SEC Insider’s Guide
SEC WHISTLEBLOWER ADVOCATESSEC Insider’s Guide:A Guide to the SEC’s Investigativeand Enforcement ProcessIn addition to the information contained in this Guide, we encourage readers to visit our website to review FrequentlyAsked Questions about the SEC Whistleblower Program, the securities laws enforced by the SEC and our Firm.
Table of ContentsI.OVERVIEW OF THE SEC. 1IV. SOURCES OF INVESTIGATIONS. 11A. Introduction and Mission. 1A. Complaints and Tips From the Public. 11B.Organization of the SEC. 2C.SEC Divisions. 4B. Referrals From Self-RegulatoryOrganizations. 121.Division of Corporation Finance. 42.Division of Investment Management. 43.Division of Trading and Markets. 54.Division of Economic and Risk Analysis. 55.Division of Enforcement. 5D. Other Important Offices. 61.Office of the General Counsel. 62. Office of Compliance Inspectionsand Examinations. 63.Office of International Affairs. 6C.Other Sources . 12V. SUBPOENAS OF DOCUMENTSAND/OR TESTIMONY. 12A. The Power to Issue Subpoenas. 12B.Challenges to Subpoenas. 12VI. PRIVACY AND CONFIDENTIALITYOF INVESTIGATIONS. 13A. Confidentiality of Information. 13II. THE SEC’S LAW ENFORCEMENT ARM:THE DIVISION OF ENFORCEMENT. 6A. Overview. 6B.Freedom of Information Act. 13C.The Privacy Act of 1974. 13D. Whistleblower Confidentiality. 14B.How the Securities Laws are Enforced. 71.Investigations. 72.Types of SEC Enforcement Actions. 7VII. PRIVILEGES. 14C.Specialized Units and Market Intelligence. 8A. Attorney-Client Privilege. 14B.Work-Product Doctrine. 14III. THE INVESTIGATIVE PROCESS. 9C.Self-Evaluative Privilege. 15A. Matters Under Inquiry. 9D. Waiver. 15B.Formal Investigations. 10Page iiwww.secwhistlebloweradvocate.com
VIII. COOPERATING WITH THE SEC. 16A. Proffer Agreements. 16B.Cooperation Agreements. 16C.XI. ENFORCEMENT ACTIONSAND REMEDIES. 22A. Civil Actions. 221.Civil Injunction. 22Deferred Prosecution Agreements. 172.Disgorgement. 22D. Non-Prosecution Agreements. 173.Civil Penalties. 224.Barring Service as an Officer or Director. 22B.Administrative Proceedings. 231.Cease and Desist Proceedings. 23IX. CLOSING AN INVESTIGATION. 192.Civil Monetary Penalties. 23A. Wells Process. 193. Revocation of Licenses and BarsE.Grants of Immunity. 171.Wells Notice. 192.Wells Submission. 19B. Closing Investigations Resultingin an Enforcement Action. 19C.Closing Without Further Action. 20D. Termination Letters. 20X. STATUTE OF LIMITATIONSIN ENFORCEMENT ACTIONS. 21A. Governing Statutes. 21B.Scope. 21C.Tolling Agreements. 21from the Industry. 234.Proceedings to Correct Filings. 235.Disciplining Professionals. 23XII. SEC COOPERATION WITHOTHER AGENCIES. 24A. Parallel Proceedings. 24B.Informal Referrals to Other Authorities. 241.Referrals to Criminal Authorities. 242.Referrals to Self-Regulatory Organizations. 243. Referrals to the Public CompanyAccounting Oversight Board. 244.Referrals to State Agencies. 245.Referrals to Professional Licensing Boards. 24C. Sharing Information ObtainedDuring Investigations. 25SEC Insider’s GuidePage iii
SEC Insider’s GuideA GUIDE TO THE SEC’S INVESTIGATIVE AND ENFORCEMENT PROCESSLabaton Sucharow was the first, and remains the only, law firm to establish a national practice focusedexclusively on representing SEC whistleblowers. Collectively, our team brings more than a century of timetested, real-world federal law enforcement experience to our SEC whistleblower advocacy. Our practiceleader, a principal architect of the SEC Whistleblower Program, and members of our team previously heldsenior positions within the SEC, and led hundreds of successful SEC enforcement actions and related DOJprosecutions. We have cultivated important relationships and in-the-trenches knowledge of what drivessuccessful enforcement actions. As a low-volume, ultra-selective practice winning precedent-settingwhistleblower awards, we offer our clients sophisticated counsel driven by a highly disciplined qualitativeand quantitative analytical approach. Successfully reporting securities violations is a high-stakes, complexprocess. This guide serves as an introduction to the structure and operations of the SEC, as well as topicsrelated