SEC Investigations 101: The Endgame

May 23, 2019

This post is the eighth in a series of posts for non-lawyers, or non-securities lawyers, who might suddenly find themselves on the wrong end of a Securities and Exchange Commission document request, subpoena or call from Enforcement division staff.

SEC HQ front.jpgBy Dan Portnov

We’ve often had clients ask us how they can speed up the resolution to an SEC investigation. In some cases, they have even asked us if they can cut a check and be done with it (this was not advised). The real answer is that the SEC will reach its conclusion when… it decides to reach its conclusion. And there are several ways in which an SEC investigation can conclude.

This post will discuss possible conclusions for SEC investigations, from the benign to the most problematic.

  1. Not with a bang, but a whimper…

On the occasion where the Enforcement staff determine that no securities laws were violated, or that charges are not merited, the investigation will terminate.

While this is the best possible outcome, it is not always made known to the individual or entity that they are in the clear. Sometimes, the Enforcement staff will disappear, ceasing all requests and contact with counsel for many months or even years. In these situations, it is often best to “not poke a sleeping bear,” lest the staff suddenly remember you and take further interest.

However, in certain circumstances, such as when a corporation needs to make disclosures regarding exposure to risk (e.g. open investigations), it may be necessary to seek a termination notice. Termination notices are notifications from the Enforcement division that an enforcement action will not be recommended.[1] They are not required to be sent to all parties, per the list in the Enforcement Manual, but typically a party who asks for such a notice will receive one (assuming that the staff has already made its final decision not to charge).

2.  Cooperation, or the like.

A party under investigation by the Enforcement Division may enter into one of several agreements with the SEC: a cooperation agreement, non-prosecution agreement (NPA), or a deferred prosecution agreement (DPA). (We wrote a little about these here.) These agreements do not actually end an investigation, but they provide some certainty – that if a party carries out its responsibilities under the agreement that it will not be charged or suffer the full weight of the SEC’s penalties once the investigation ends.

3.  Administrative action.

The administrative action utilizes the SEC’s in-house administrative law judges (ALJs) to bring contested cases or approve settlements. Recent Supreme Court decisions notwithstanding, the ALJs have been backbone of the SEC’s enforcement process, with approximately 75% of enforcement actions filed in the SEC’s in-house courts (versus 25% in federal court) in recent years.[2]

Since the passage of Dodd-Frank in 2010, the SEC has used administrative proceedings against both entities registered with the Commission (broker-dealers and investment advisors) and unregistered individuals and companies (insider traders, Ponzi-schemers, etc.). The Enforcement division traditionally weighed four factors when considering in which forum to bring the contested action:

  1. Which forum has the authority to litigate the specific charges and relief requested in the case? Temporary restraining orders (TROs), asset freezes, “control person” cases and actions against relief defendants can only be litigated in federal court. In contrast, failure to supervise and actions alleging liability for “causing” a securities law violation may only be brought in administrative proceedings.
  2. Is the entity registered with the Commission or associated with a registered entity? If so, Enforcement has historically brought the action in the administrative forum.
  3. Efficiency and conservation of resources. With abbreviated discovery, deadlines and rules, administrative proceedings are typically litigated much quicker than federal court actions.
  4. Whether the ALJ’s “extensive knowledge and experience concerning the federal securities laws” will promote “fair, consistent, and effective resolution of securities law issues and matters.”

Administrative proceedings are often used to summarily settle actions, a/k/a the “settled AP.” This is when the Enforcement staff and investigated entity agree to a resolution regarding the charges to be filed and to any remedies and relief against the entity. A typical settled AP will be approved by the full Commission at its weekly closed meeting, and then submitted with an Order Instituting Administrative Proceedings that outlines a) the Commission’s jursidictional authority, b) the findings of the investigation, c) the securities laws at issue, d) the penalty, disgorgement, injunctive relief, bars or other remedial undertakings. Once the order is signed by the Secretary of the Commission, the settlement becomes final.

4.  Civil action.

In the alternative, the Enforcement staff may bring an action in federal district court. Typically, federal court is where the Commission turns for immediate injunctive relief, such as asset freezes, or when the balance of factors weighs against bringing the contested action in an administrative proceeding. A civil action in which the SEC is the plaintiff follows all of the rules of federal civil procedure and, as is the case for many lawsuits in federal court, may take years to litigate to conclusion.

Federal court-approved settlements do happen, but are far rarer than settled APs.

5.  Referral to Department of Justice

Finally, the SEC may refer a matter to DOJ for criminal investigation if the staff believes the facts and circumstances warrant it. This is clearly the most serious outcome of an SEC investigation and may occur even if the individual or entity agrees to a settlement with the SEC.

It is not uncommon for the DOJ and SEC to each investigate potentially egregious violations of securities laws and independently seek civil and criminal penalties. (Check out our previous post on parallel proceedings).


SEC investigations have serious consequences and cannot be fast-tracked. It is often the Enforcement staff, with approval of the Commission, who have the final say of how the investigation concludes, whether any settlement may be achieved and which forum is used to litigate should a settlement fail. With that, it is vital that individuals and entities under investigation hire experienced counsel who can help them navigate the possible outcomes.


[1] SEC Enforcement Manual Section 2.6.2.

[2] 75% as of Fiscal Year 2015. In Fiscal Year 2016, the percentage reportedly jumped. After Lucia v. SEC was decided, it is likely the ratio has dropped off a bit. Unfortunately, the SEC’s Enforcement Division’s annual report for FY 2018 fails to provide a breakdown between cases filed in front of ALJs versus those filed in federal court.

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