SEC Enforcement Division: Who They Are and What They Do.

The SEC Division of Enforcement is the branch of the SEC responsible for investigating potential federal securities-law violations. It is also the SEC’s “litigation arm,” and it handles enforcement proceedings when necessary. The Division has two branches, the Office of Investigations and the Office of Litigation, that work together to develop the SEC’s enforcement cases.

Types of Enforcement Proceedings

Depending on the case, SEC enforcement proceedings can be either administrative proceedings or civil judicial actions. Administrative proceedings are litigated before an Administrative Law Judge (ALJ), and civil judicial actions are litigated in federal district court. Both types of proceedings can involve significant penalties and sanctions.

While federal criminal charges are a potential risk in many SEC enforcement proceedings, they are outside the SEC’s mandate. Instead, federal criminal cases are prosecuted by the U.S. Department of Justice (DOJ).

How Enforcement Proceedings Begin

The Division itself does not have the power to authorize enforcement actions. Instead, it can only recommend that the SEC Commissioners authorize enforcement action in a given case. The Commissioners will then review the case and decide whether to authorize enforcement action.

Who Can Face SEC Enforcement Proceedings?

The following companies and entities are among those that can face SEC enforcement proceedings:

• Public companies and their executives: SEC rules can be notoriously complex and often burdensome. Public companies must ensure that they properly disclose all material information to the market in order to avoid the possibility of enforcement actions following initial public offerings (IPOs) and other securities transactions.
• Investment advisers and private funds
• Broker-dealers and other financial institutions
• Auditors and accounting firms
• Other entities subject to SEC regulations and oversight

How does a potential violation reach SEC Enforcement?

What Leads to SEC Enforcement Proceedings?

The SEC’s Division of Enforcement is headed by a Director who reports to the SEC’s Chair. There are several different ways that SEC investigations and enforcement proceedings can begin, though some are far more common than others.

Tips, Complaints, and Referrals

Tips, complaints, and referrals to the SEC are the most common sources of potential securities violations. These reach the SEC’s Office of Market Intelligence, which then triages them to determine if a full-scale investigation is warranted. If so, the Office of Market Intelligence then refers the case to the Division of Enforcement, where it can trigger an investigation.

SEC Examinations

Some of the SEC’s other divisions conduct examinations of various entities that are subject to the agency’s oversight. If an examination uncovers evidence of a securities law violation, the overseeing division will then refer the case to the Division of Enforcement.

Whistleblower Tips

SEC whistleblowers can play an important role in identifying potential violations. In fact, whistleblower tips are one of the most common catalysts for government securities investigations. If an individual has evidence of a securities law violation, the SEC’s whistleblower program allows them to report this evidence directly to the SEC in exchange for a reward if this leads to enforcement action.

Self-Disclosures and Other Referrals

In many cases, the Enforcement Division will be evaluating a company’s self-disclosure of a potential violation of securities law in addition to reviewing various tips, complaints, and referrals to the agency. Along with any evidence that may exist, the Division’s staff will also consider several other factors when deciding whether to open an investigation. These factors include:

• The seriousness of the alleged violation
• The number of investors who may have been harmed
• The need for a deterrent effect
• The SEC’s current enforcement priorities
• The available resources in any particular case
• The ability to uncover sufficient evidence to support an enforcement action

Insider Trading Referrals from FINRA and CBOE

Insider trading investigations often begin after a referral from FINRA or CBOE. With this in mind, it is often prudent to assume that the SEC is aware of a potential insider trading case. When it came to whistleblower complaints in fiscal year 2024, the SEC received more than 24,000.

What happens during an SEC enforcement investigation?

What Constitutes an “Enforcement Matter” with the SEC?

An “enforcement matter” is an overarching term for two different types of investigations.