to investigations and enforcement actions.I. Overview of the SECA. Introduction and MissionThe mission of the Securities and Exchange Commission (the “SEC” or “Commission”) is to protect investors, maintain fair,orderly, and efficient markets, and facilitate capital formation. An independent federal agency established pursuant to theSecurities and Exchange Act of 1934 (the “Exchange Act” or the “’34 Act”), the SEC was designed to enforce the ExchangeAct and the Securities Act of 1933 (the “Securities Act” or “’33 Act”). In the wake of the Great Depression, these acts werecreated to restore investor confidence in the capital markets.The Commission is empowered with broad authority over all aspects of the securities industry. This includes the power toinvestigate and prosecute violations of the securities laws, as well as the power to regulate and oversee brokerage firms,transfer agents, clearing agencies, and stock exchanges, such as the New York Stock Exchange and NASDAQ.In particular, the SEC’s responsibilities are to: interpret the federal securities laws;issue new rules and amend existing rules;oversee the inspection of securities firms, brokers, investment advisors, and ratings agencies;oversee private regulatory organizations in the securities, accounting, and auditing fields; andcoordinate U.S. securities regulation with federal, state, and foreign authorities.SEC Insider’s GuidePage 1
B. Organization of the SECThe SEC is headed by a bi-partisan five-member Commission, comprised of a Chairman and four Commissioners. Allmembers are appointed by the President, confirmed by the Senate and serve staggered 5-year terms. The Chairman servesas the Commission’s Chief Executive Officer. The SEC is headquartered in Washington, D.C.The SEC is organized into five main divisions and 24 offices headquartered in Washington, D.C. The five main divisions are:Corporate Finance; Investment Management; Trading and Markets; Risk, Strategy, and Financial Innovation; and Enforcement.The SEC also has 11 regional offices in the following cities: New York; Boston; Philadelphia; Atlanta; Miami; Chicago; Denver;Fort Worth; Salt Lake City; San Francisco; and Los Angeles. The regional offices investigate and litigate potential violations ofthe securities laws. The regional offices also employ examination staff, who examine and investigate regulated entities suchas investment advisers, investment companies and broker-dealers. Their jurisdiction extends to surrounding areas as follows:SEC HEADQUARTERS AND REGIONAL OFFICE LOCATIONS BOSTONSAN FRANCISCO NEW YORK SALTLAKE CHICAGO PHILADELPHIA SEC HEADQUARTERSLOS ANGELES ATLANTA FORT WORTH MIAMI SEC HEADQUARTERS ATLANTA REGIONAL OFFICEGEORGIA, NORTH CAROLINA, SOUTH CAROLINA, TENNESSEE, ALABAMA BOSTON REGIONAL OFFICECONNECTICUT, MAINE, MASSACHUSETTS, NEW HAMPSHIRE, VERMONT, RHODE ISLAND CHICAGO REGIONAL OFFICEILLINOIS, INDIANA, IOWA, KENTUCKY, MICHIGAN, MINNESOTA, MISSOURI, OHIO, WISCONSIN DENVER REGIONAL OFFICECOLORADO, KANSAS, NEBRASKA, NEW MEXICO, NORTH DAKOTA, SOUTH DAKOTA, WYOMING FORT WORTH REGIONAL OFFICETEXAS, OKLAHOMA, ARKANSAS(EXCEPT FOR THE EXAM PROGRAM WHICH IS ADMINISTERED BY THE DENVER REGIONAL OFFICE) LOS ANGELES OFFICEARIZONA, HAWAII, GUAM, NEVADA, SOUTHERN CALIFORNIA(ZIP CODES 93599 AND BELOW, EXCEPT FOR 93200-93299) MIAMI REGIONAL OFFICEFLORIDA, MISSISSIPPI, LOUISIANA, U.S. VIRGIN ISLANDS, PUERTO RICO NEW YORK REGIONAL OFFICENEW YORK, NEW JERSEY PHILADELPHIA REGIONAL OFFICEDELAWARE, MARYLAND, PENNSYLVANIA, VIRGINIA, WEST VIRGINIA, DISTRICT OF COLUMBIA SALT LAKE REGIONAL OFFICEUTAH SAN FRANCISCO REGIONAL OFFICEWASHINGTON, OREGON, ALASKA, MONTANA, IDAHO, NORTHERN CALIFORNIA(ZIP CODES 93600 AND UP, PLUS 93200-93299)Page 2www.secwhistlebloweradvocate.com
