SEC investigations can be triggered in many ways, including the review of forms filed with the SEC, routine inspections of persons or entities regulated by the SEC, tips from members of the public, referrals from other government agencies, news reports, and information received in other SEC investigations. Regardless of how they are triggered, SEC investigations are almost always conducted privately.
The stages of a typical SEC investigation are represented as a flowchart below. The first stage of an SEC action is typically an informal investigation. At this stage, the Commission staff has no formal subpoena power, and hence must rely on the cooperation of the relevant individuals and entities to gather information. At the conclusion of an informal investigation, SEC staff may recommend that the Commission undertake an enforcement action seeking sanctions, seek a formal order of investigation from the Commission, or conclude the investigation without recommending an enforcement action.
When the SEC staff request and receive a formal order, the next stage is a formal investigation. The Commission approves requests for formal orders when it finds that it is likely that a securities law violation has occurred. The formal order grants designated SEC staff the ability to issue subpoenas and to administer oaths.
When the staff has concluded its investigation, it may recommend to the Commission that enforcement proceedings be commenced, or it may determine to take no further action. If the staff has determined to recommend that the Commission commence an enforcement proceeding, it typically gives prospective defendants a Wells notice informing them of the staff’s intent. The recipient of a Wells notice has a period of time, generally one month, to provide the staff with a Wells submission, which is essentially a brief arguing why an enforcement proceeding is not merited. Upon reviewing the Wells submission, the staff may elect to modify or reverse its recommendation to the Commission.
Upon the staff's recommendation to bring an enforcement action, the Commission has several options. It may authorize a civil action in federal court, an administrative proceeding before an administrative law judge, or no enforcement proceeding at all. Whether the Commission authorizes a civil action in federal court or an administrative proceeding depends on several factors, including the severity of the allegations, the nature of the conduct alleged, tactical considerations, and the type of sanctions sought.
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