How Does an SEC Investigation Work?
An independent agency of the federal government, the U.S. Securities and Exchange Commission (SEC) aims to support capital formation, maintain fair and efficient markets, and protect investors. The agency’s Enforcement Division supports the SEC’s law enforcement function through the recommendation of investigations into securities law violations.
Specifically, the Enforcement Division recommends that the SEC brings civil actions in courts or before a judge, then prosecutes these cases. Collaborating with law enforcement agencies domestically and internationally, the division brings criminal cases in select circumstances.
To support such cases, the division seeks evidence of securities law violations from numerous sources, including market surveillance activities and investor tips. Additionally, the division may receive information from media reports, securities industry sources, and self-regulatory organizations.
The SEC conducts all investigations privately, utilizing techniques such as witness interviews and informal inquiry to assemble a case. The SEC also reviews brokerage records and trading data to compile helpful information. In the case of a formal investigation order, the division may subpoena witnesses to testify, as well as to submit records and legal documents.
After a thorough investigation, SEC investigators present a case to the SEC for review. The staff members receive a recommendation to either bring an administration action or to file a case in federal court. The SEC and the charged party may also elect to settle the case without taking it to trial.
Many factors contribute to the decision to take a case to an administrative judge within the SEC or to take the case to a federal court. Depending on the severity of the misconduct, both actions may occur. When administrative action occurs, the SEC can pursue sanctions for the offending party. This type of proceeding involves an appearance before an administrative law judge who is not associated with the SEC.
The judge listens to the Enforcement Division’s case, considering all evidence and legal information. The judge also considers any evidence submitted by the subject of the proceedings. Then, the judge makes an initial decision with a recommended sanction that may include the suspension of the defendant from investment advisor or broker-dealer registrations, barring them from professional securities industry associations, or cease and desist orders.
Additionally, the judge may recommend fines and repayment of illegal profits (disgorgement). Both the defendant and the division staff have the right to appeal the initial decision. The SEC may accept or reverse the administrative judge’s decision, or the agency may remand the decision for additional hearings.
Should the commission seek civil rather than administrative action, investigators file a complaint with a U.S. district court, requesting an injunction to prohibit further practices in violation of commission rules. With an injunction, the SEC can also seek special supervision or audits of the defendant. In a civil case, the SEC may seek disgorgement or monetary penalties, in addition to the suspension of a professional’s right to serve as a director or corporate officer. If an individual violates the injunction, they may receive further fines or imprisonment.
What kind of securities activities warrant an SEC investigation? Common violations include the manipulation of market prices of securities, the sale of unregistered securities, and the misrepresentation of essential securities information. The SEC may also investigate individuals who engage in insider trading, which involves trading non-public information about a security. Traders who misappropriate customer funds or fail to treat customers fairly may also be subject to an SEC investigation.
