NATIONALLY RECOGNIZED FEDERAL LAWYERS
Last Updated on: 25th October 2023, 02:38 pm
The SEC, or Securities and Exchange Commission, is the federal agency responsible for enforcing securities laws and regulating the securities industry. One of the tools the SEC uses to conduct investigations into potential securities law violations is issuing subpoenas to compel the production of documents or testimony. But what exactly is a subpoena, and what should you do if you receive one from the SEC? This article provides a plain English overview of SEC subpoenas for the everyday person.
What is a Subpoena?
A subpoena is a legal document that requires an individual or company to provide documents, give testimony, or both, related to an SEC investigation. Subpoenas are issued under the SEC’s formal investigative authority. This allows SEC staff to compel witnesses to cooperate with an investigation, even if they don’t want to.Subpoenas can be issued to anyone the SEC believes may have information relevant to an investigation – individuals, companies, third parties like auditors or attorneys, etc. The SEC can issue subpoenas nationwide. Failure to comply with an SEC subpoena can lead to civil or criminal penalties.
Why Might I Receive a Subpoena?
There are a few reasons why you might receive a subpoena from the SEC:
- You are the target of an SEC investigation
- You have documents or information related to an SEC investigation target
- You are a third party with potentially relevant information, like an auditor, attorney, or service provider
- You are an expert witness
Receiving a subpoena does not necessarily mean you have done anything wrong. The SEC casts a wide net with subpoenas to make sure they gather all potentially relevant information as part of an investigation.
What Happens After I Receive a Subpoena?
Once you receive an SEC subpoena, you have a few options:
- Comply: Gather the requested documents and/or prepare for testimony by the deadline. This is the safest option to avoid penalties.
- Negotiate: You may be able to negotiate the subpoena’s terms with the SEC staff attorney who issued it. For example, you could request more time to comply or a narrower scope of documents.
- Object: You can object to the subpoena if you believe it is inappropriate, overly broad, vague, or unduly burdensome. This involves filing a petition to have the subpoena modified or quashed (cancelled).
- Disobey: You can choose not to comply at all, but this risks serious consequences like civil monetary penalties or being held in contempt of court.
Unless you obtain a court order quashing the subpoena, it’s usually wise to comply in some form, even if that means negotiating a compromise with the SEC.
What Happens if I Don’t Comply?
If you don’t comply with an SEC subpoena, the SEC can ask a federal court to compel you to comply. If the court orders you to comply and you still refuse, you could face penalties including:
- Civil monetary penalties of up to $100,000 for an individual or $500,000 for a company
- Reimbursement of the SEC’s costs for the proceedings against you
- Contempt charges resulting in fines or imprisonment
The SEC also can refer noncompliance to the Department of Justice for criminal prosecution.
What Does the SEC Look for in Subpoenaed Documents?
The SEC typically seeks documents that may shed light on the potential securities law violations under investigation. Some examples include:
- Emails and other communications
- Trade records, account statements, and confirmations
- Telephone records
- Corporate minutes and memos
- Marketing materials
- Financial records – bank statements, ledgers, invoices, etc.
- Audit workpapers
- Policies and procedures
The subpoena spells out what documents are sought with requests like “all communications between X and Y regarding Z”. The SEC tries to be comprehensive to build the most complete factual record possible.
Responding to Document Requests
The SEC knows producing documents can be burdensome. They try to balance thoroughness with reasonableness. Some tips for efficiently responding to a document subpoena:
- Ask for clarification of any vague or ambiguous requests
- Propose limiting the scope to key issues or date ranges
- Use targeted search terms to identify responsive documents
- Negotiate additional time if needed to respond fully
- Ask about producing documents electronically to reduce costs
- Organize documents clearly and label them per the SEC’s specifications
- Add a cover letter describing your production and certification of completeness
What Happens in SEC Testimony?
If you receive a subpoena to testify, it means giving sworn testimony before SEC staff. This generally occurs during a formal investigation but may happen at other times. You will likely testify at the SEC’s office, though they may come to you if travel is impractical.In testimony, the SEC will ask you questions one-on-one regarding the investigation. Testimony is transcribed by a court reporter. You must answer all questions completely and truthfully. You may have an attorney present to advise you, but they cannot answer on your behalf. Lying in SEC testimony can result in criminal prosecution.The SEC may ask you to testify more than once if they have follow-up questions. Testimony can be time-consuming but it’s important to take it seriously. Avoid speculation – stick to facts you know firsthand. Say you don’t know if you’re unsure. And listen carefully to each question before responding.
Practical Tips for Handling SEC Subpoenas
Here are some practical tips for responding to an SEC subpoena:
- Stay calm – An SEC subpoena can be unsettling but panicking helps no one. Take a breath and focus on methodically responding.
- Hire a securities attorney – Having experienced legal counsel to guide you through the process can really help reduce stress and avoid missteps.
- Be cooperative – While it’s fine to negotiate, outright refusing to comply will only bring more trouble. Work constructively with the SEC.
- Tell the truth – Lying to the SEC under oath is a federal crime. Answer all questions honestly, even if the truth is uncomfortable.
- Review documents carefully – Make sure you don’t inadvertently produce privileged or confidential information.
- Preserve all relevant documents – Once you receive a subpoena, you must retain all potentially relevant evidence. Destroying documents can lead to obstruction charges.
- Stay discreet – SEC investigations are confidential. Don’t discuss the subpoena publicly or tip off investigation targets.
- Ask for help if needed – The SEC understands subpoenas can be burdensome. If you’re overwhelmed, ask them for guidance.
Receiving an SEC subpoena can be intimidating but panic helps no one. By reviewing this overview, you now understand the subpoena process better. The key is responding prudently, with the help of counsel, in a cooperative spirit. This minimizes disruption while avoiding penalties that can arise from disobeying. While SEC subpoenas aren’t fun, they protect investors by ensuring federal securities laws are followed.