Court affirmed that net profits awarded for the relief of victims are not disgorgement. This includes the SEC’s ability to recover the profits that were obtained through illegal means.

Another limitation is the five-year statute of limitations period under 28 U.S.C. § 2462. This means that the government can only impose civil penalties for violations that occurred within five years prior to the filing of the claim.

However, ten years can be applied for disgorgement and equitable remedies. The Supreme Court decided in Kokesh v. SEC and SEC v. Liu that these two are not penalties under 28 U.S.C. § 2462 and thus the statutory period would not apply. Instead, Exchange Act § 21(d)(8) applies to disgorgement. This statute imposes a ten-year limitation period on scienter violations. Similarly, Exchange Act § 21(d)(8) imposes a ten-year limitation period on cases seeking a “specification of statutory penalties.”

3. How can the SEC enforce an Administrative Order?

Enforcement of an administrative order is conducted by filing a complaint in federal court. An administrative order that does not impose any penalties or disgorgement will not need to go through the federal courts to be enforced. With this, the SEC can seek the court’s assistance to enforce administrative orders. When an Administrative Order is enforced through the federal courts, it will be enforceable as a judgment against the defendant.

4. Does the Commission need to approve a negotiated settlement?

Yes, the Commission must approve a negotiated enforcement settlement before filing the complaint or administrative order. Settlement negotiations are between the individual or company and the SEC. During negotiations, it is important that you do not concede to any proposed allegations of violations. With the approval of the Commission, the SEC can then execute the complaint or administrative order to settle a proposed action.

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.