• Informal inquiries are informal and generally rely on staff reaching out to targets with a request for voluntary cooperation.
• Formal investigations occur when the SEC issues a “formal order of investigation.” The SEC’s formal order designates specific staff to investigate the matter and authorizes them to exercise the agency’s full range of investigative powers. With that, the most significant power that can be exercise by the SEC’s investigative staff is their ability to issue subpoenas.

What is a Wells Notice?

A “Wells notice” is a notice issued to a target of an SEC investigation stating that the staff is preliminarily recommending charges in an SEC enforcement proceeding. With that, it is important to clarify two important points about Wells notices:

• A Wells notice is only a preliminary charging recommendation. It is not a final decision.
• A Wells notice neither commences an SEC proceeding nor has the effect of conclusively establishing a violation of the federal securities laws.

Instead, when targets of SEC investigations receive Wells notices, this essentially gives them a chance to write to the SEC Commissioners in an effort to persuade them against authorizing enforcement action.

Are Formal Investigative Proceedings Public?

In general, formal investigative proceedings are nonpublic. Pursuant to 17 C.F.R. § 203.5, “information is confidential” when it comes to the SEC’s investigative proceedings. While, however, there are certain exceptions to this rule in which the SEC may release information to the public. Nevertheless, targets of an SEC investigation should not assume that their investigation is public, nor should they assume that the public will not learn about the investigation in the future.

How Long Does the SEC Have to Conclude Its Investigations?

The SEC has a wide range of investigative options at its disposal. These include:

• Interviewing witnesses and targets;
• Reviewing documents and digital records;
• Obtaining court orders; and
• Using the SEC’s administrative subpoena power.

With these extensive investigative options available, and no single rule imposing a universal deadline for completing investigations, it is often hard to tell how long the SEC is likely to take to reach its conclusion.

Is There a Deadline for the SEC to File its Complaints?

Along with no single rule imposing a universal deadline for completing investigations, there are no statutory time limits on the SEC’s ability to bring civil enforcement proceedings against targets. While, however, the statute of limitations imposes restrictions on penalties and liability in some cases. This means that preservation of a comprehensive record is essential in all matters involving the SEC.

What Rights Do I Have When I Receive an SEC Subpoena?

What Rights Do I Have Under an SEC Subpoena That Requests Documents?

The SEC’s authority to issue subpoenas requesting documents stems from Section 21(b) of the Exchange Act. However, the SEC does not have the power to enforce its own subpoenas. Instead, enforcement authority rests with the federal district courts. Under Section 21(c) of the Exchange Act, if an individual or entity fails to comply with a subpoena, the SEC can petition a federal district court to issue a civil enforcement order. The individual or entity will then be subject to the federal district court’s contempt authority if it doesn’t obey the federal district court’s order.

With that, if you are facing an SEC subpoena that requests documents, it is important to understand the following:

• The SEC cannot independently hold you in contempt of court if you fail to comply with a subpoena that it issues.
• A subpoena will specify its return date, and will specify other deadlines as appropriate. However, there is no universal response period that applies in all cases.

What Rights Do I Have Under an SEC Subpoena That Requests Testimony?

The SEC’s authority to issue subpoenas requesting testimony is also found in Section 21(b) of the Exchange Act, which imposes the same limits on the SEC’s enforcement authority. With that, if you are facing an SEC subpoena that requests testimony, you should also be aware of the following:

• You have the right to have counsel present during your testimony. Along with permitting this, 17 C.F.R. § 203.7 outlines what witnesses can do and say to their counsel during testimony.
• You can invoke your Fifth Amendment right against self-incrimination during your testimony. While, however, you need to be aware of the adverse-inference rule. Under this rule, courts in civil cases can draw adverse inferences from an individual’s invocation of the Fifth Amendment.
• You have the right to refuse to disclose confidential legal communications under the attorney-client privilege. However, you should keep in mind that the attorney-client privilege does not extend to the facts and documents that are relevant to the legal communication, and you will not be able to rely on the attorney-client privilege in response to requests for documents.
• You have the right to refuse to answer questions that may reveal corporate confidential information. You have the right to rely on the Fourth Amendment, though. However, you will still have to prove that the information is confidential.

