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Thursday, October 23, 2014

SEC INVESTOR BULLETIN ON ENFORCEMENT DIVISION INVESTIGATIONS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to provide investors with a general overview of how the SEC’s Division of Enforcement conducts investigations.

The SEC’s Division of Enforcement (Enforcement) works on hundreds of investigations each year.  Many investigations originate from complaints or tips that the SEC receives from the public.  The purpose of an SEC investigation is to determine whether any persons or entities violated the federal securities laws.  Common violations include misrepresenting important information about potential investments, manipulating the market prices of securities, stealing customers’ funds or securities, insider trading, and selling unregistered securities.

SEC investigations are generally conducted on a confidential basis to maximize their effectiveness and protect the privacy of those involved.  Because SEC investigations are generally nonpublic, Enforcement will not confirm or deny the existence of an investigation unless the SEC brings charges against a person or entity involved.  Enforcement also will not provide updates on the status of any pending SEC investigation.

SEC investigations are civil, not criminal.  The SEC can charge individuals and entities for violating the federal securities laws and seek remedies such as monetary penalties, disgorgement of ill-gotten gains, injunctions, and restrictions on an individual’s ability to work in the securities industry or to serve as an officer or director of a public company, but the SEC cannot put people in jail.  Enforcement may refer potential criminal cases to criminal law enforcement authorities for investigation or coordinate SEC investigations with criminal investigations involving the same conduct.  If a person is convicted of a criminal violation of the securities laws, a court may sentence that person to serve time in jail.

Enforcement decides whether to initiate an investigation based on many factors, including the magnitude and nature of the possible violations, the number of victims affected by the misconduct, the amount of potential or actual harm to investors from the misconduct, and whether misstated or omitted facts would have impacted investors’ investment decisions.  Enforcement also considers whether the conduct is ongoing or whether it occurred too long ago to pursue the full range of available remedies.  Enforcement may be more likely to initiate an investigation if the matter:

Requires immediate action to protect investors;
Relates to conduct that may threaten the fairness or liquidity of the securities markets;
Involves individuals with a history of misconduct;
Involves a subject matter the SEC or Enforcement has designated as a priority;
Fulfills a programmatic goal of the SEC and Enforcement; or
Concerns an industry practice that may be widespread and should be addressed.
Enforcement receives information about possible violations from many sources, including market surveillance activities, investor tips and complaints, whistleblower submissions, other divisions and offices of the SEC, self-regulatory organizations and other securities industry sources, and media reports.  If Enforcement opens an investigation, it may request documents and interview witnesses on a voluntary basis.  If authorized with a formal order of investigation, Enforcement can issue subpoenas requiring the production of documents and witness testimony.  Enforcement develops the facts in an SEC investigation primarily through interviewing witnesses under oath and analyzing documents and data (e.g., emails, brokerage records, and trading data).

The securities laws are complex and SEC investigations often last months or even years.  At any point during an investigation, Enforcement may decide to close the investigation without recommending any enforcement action.

If Enforcement makes a preliminary determination to recommend enforcement action, it may elect to provide individuals or entities who would be charged in the action with a Wells notice explaining the proposed charges against them and informing them that they can make a voluntary submission setting forth their interests and position.  If Enforcement believes (based on the evidence it has compiled and after considering a Wells submission or deciding not to issue a Wells notice) that enforcement action should be taken, Enforcement seeks authorization from the Commission for the SEC to file a civil lawsuit, to commence an administrative proceeding, or, in certain circumstances, to issue a report of investigation.  Any enforcement action that the SEC initiates is based on Commission authorization.

In some situations, Enforcement may continue to investigate other involved parties or related conduct even after the SEC files an enforcement action.  Information about filed enforcement actions is provided in litigation releases and administrative orders posted on the SEC’s website.

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