The current SEC organization chart looks like LCOUNSELATLANTAREGIONALOFFICEECONOMIC& IONALOFFICECHAIRMAN-------------------OFFICE OFTHE CHAIRMANCOMMISSIONERTRADING STRATIVELAW TINGSETHICSCOUNSELINVESTOREDUCATION &ADVOCACYLEGISLATIVE& INTERGOVERNMENTALAFFAIRSMINORITY& WOMENINCLUSIONMUNICIPALSECURITIESPUBLIC ESSUPPORTOPERATIONSFORT WORTHREGIONALOFFICELOS ANGELESREGIONALOFFICEMIAMIREGIONALOFFICENEW YORKREGIONALOFFICEPHILADELPHIAREGIONALOFFICESALT LAKEREGIONALOFFICECOMPLIANCEINSPECTIONS &EXAMINATIONSSAN FRANCISCOREGIONALOFFICESource: https://www.sec.gov/images/secorg.pdf.In fiscal year 2016, the SEC’s total budgetary resources amounted to 1.9 billion, a 10% increase over the preceding fiscalyear. The majority of the SEC’s spending was on personnel compensation and benefits; the agency employed a staff of 4,554full-time equivalents (FTEs), including 4,404 permanent and 150 other-than-permanent FTEs in FY 2016. Additional spendingprimarily consisted of contractual services and supplies, and acquisitions of assets. The SEC’s spending is almost entirelyoffset by its collections each fiscal year, and FY 2016 was no exception:OFFSETTING COLLECTIONS VS. NEW BUDGETARY AUTHORITY SECTION 31 EXCHANGE AND FILING FEES(DOLLARS IN MILLIONS)FY 2004 – FY 2011Offsetting Collections includefiling fees and transaction fees. 2,000 1,598 1,583 1,0000FY 2007 1,443 984 1,016FY 2008FY 2009FY 2010 Total Actual Offsetting CollectionsSEC Insider’s GuideFY 2011FY 2012 and beyondOffsetting Collections includetransaction fees only. 33 1,321FY 2012 Appropriations 48 1,321FY 2013 59 1,350FY 2014 8 1,500FY 2015 129 1,605FY 2016 New Budgetary AuthorityPage 3
C. SEC Divisions1. Division of Corporation Finance The Division of Corporation Finance assists the Commission in overseeing corporate disclosure of importantinformation to the investing public. Under the securities laws, publicly-held companies must disclose importantinformation to investors when their stock is initially sold, and on a continuing and periodic basis thereafter. Thisdivision’s staff routinely reviews these disclosure documents, which include: registration statements for newly-offered securities; annual and quarterly filings (Forms 10-K and 10-Q); proxy materials sent to shareholders before an annual meeting; annual reports to shareholders; documents concerning tender offers;1 and filings related to mergers and acquisitions. hese documents disclose information about a company’s financial condition and business practices to helpTinvestors make informed investment decisions. During the review process, the division’s staff checks to see ifpublicly-held companies are meeting their disclosure requirements and seeks to improve the quality of thedisclosure. In general, a company issuing securities or whose securities are publicly traded must make available allinformation, whether it is positive or negative, that might prove relevant to an investor’s decision to buy, sell, or holdthe security. The Division of Corporation Finance also provides administrative interpretations of the ’33 Act, the ’34 Act, and theTrust Indenture Act of 1939, and recommends regulations to implement these statutes. In addition, this divisionprovides guidance and counseling to registrants, prospective registrants, and the public to help them comply withthe law. For example, a company might ask whether the offering of a particular security requires registration with theSEC, and receive a reply from staff providing the division’s interpretation of relevant securities regulations and adviceon compliance with disclosure requirements. nother responsibility of the Division of Corporation Finance is, together with the SEC’s Office of the ChiefAAccountant, to monitor the activities of the accounting profession, particularly the Financial Accounting StandardsBoard (FASB), the organization responsible for establishing generally accepted accounting principles (GAAP). Allfinancial statements disclosed by U.S. companies must conform with GAAP.2. Division of Investment Management The Division of Investment Management is responsible for investor protection and for promoting capital formationthrough its oversight and regulation of America’s approximately 67 trillion investment-management industry. Theinvestment-management industry includes mutual funds and the professional fund managers who advise them;analysts who research individual assets and asset classes; and investment advisers to individual customers. This division is also responsible for: assisting the Commission in interpreting laws and regulations for the public and for SEC inspection andenforcement staff; responding to no-action requests and requests for exemptions;1 A tender offer is an offer to buy a large number of shares of a corporation, usually at a premium above the current market price.Page 4www.secwhistlebloweradvocate.com