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

Can an SEC Investigation Lead to Other Proceedings?

While the SEC is the government’s primary agency for enforcing federal securities laws, this does not mean that an SEC investigation cannot lead to other proceedings as well. If you are facing an SEC investigation, you could be facing the following proceedings as well:

• FINRA proceeding: FINRA is a private self-regulatory organization that has oversight authority over broker-dealers and associated persons. However, its relationship with the SEC has resulted in a number of overlap in the two organizations’ authority and enforcement protocols. As a result, cases that begin at FINRA often end up at the SEC, and cases that begin at the SEC can wind up at FINRA as well. This is in part because FINRA is the SEC’s “designated self-regulatory organization” for the securities industry, and FINRA is accountable to the SEC under its rules.
• CFTC proceeding: The CFTC oversees commodities and securities transactions that involve derivatives and commodity-related exchanges. Because the SEC’s and CFTC’s investigative staffs both have oversight authority, it is not uncommon for them to both investigate a target’s conduct simultaneously.
• Parallel proceeding: A parallel proceeding can trigger simultaneous civil, criminal, and regulatory exposure, with the DOJ overseeing criminal proceedings, the SEC overseeing civil enforcement proceedings, and FINRA or some other SRO overseeing regulatory proceedings.
• Examination by the Division of Examinations: As previously noted, the SEC’s Division of Examinations conducts compliance examinations that are separate from the SEC’s Enforcement Division investigations.
• Private securities litigation: Private securities litigation involves enforcement by private plaintiffs who believe that public companies or executives have violated the federal securities laws. The SEC generally initiates enforcement proceedings with the public’s interest in mind, while in private securities litigation, the private plaintiffs typically act on behalf of themselves in an effort to recover financial losses.
• Parallel enforcement under the Foreign Corrupt Practices Act (FCPA): When investigating potential violations of the FCPA, the SEC and DOJ will often work together and file parallel civil and criminal charges.
• PCAOB proceeding: the PCAOB is a nonprofit corporation created by the Sarbanes-Oxley Act of 2002 and overseen by the SEC, which regulates the auditors of public companies. As a result, auditors and accounting firms can face PCAOB proceedings under the PCAOB’s own rules when they violate auditing standards, misstate financial statements, or fail to maintain auditor independence.

What Penalties and Proceedings Can the SEC Pursue?

What Penalties Can the SEC Pursue in Civil Enforcement Proceedings?

While the SEC can pursue a wide range of penalties and remedies in civil enforcement proceedings, this does not include imprisonment. As noted above, the SEC only has the power to bring civil proceedings. Any charges for federal criminal law violations must be filed with the DOJ. With this, the federal penalties that the SEC can seek include:

• Disgorgement: Under 15 U.S.C. § 78u(d), district courts have the authority to order disgorgement in civil enforcement proceedings. The SEC will typically seek disgorgement when it has reason to believe that a target of an enforcement proceeding has profited from a securities violation. In such cases, an individual or entity will be ordered to return all of its profits from its alleged violations.
• Civil Penalties: When seeking civil penalties, the SEC can rely on the power afforded by 15 U.S.C. § 78u(d)(3). Once again, the SEC will typically seek civil penalties when a target of an enforcement proceeding has profited from a securities violation and harmed investors.
• Injunctive Relief: Although the SEC cannot pursue criminal penalties, federal district courts have the authority to issue injunctions in civil cases. This means that defendants can face injunctive relief when accused of violating federal securities laws in civil enforcement proceedings brought by the SEC.

What Penalties and Proceedings Can the SEC Pursue in Administrative Proceedings?

In administrative proceedings, the SEC can impose penalties such as cease-and-desist orders, the suspension or revocation of broker-dealers’ registrations, or bars to the securities industry for individuals. It also has the power to issue financial penalties and censures, which apply equally to firms and individuals.

