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What Is the Process of an SEC Investigation?  

The U.S. Securities and Exchange Commission (SEC) is a federal agency with the primary mission of enforcing securities laws. The SEC has jurisdiction to enforce federal securities laws to protect investors and the public. If the SEC is notified of a potential securities law violation, it may launch an investigation that could lead to civil, criminal or administrative action if there is evidence of a violation.

A Red Flag Is Raised

First, the SEC will be given a reason to initiate an investigation into an individual, corporation or entity for a potential legal violation. Information about a violation could be obtained by the SEC’s own agents and investigators, such as during standard market surveillance, exams conducted by the SEC’s Division of Examinations, or an analysis of regulatory findings.

A red flag could also be raised by a tip submitted through the SEC Whistleblower Program, which offers monetary incentives to individuals who report potential securities law violations to the SEC. If a whistleblower tip results in a successful SEC enforcement action, the whistleblower can receive an award ranging from 10 to 30 percent of the money or proceeds collected.

Preliminary Inquiry

Next, the SEC’s Division of Enforcement will review the initial information to determine if there is enough to warrant a formal investigation. The SEC may then authorize its enforcement staff to issue subpoenas, request documents and records, and interview witnesses.

Evidence of a Violation Is Sought

When an SEC investigation is opened, the Commission will look for evidence that one or more securities laws have been violated. Common violations include bribing foreign officials, false or misleading statements by public companies, misrepresentation of important information about securities, market price manipulation, fund or securities theft, insider training, and unregistered securities.

The SEC’s list of sources where evidence of possible violations may be obtained includes:

  • Market surveillance activities
  • Investor tips and complaints
  • Other SEC Divisions and Offices
  • Self-regulatory organizations
  • Other securities industry sources
  • Media reports

The SEC will use various sources to search for evidence of a broken law or unlawful conduct. The SEC’s investigatory process is extensive and involves multiple levels of review that could take years to complete. The details of each ongoing SEC investigation are not public.

Action May Be Taken

At the conclusion of an SEC investigation, the Commission may take action against an individual or entity if it has found sufficient evidence of a securities law violation. The SEC may try to negotiate a settlement with the violator that involves monetary sanctions such as disgorgement or penalties, and other consequences. It may also file a formal complaint in federal court or take administrative action.

SEC actions and sanctions can include criminal fines, monetary penalties, disgorgement (the return of illegal profits), the violator being barred from the securities industry, and the suspension of a violator’s position as director or corporate officer. In some cases, the SEC will refer a case to the Department of Justice for investigation of criminal violations.  Those cases could result in criminal penalties and imprisonment.

Recently, the SEC announced their enforcement results for fiscal year 2023. For more information about an SEC investigation, contact Youman & Caputo, LLC for a free case consultation.