SEC Investigations: How Do They Work?

By Patricia Uceda, Fall 2014 Graduate Research Assistant

investigateThe SEC’s Division of Enforcement is responsible for conducting investigations into possible violations of the federal securities law and prosecuting those that are found to have violated those laws in federal civil suits and administrative proceedings.

SEC investigations are civil, not criminal, and seek remedies such as monetary penalties, disgorgement, injunctions, and restrictions on the ability to work in the securities industry. However, the SEC Division of Enforcement does refer potential criminal cases to criminal law enforcement authorities as well, and if a person is convicted of a criminal violation of the securities law they may have to serve time in jail.

The SEC Division of Enforcement’s investigations operates in large part on complaints and tips from the general public. The SEC also receives information about possible securities law violations from market surveillance activities, whistleblower submissions, self-regulatory organizations such as FINRA, and media reports. Once they receive a tip, the SEC Enforcement Division will decide whether to conduct an investigation. This decision is based on a number of factors including nature of the possible violation, the number of victims that could be affected by the misconduct, amount of potential or actual harm to investors stemming from the misconduct, etc.

If they decide to investigate, the SEC Enforcement Division will begin conducting a confidential investigation. The investigation will involve requesting documents and interviewing witnesses who may have knowledge of the misconduct. Documents that are commonly requested include emails, brokerage records, and trading data. This is a very laborious process due to the complex nature of the subject matter, therefore investigations can last months and even years. The public will not be notified of the investigation unless the claims are substantiated and the SEC decides to bring charges against that party.

In order to bring charges, the SEC Enforcement Division must request authorization from the Commission. Prior to doing so, they may elect to provide the party being charged with notice of the proposed charges against them and allow them a chance to explain their position. After consideration of all the information received they will make the final decision of whether to seek authorization to file a civil lawsuit or commence an administrative proceeding.

If you would like more information about how investigations work, please go here. Also, if you or someone you know have information about a possible federal securities law violation, please visit the SEC’s Tips and Complaints center in order to learn how to submit a complaint.