While Administrative Law Judges (ALJs) serve as the initial decision makers in administrative proceedings, the Commissioners will have the final say. A company or individual can file a petition for review before the Commission in order to seek review of an ALJ’s initial decision. After hearing from the parties in the petition for review, the Commissioners will then issue a final decision that is generally reviewable in federal courts of appeals.

What Remedies Are Available to Defendants in SEC Proceedings?

When facing SEC enforcement action, companies and individuals have several different types of remedies available, depending on the type of proceeding they are facing.

• Federal-Court Defendants: For companies and individuals that the SEC is suing in federal court, the available remedies include all of those available to defendants under the Federal Rules of Civil Procedure. This means that defendants can serve the SEC with requests for admissions and document production requests under the rules’ discovery provisions. However, with the Supreme Court’s recent ruling in SEC v. Jarkesy, juries are also available to defendants that the SEC is suing for civil penalties analogous to common-law fraud.
• Administrative Law Judge (ALJ) Proceedings Defendants: For companies and individuals that the SEC is suing in administrative proceedings, the available remedies are more limited. Along with the fact that juries are not available to defendants, the SEC’s rules and regulations on discovery are also far more restrictive than those in the Federal Rules of Civil Procedure.

What Should I Tell an SEC Defense Attorney?

What Types of Attorneys Can Be on an SEC Defense Team?

Although there is no single SEC rule, SEC defense teams commonly consist of a mix of regulatory, white-collar, and trial lawyers. This is in part because the SEC’s enforcement authority and procedures are quite complex, and it often helps to engage a defense team with experience in all of these areas. For example, a regulatory attorney can help you negotiate an advantageous outcome with the SEC’s Enforcement Division, while a trial attorney can take your case to a federal district court if necessary.

Do Companies, Officers, Directors, Employees, and Auditors Each Need Their Own Attorney?

Companies, officers, directors, employees, and auditors may each need their own attorney in many cases. Although no SEC rule dictates how many attorneys should be on a target’s defense team, ABA Model Rule 1.6 generally requires attorneys to keep client communications and information confidential. This means that securities-enforcement defense attorneys must protect their clients’ interests and will typically be unavailable to represent anyone else that the SEC is investigating in a given case. With that, a securities-enforcement defense attorney may be able to represent your company in an SEC investigation, but this could create conflicts of interest if you are facing similar charges.

What Should Companies’ Board Members, Officers, and Employees Need to Know About Company Counsel?

If you are a company board member, officer, or employee, you need to be aware of the following three rules that govern your company counsel’s representation of the company in an SEC investigation:

• ABA Model Rule 1.13: Pursuant to ABA Model Rule 1.13, an organization is the client of organizational counsel, not the individual officers, directors, employees, or other agents of the organization.
• ABA Model Rule 1.7: According to ABA Model Rule 1.7, “Concurrent Conflicts of Interest” occur when a lawyer cannot provide competent and diligent representation to one client without compromising its representation of another client. With that, if an SEC enforcement matter leads to an investigation of a company, the company’s corporate counsel may be unable to provide a representation that is not compromised. In other words, the company’s corporate counsel would be subject to the requirements for informed consent if he or she sought to represent individuals who may be facing conflicts of interest in an SEC investigation.
• Attorney-Client Privilege: A corporation is generally entitled to control the attorney-client privilege in order to assert or waive it in its favor. With this in mind, companies’ board members, officers, and employees should be aware of an Upjohn warning if it is issued. An Upjohn warning is a notification that company counsel represents the company, not the individual, and that the company will maintain control of the attorney-client privilege.

Get Advice on Your Situation

If you want someone to look at the specifics of your case, Spodek Law Group handles federal criminal defense nationwide from New York and Los Angeles. The firm has been practicing since 1976 and its motto is simple: we owe loyalty to only you. Call 212-300-5196.