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From Suspicion to Certainty: How SEC Investigations Work

What Triggers an SEC Investigation?

Each year, the SEC receives more than 20,000 tips, complaints and referrals. Nods come from many sources, including market surveillance activities, whistleblower tips, investor complaints, other divisions and offices of the SEC, self-regulatory organizations such as FINRA, and sometimes even news reports. So how does the Commission analyze this information to determine if a federal securities law been violated? Answering that question isn’t simple. While we provide a brief overview of the process below, for a more detailed explanation of the agency’s investigative procedure, see our SEC Insider’s Guide.

At the point of intake and initial examination, the SEC seeks to establish the veracity of allegations through informal inquiry and document review. A number of factors will lead the Commission to open a formal investigation, including if the alleged violations caused – or are actively causing – significant harm to investors or the integrity of the markets. At that point, the Division of Enforcement staff may compel witnesses by subpoena to testify and/or produce books, records, and other relevant documents. Since SEC investigations are civil and not criminal, if, in the course of its inquiries, the agency discovers possible criminal misconduct, it will refer the matter to the appropriate law enforcement authority. Formal investigative proceedings are nonpublic unless otherwise ordered by the Commission. Indeed, individuals and organizations cannot reach out to the SEC to determine if they are under investigation or to secure updates on an open investigation.

SEC Investigations Can Be a Lengthy Process

The average investigation spans two to four years. For the SEC, investigations are serious, lengthy and comprehensive because there is no more important work than protecting the investing public. In the course of this work, the SEC doesn’t always uncover a violation of the federal securities laws. At any point during an investigation, the Division of Enforcement may decide to close the inquiry without recommending any further action. More often than not, however, the evidence supports findings of a violation, which are presented for review. Ultimately, the Commission can authorize the staff to file a civil or administrative action. In a civil action, the SEC files a complaint in federal court and may seek substantial sanctions and remedies. In an administrative action, SEC staff presents the evidence to an Administrative Law Judge who issues a decision and a recommended sanction. Both the charged party and the Division of Enforcement may appeal the decision. Ultimately, the decision is in the hands of the Commission. At the end of the day, in many cases, the Commission and the party charged decide to settle a matter prior to civil or administrative proceedings.

At any one time, the SEC actively conducts about 2,000 investigations. Given this tremendous workload, only the very best whistleblower tips will be investigated.

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