Navigating Inside the SEC

Fike’s presentation walked through three key areas: (1) the structure and function of the Commission’s divisions and offices; (2) the Division of Enforcement and the stages of an investigation, including how an investigation begins; and (3) the things to consider when facing an SEC inquiry or investigation and when to reach out to SEC counsel before one even begins.

Making Sense of the Sprawling SEC Structure

The SEC, which is headquartered in Washington, D.C., is led by five presidentially appointed and Senate confirmed commissioners and is organized into six divisions and twenty-five offices, as well as eleven Regional offices. The Division of Corporation Finance, often referred to as “Corp Fin,” is charged with ensuring that investors are provided with material information in order to make informed investment decisions. Corp Fin also periodically reviews company filings. The Division of Economic and Risk Analysis, or “DERA,” assists the Commission in its efforts to identify, analyze, and respond to economic and market issues by developing financial and market data-analysis tools, supplying economic statistics, and promoting data standards. The Division of Examinations (“Exam”) conducts the SEC’s National Exam Program through on-site or virtual exams of market participants and promotes compliance with the federal securities laws. The Division of Investment Management (“IM”) develops regulatory policy for investment companies and for investment advisers. The Division of Trading and Markets (“TM”) regulates major market participants, such as the securities exchanges, securities firms, self-regulatory organizations, transfer agents, securities information processors, and credit rating agencies. And finally, the Division of Enforcement (“Enforcement” or the “Division”), the Commission’s largest division, investigates potential violations of the federal securities laws and often receives referrals from the other divisions. The Commission also has a number of offices, some of which regulate specific aspects of the financial markets, like the Office of Credit Ratings and the Office of the Strategic Hub for Innovation and Financial Technology, and others that focus on outreach, like the Office of Investor Education and Advocacy and the Office of the Advocate for Small Business Capital Formation.

A Focus on the Division of Enforcement

Commissioners as Clients

Fike stressed that staff in the Division of Enforcement cannot act alone. Rather, the SEC Commissioners are the Enforcement attorney’s client, and any public enforcement can only be undertaken with approval by a majority of the Commissioners. For this reason, Fike noted, the priorities of the Division can vary depending on the makeup of the Commissioner and particularly the priorities of the chair. When asked about the priorities of the Commission’s current chair, Gary Gensler, Fike noted that one thing is clear: “Commissioner Gensler believes in regulation as a tool to support the financial markets and that rulemaking is an important tool to get there.” Gensler, Fike noted, is committed to using “every tool the SEC has” to focus on the regulation of areas he has deemed important.

The Stages of an SEC Investigation

Enforcement staff gets their cases from a variety of sources: through the Commission’s Tips, Complaints, and Referrals (“TCR”) System, through internal referrals from other divisions within the SEC or from other criminal and civil agencies, such as state regulators or the Department of Justice, through the Commission’s Whistleblower Program, or by opening matters themselves based on news articles or other observations.

Tips received by the Commission are triaged by an internal team to assess the substance and validity of the submission and then determine whether a matter should be opened. An investigation is generally first opened as a “Matter Under Inquiry” or “MUI.” In a MUI, Enforcement staff can reach out to entities or individuals for documents and information, but any responses are voluntary.

Fike noted that she gets the most questions from clients about whistleblowers and how the Commission handles complaints or submissions they might file. Whistleblower complaints are submitted and triaged through the SEC’s Office of the Whistleblower and are treated anonymously by the staff. Even if the name of the whistleblower is known, the staff will not use or share the name with anyone outside the Commission during the investigation. Fike added that whistleblowers often use counsel to represent them and help protect their anonymity. Whistleblower submissions are given a careful review, as they often include insider information that staff otherwise may not have; however, not every submission results in opening a MUI or an investigation. Whistleblower submissions have grown every year since the inception of the Commission’s Whistleblower Bounty Program authorized under the Dodd-Frank Act of 2010. Fike noted that the Office of the Whistleblower publishes its annual report to Congress on the SEC’s website. According to last year’s report, the Commission received 12,200 submissions and awarded $564 million in awards to 108 individuals.¹

When Fike asked her colleagues at V&E what SEC-related questions their clients ask the most, “every single one mentioned whistleblowers.” Fike relayed best practices if a company suspects a whistleblower: “If you suspect a whistleblower, follow your own policies and procedures and document everything. Consider whether an internal investigation should be conducted. Preserve relevant documents. Make sure you have a full and complete file of what is helpful for you.” Fike also added that, whether you think a whistleblower complaint might be substantive or baseless, it is also a good time to discuss with your SEC counsel if a self-report to the SEC would be helpful.

