Helping Clients Defend Against SEC Actions
Who is the SEC? What is the SEC?
"SEC" is an acronym for U.S. Securities and Exchange Commission, which is an “independent” government agency of the United States (“U.S.”) government that is not attached to any cabinet-level department of the government. As with any governmental agency, it is not independent in a political sense. There are five commissioners, each serving a staggered five-year term, who make up the "Commission." No more than three commissioners may belong to the same political party and the President designates one commissioner to serve as chairman, a role that sets the SEC's agenda, controls its budget, and, as a result, exerts significantly more influence over policy than any of the other commissioners.
What people are in the SEC?
The acronym SEC is ambiguous when it comes to the people within this government agency:
(1) In the strictest sense, the SEC is the “Commission”—the Securities Exchange “Commission”—which has five commissioner slots, one of which the chairman occupies. The SEC chairman is not simply the primus inter pares (“first among equals”), but more like the chief executive officer with the final decision-making power over employment decisions within the agency, agenda-setting authority, and so on. The chairman, however, has no employment-decision power over any of the other commissioners.
(2) In another strict sense, the SEC is the staff of the Commission, or the “SEC Staff.” The staff work for the Commission and consist of supervisory federal employees and non-supervisory employees. Sometimes some SEC employees who are not Commissioners (that is, are staff members) refer to other employees as staff, but all employees other than the Commissioners are staff members.
(3) In a global sense, the SEC is the Commission and its staff. This is the default meaning.
How is the SEC organizationally structured?
The SEC is structured into divisions, which have their offices within, and “independent” offices. The divisions are structured to address one or more federal securities statutes or parts of one or more of these statutes. The offices are generally agency-support offices. The Division of Enforcement is the division within the SEC that sues people for alleged violations of one or more federal securities laws.
What is regulatory power or administrative power?
When it comes to a society’s sets of written, oral, and implied rules or laws, “law,” and the studies concerning their origins, development, and justifications, such as political philosophy and jurisprudence, one discovers that lawyers, judges, and legislators create categories, use concepts, and construct social fictions and treat them as real objects in a real world.
For instance, the “state” is a categorical construct of political philosophy, even though one can apply the term to nations. Similarly, a corporation has no existence beyond the individuals who work for and interact with it. Where is the “title” to your house? If it’s in a piece of paper called a deed, and you lose the deed, do you lose your title? The “legal fictions,” as they are called, really refer to categorical concepts that we are taught to treat as if they exist, which gives them a “social existence.”
“Authority” is another social construct. It effectively binds and blends the notions of power and legitimacy. Administrative authority is the set and scope of decisions that the legislature—the maker of rules—gives to an administrative agency to administer the legislature’s statutes. It is conceived as a thing being handed from one group (the legislature) to another (the agency). The SEC is the administrative agency that Congress has tasked to administer—clarify, monitor, and enforce—Congress’s set of federal securities statutes.
Who has the authority in the SEC?
The SEC commissioners theoretically have the administrative authority for the SEC, and this is particularly true when it comes to the question of suing individuals and companies for violations of one or more of the federal securities laws. A majority of the Commission’s quorum is required for the Commission to authorize the staff, particularly the Division of Enforcement, to commence a legal action in a U.S. District Court with specific claims (“charges”) or to commence an in-house administrative proceeding against one or more alleged violators.
How does the Commission transfer the authority it obtained from Congress to the staff members of the SEC Division of Enforcement?
Because “authority” is treated as a thing, Congress hands it to the Commission (the SEC), and the Commission can, but does not always, hand it to staff within the Division of Enforcement (“Enforcement”). This handing-off is called “delegation.” Enforcement needs delegated authority from the Commission (1) to use the Commission’s powers to issue subpoenas and compel appearance of witnesses and to take testimony of witnesses under oath during an investigation; and (2) to sue a company or individual for a certain violation (claim or “charge”) either in a U.S. district court or in-house as an administrative proceeding.
Does the SEC Enforcement staff have two types of investigations?
No. The SEC Enforcement staff can investigate without the Commission’s powers to compel documents and testimony (without subpoena powers) or with such powers. Usually, the first level of an investigation begins without subpoena powers, to determine whether it is worth the staff’s resources (time, energy, travel costs, etc.) to continue investigating.
Why does the SEC begin an investigation?
The SEC’s Division of Enforcement generally needs “predication” to undertake an informal investigation and formal investigation at a particular time of decision. Predication is the basis or reason for investigating, and it includes several questions: (1) What information exists at the time of the decision to believe that X violated one or more of the federal securities laws? (2) How likely is it that X violated the law? (2) How easy is it to obtain and process additional needed information to decide at a later date whether to continue the investigation: (3) How important is the violation to the public, the market, etc.?
Does the SEC close investigations without suing anyone?
Yes. However, because the SEC's investigations are non-public, there is no great fanfare or publicity when the investigation is closed unless the subject of the investigation puts out a press release or discusses it publicly.
What is a MUI? What is an “informal SEC investigation”?
The word MUI is the SEC’s acronym for a “matter under inquiry.” A matter under inquiry is an investigation that is undertaken without the authorization to use the Commission’s subpoena powers. A MUI may be opened and closed without ever becoming a formally authorized investigation in which the Commission has authorized the Enforcement staff to use its subpoena powers.
In the course of a MUI, the Enforcement staff can obtain information on their own or voluntarily from individuals and companies. Oftentimes, individuals and companies provide information (1) to show the Enforcement staff that there is no reason for an investigation, and (2) to not create an excuse for the Enforcement staff to seek and obtain a formal order of investigation.
What is the difference between an SEC matter and SEC case?
A matter is a transaction, set of transactions, or other activities of an individual and company that the SEC is investigating; a case is a matter (or a certain part of a matter) that is before a federal court or an SEC administrative proceeding.
Are SEC cases civil or criminal?
The SEC has only civil jurisdiction, but can nonetheless impose monetary fines. Its actions cannot cause someone to be incarcerated, although it sometimes works parallel with the U.S. Department of Justice, typically through the office of a federal prosecutor (federal district attorney) which is called the U.S. attorney’s office (USAO) for that particular federal district. (Federal districts are the national government what counties are to state governments. Accordingly, each federal district has its U.S. attorney, U.S. marshal, and U.S. district court, while each state county has its state district attorney, county sheriff, and state court for the county.
Why does the SEC make public announcements about “charging” people with violations? Civil claims are the civil equivalent of criminal charges. The SEC’s “charges” are civil claims, but using the verb “to charge” in the past tense sounds more conclusive and forceful than using “the verb to claim” in the present tense: Which is better, from the SEC’s perspective: “SEC charged X with violating Y” or “SEC claims X violated Y”?
What is the SEC’s Enforcement Manual?
The Enforcement Manual is a public document that, according to the SEC, is a reference only for Enforcement staff. It was first published in 2008, and has been revised since.
To avoid the argument that the Enforcement Manual provides “rights” to anyone, the Manual explicitly states that “[i]t is not intended to, does not, and may not be relied upon to create any rights, substantive or procedural, enforceable at law by any party in any matter, civil or criminal.” (1.1, entitled, Purpose and Scope). It is a good source of information for Enforcement operations.
What are the specific steps of an SEC Investigation?
To learn more about the phases of an SEC investigation, please refer to our separate discussion called “Phases of an SEC Investigation.”