Quick Facts
- 20,000+ tips, complaints, and referrals received annually
- 2,000 active investigations at any given time
- 2-4 years average investigation duration
- Investigations are confidential and non-public by law
Understanding The SEC Investigation Process
The Securities and Exchange Commission’s enforcement division employs systematic methods to investigate potential securities law violations. The SEC investigation process begins when the staff receives information about alleged violations through various channels, including whistleblower complaints, market surveillance activities, self-regulatory organizations like FINRA, media reports, and trading data. These common triggers prompt SEC staff members to conduct preliminary reviews to determine whether a formal investigation is warranted.
Before the SEC issues a formal order of investigation, enforcement staff typically conduct an informal inquiry, a preliminary review where the agency gathers information without subpoena power. During this phase, the SEC seeks voluntary cooperation from parties to produce books, records, and other relevant documents. The Division of Enforcement reviews public filings, examines brokerage records, and uses other methods to gather information about potential violations ranging from insider trading and market manipulation to selling unregistered securities.
What Triggers an SEC Investigation?
Each year, the SEC receives more than 20,000 tips, complaints, and referrals. Leads come from many sources, including market surveillance activities, whistleblower tips, investor complaints, other divisions and offices of the SEC, self-regulatory organizations such as FINRA, and sometimes even news reports.
So how does the Commission analyze this information to determine if a federal securities law been violated?
Answering that question isn’t simple. While we provide a brief overview of the process below, for a more detailed explanation of the agency’s investigative procedure, see our SEC Insider’s Guide.
At the point of intake and initial examination, the SEC seeks to establish the veracity of allegations through informal inquiry and document review. A number of factors will lead the Commission to open a formal investigation, including if the alleged violations caused – or are actively causing – significant harm to investors or the integrity of the markets. At that point, the Division of Enforcement staff may compel witnesses by subpoena to testify and/or produce books, records, and other relevant documents.
Since SEC investigations are civil and not criminal, if, in the course of its inquiries, the agency discovers possible criminal misconduct, it will refer the matter to the appropriate law enforcement authority. Formal investigative proceedings are nonpublic unless otherwise ordered by the Commission. Indeed, with few exceptions, individuals and organizations cannot reach out to the SEC to determine if they are under investigation or to secure updates on an open investigation.
From Informal To Formal: Critical Stages
When the SEC staff determines that an informal inquiry reveals potential violations of federal securities laws, they may request a formal order of investigation from senior Division officials. This formal order grants enforcement staff subpoena power, the authority to compel testimony, and the production of relevant documents. During a formal investigation, the SEC investigation process is conducted privately, with proceedings remaining confidential to protect both the integrity of government investigations and the rights of those under scrutiny.
During formal investigations, SEC staff can issue subpoenas requiring witnesses to appear and testify under oath. The Commission’s subpoena power extends to compelling production of trading data, communications, financial records, and other evidence. Law enforcement agencies may conduct parallel criminal investigations alongside SEC’s civil enforcement action, particularly in cases involving securities fraud or other significant violations, including artificially inflating market prices.
The Investigation Process
- Intake & Initial Review
The SEC receives tips from whistleblowers, investors, market surveillance, and other sources. Staff conducts informal inquiry and document review to verify allegations. - Formal Investigation
If violations appear to have caused significant harm to investors or markets, the Division of Enforcement opens a formal investigation. Staff may issue subpoenas for testimony and documents. - Investigation Phase (2-4 Years)
The SEC conducts a comprehensive investigation. Proceedings remain confidential and non-public. Criminal matters are referred to the appropriate law enforcement. - Resolution
The investigation may be closed without action, or the Commission may authorize civil or administrative proceedings. Many cases settle before formal proceedings begin.
SEC Investigations Can Be a Lengthy Process
The average investigation spans two to four years. For the SEC, investigations are serious, lengthy, and comprehensive because there is no more important work than protecting the investing public. In the course of this work, the SEC doesn’t always uncover a violation of the federal securities laws. At any point during an investigation, the Division of Enforcement may decide to close the inquiry without recommending any further action.
Ultimately, the Commission can authorize the staff to file a civil or administrative action. In a civil action, the SEC files a complaint in federal court and may seek substantial sanctions and remedies. In an administrative action, SEC staff presents the evidence to an Administrative Law Judge who issues a decision and a recommended sanction. Both the charged party and the Division of Enforcement may appeal the decision. Ultimately, the decision is in the hands of the Commission. At the end of the day, in many cases, the Commission and the party charged decide to settle a matter prior to civil or administrative proceedings.
Wells Notice and Enforcement Recommendations
Near the conclusion of SEC investigations, if enforcement staff believe evidence supports charges, they typically issue a Wells notice, a formal communication informing targets that the staff intends to recommend enforcement action. The Wells notice identifies which securities law violations the staff preliminarily determined occurred and provides recipients with the opportunity to submit a Wells submission, a written response presenting arguments against the proposed charges.
This critical stage allows parties under investigation to present evidence, legal arguments, and mitigating factors before the Division staff makes final recommendations to the Commission. Companies and executives often engage experienced securities counsel to prepare detailed Wells submissions addressing the evidence and arguing why the SEC should decline enforcement or pursue lesser charges. Following the Wells process, if the Commission authorizes an enforcement action, the SEC may file a civil lawsuit in federal court seeking civil penalties, disgorgement of illegal profits (also called ill-gotten gains), injunctions against future violations, and other remedies. Alternatively, the Commission may pursue administrative proceedings before an administrative law judge.
The fullest extent of SEC enforcement can include severe penalties: in civil actions, defendants may face disgorgement of profits, civil money penalties, additional fines, and court orders barring individuals from serving as officers or directors of public companies. Many cases result in settlements, with the charged party and the Commission resolving claims without trial, often involving substantial monetary settlements and commitments to prevent future violations.