Lastly, Fike described that Enforcement staff may learn of possible securities violations from public news sources or a self-report by a company or its counsel. For example, a newspaper article or a spike in a stock price might lead Enforcement staff to initiate an investigation. An investigation may also be opened when a party self-reports a possible securities violation directly to a member of the Enforcement staff. When asked about the benefits of self-reporting, Fike noted that self-reporting allows the client to “exert . . . potentially, some control over where the investigation opens up” because the client, through its counsel, can choose where and to whom the self-report is made. This is especially helpful, according to Fike, when the client or its counsel has a good working relationship with a particular office or member of the staff within the Division.

Once Enforcement staff decides to investigate a potential violation, the staff opens a MUI in the Commission-wide case tracking system. Fike described the next steps staff might take during the MUI phase, such as sending a voluntary request letter to an individual or entity. And while disclosure is voluntary at this stage, Fike warned that “a refusal to turn over the information” is often grounds to seek Formal Order of Investigation (“Formal Order”) authority to send a subpoena. To obtain a Formal Order, Enforcement staff must first draft and submit a memorandum requesting authority, highlighting potential violations of the securities laws and the facts that might support them. Formal Order authority is held by the Commissioners but can be delegated to the Director of the Division of Enforcement or other Senior Officers at the chair’s discretion. Once a MUI has been converted to an investigation and the staff has received Formal Order authority, they can then issue subpoenas to individuals and entities for documents and testimony. Responding to a subpoena is compulsory and can be compelled by a court if a recipient does not comply.

Other things to know when your client or company is facing an SEC investigation: any request for documents or testimony will be accompanied by a Form 1662 that describes how the Commission uses information provided to it in investigations. Included in this form is information about how the staff can share information with other state and federal, civil and criminal, agencies. Additionally, Fike explained, once they have obtained Formal Order authority, the staff can request bank and brokerage records for any entity, including LLCs, formed by individuals. To close an investigation, staff must prepare a memorandum explaining why the investigation should be closed and should generally send closing letters to the parties who received subpoenas during the investigation.

Best Practices and When to Call Your SEC Counsel

When a company learns that it is, or likely will become, the subject of an SEC investigation, Fike noted, it should move quickly to retain experienced counsel. Fike provided additional best practices and recommendations for companies facing an investigation to consider.

Fike highlighted, for instance, the importance of hiring independent counsel to investigate a potential securities violation. According to Fike, this independent counsel should be retained by the company’s audit committee or a special committee appointed to help ensure that the counsel’s independence cannot later be called into question. During this process, Fike noted, relevant parties should be instructed to retain all documents. In fact, as soon as a company begins to suspect a securities violation or an SEC investigation, it must prioritize the retention of documents and evidence. “Even if you did everything fine,” Fike emphasized, “if the right documents are not retained, it can be a very expensive process to prove that nothing was done wrong.”

Fike also outlined the factors a company must weigh when considering whether to self-report a securities violation to the Commission. Fike emphasized that self-reporting to the SEC is a “one-time opportunity” that must be taken by the company early on. When imposing damages, the SEC considers whether a company self-reported, “and that is a yes or no question.” If done right, self-reporting can gain a company credit for cooperation. And while it might make sense under certain circumstances to forgo this opportunity, Fike emphasized that the credit can’t be re-earned and gives companies a potential bargaining chip at the end. Companies should therefore weigh the option of self-reporting carefully.

According to Fike, a company must also proceed with caution if and when it decides to initiate an internal investigation into possible securities violations. For instance, a company should not restrict the bounds of the investigation in such as a way that it makes certain topics or sectors “off-limits.” Any limitations placed on an internal investigation, Fike noted, will likely raise questions and concerns from the Commission. Further, Fike explained that any final presentation or report after the internal investigation is completed should be made with the SEC in mind and preserved with any key documents used to support the conclusions within. By doing this, Fike said, “you put yourself in the best positions you can be in” to resolve the matter as quickly as possible should the SEC come knocking later.

Lastly, Fike concluded by encouraging companies to consult with SEC defense counsel before a securities violation occurs. “There are lots of times prior to an investigation that getting the advice of an SEC defense lawyer can be helpful,” noted Fike, including when the company is negotiating a deal or evaluating the adequacy of its compliance program. By being proactive and seeking early advice, Fike noted, a company places itself in the best position to avoid SEC investigations altogether.

While this article summarizes the highlights of Fike’s presentation, the full video of the presentation provides a complete view of Fike’s expertise from her years at the Division of Enforcement.

¹U.S. Sec. and Exch. Comm’n, 2021 Annual Report to Congress: Whistleblower Program (2021), https://www.sec.gov/files/owb-2021-annual-report.pdf.