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How the SEC investigates and enforces

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The SEC can investigate, sue and suspend trading. It cannot jail anyone, and it cannot act as your lawyer to get your money back.

The rule
  • SEC: civil cases, confidential investigations, subpoenas under a formal order, penalties, disgorgement, injunctions, bars and short trading suspensions.
  • Not the SEC: jail, criminal prosecution, or acting as an investor’s own lawyer.

Civil power, used quietly

SEC investigations are civil, not criminal. The Division of Enforcement can ask for documents and interviews on a voluntary basis. If the Commission issues a formal order of investigation, staff can subpoena documents and testimony. Investigations are generally confidential: the SEC will not confirm or deny one, or give updates, unless it brings charges. Any case it files needs the Commission’s authorization.

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In a case, the SEC can seek monetary penalties, disgorgement of ill-gotten gains, injunctions, and limits on working in the securities industry or serving as an officer or director of a public company. It cannot put anyone in jail. Where conduct may be criminal, Enforcement can refer it to criminal authorities or work alongside their investigation. Jail for a securities crime follows a criminal conviction in court.

The SEC can also suspend trading in a stock for a short period when it believes investors need protecting. Reasons include a lack of current, accurate or adequate information, such as a company that is not current in its periodic reports, doubts about public information, and questions about trading in the stock. A suspension does not decide whether the company committed fraud; the SEC may keep investigating after it ends.

None of this makes the SEC an investor’s lawyer. An investor who wants money back from a company or a promoter must pursue her own legal remedies, herself or through a lawyer she hires.

Exam terms (6)
Civil enforcement
The SEC’s court and administrative cases; remedies are money, orders and bars, not jail.
Disgorgement
Giving up the profits gained from a violation.
Injunction
A court order not to break the law again.
Formal order of investigation
Commission authority that lets staff issue subpoenas.
Trading suspension
A short SEC order halting trading in a stock to protect investors.
Referral
Passing a possible crime to criminal authorities.

From tip to remedy

  1. Investigation opens

    Enforcement opens a confidential inquiry

  2. Voluntary requests

    Documents and interviews, if given

  3. Formal order

    Subpoenas for documents and testimony

  4. Commission authorizes

    Civil suit or administrative case

  5. Remedies

    Penalty, disgorgement, injunction, bar

Every step is civil; a possible crime goes to criminal authorities.

Try it: For each of four requests, say whether the SEC can grant it: a prison term for a fraudster; an order barring him from the industry; a status report on a rumored investigation; a lawsuit on your behalf to get your own money back. Then name the one step that lets SEC staff compel testimony.

Check yourself

Try a question, then read the explanation to review the rule.

Opening your study record…

Worked example

An adviser, Ambrose Wennerstrom, is suspected of lying to clients about returns, and a small company he promoted stops filing its reports.

  1. Enforcement opens a confidential investigation. A client who calls the SEC is told it will neither confirm nor deny one.
  2. When the adviser will not hand over records, the Commission issues a formal order, and staff subpoena his records and testimony.
  3. Separately, the SEC suspends trading in the promoted company’s stock because current, accurate information about it is lacking.
  4. The Commission authorizes a civil case seeking a penalty, disgorgement and a bar. The possible crime is referred to criminal authorities.
  5. Clients who want their money back must bring their own claims.

Same rule, new context

Opening your study record…

The closest contrast

SEC case: civil remedies.

Criminal case: possible jail.

This decides questions that pair a fraud with a punishment. If the answer involves prison, the SEC is not the body that imposes it; the SEC sues, refers and coordinates.

Summary

  • SEC investigations are civil and confidential; a formal order lets staff subpoena documents and testimony.
  • SEC remedies are penalties, disgorgement, injunctions and bars. Jail follows a criminal conviction; the SEC refers crimes.
  • The SEC can suspend trading for a short period when information is missing or doubtful. A suspension decides nothing about fraud.
  • The SEC is not an investor’s lawyer; investors pursue their own remedies.

Related practice

  • SEC investigations, civil remedies and trading suspensionsPractice this

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