How the SEC investigates and enforces

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.

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

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.

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.

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