reviewing investment company and investment adviser filings; assisting the Commission in enforcement matters involving investment companies and advisers; and advising the Commission on adapting SEC rules to new circumstances. 3. Division of Trading and Markets he Division of Trading and Markets is responsible for maintaining fair, orderly, and efficient markets by providingTday-to-day oversight of the major securities market participants, such as: the securities exchanges (i.e., the NewYork Stock Exchange and NASDAQ); securities firms; the Financial Industry Regulatory Authority (“FINRA”); theMunicipal Securities Rulemaking Board; transfer agents (parties that maintain records of securities owners); securitiesinformation processors; and credit rating agencies (e.g., Moody’s and Standard & Poor’s). his division also oversees the Securities Investor Protection Corporation, a private, non-profit corporation thatTinsures the securities and cash in the customer accounts of member brokerage firms against the failure of those firms(but not losses arising from market declines or fraud). Additional responsibilities include: carrying out the SEC’s financial integrity program for broker-dealers; reviewing (and in some cases approving, under authority delegated from the Commission) proposed new rulesand proposed changes to existing rules filed by self-regulatory organizations (“SROs”);2 assisting the Commission in establishing rules and issuing interpretations on matters affecting the operation ofthe securities markets; and surveilling the markets.4. Division of Economic and Risk Analysis stablished in September 2009, the Division of Economic and Risk Analysis helps identify developing risks to andEtrends in the financial markets. The emergence of derivatives, hedge funds, new technology, and other factors havetransformed both capital markets and corporate governance. This division works to advise the Commission throughan interdisciplinary approach informed by law, modern finance and economics, and developments in real worldproducts and practices on Wall Street and Main Street. Among the functions performed by this division are: Analyzing the potential economic effects of Commission rulemakings or other actions; providing quantitative and qualitative research and support related to risk assessment; and assisting the Division of Enforcement (see below) by, for example, providing economic and quantitative analysisand support in enforcement proceedings and settlement negotiations.5. Division of Enforcement The Division of Enforcement acts as the law enforcement arm of the SEC. This division recommends, as appropriate,that the SEC commence investigations of securities law violations and bring civil enforcement actions in federal courtor before an administrative law judge, and prosecutes these cases on behalf of the Commission. As an adjunct tothe SEC’s civil enforcement authority, the Division of Enforcement also works closely with law enforcement agenciesin the U.S. and around the world to bring criminal cases when appropriate.2 There are numerous SROs under the SEC’s oversight. FINRA is perhaps the most well-known, but the major securities exchanges are also SROs.Other examples include joint industry plans, futures exchanges and associations, clearing agencies and the MSRB.SEC Insider’s GuidePage 5
D. Other Important OfficesIn addition to the five major divisions, additional offices provide vital support to the Commission. A few important offices arebriefly discussed below.1. Office of the General Counsel he Office of the General Counsel serves as the chief legal officer of the Commission and has overall responsibilityTfor the establishment of agency policy on legal matters. Further, the General Counsel is the chief legal advisor to theC
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