The U.S. Securities and Exchange Commission (SEC) protects investors by enforcing the nation’s securities laws. It can investigate all forms of securities fraud, including fraud committed by securities issuers, broker-dealers, investment advisors, and other industry participants.
The SEC frequently relies on its subpoena power when conducting securities fraud investigations. The subpoena is a powerful instrument that the SEC and other federal agencies use to request extensive amounts of information from companies and individuals, often spanning multiple years’ worth of corporate records. This includes electronically stored information (ESI), encompassing everything from corporate meeting minutes and shareholder voting records to text messages and other internal communications.
“Companies, firms, and individuals that receive SEC subpoenas need to proceed very carefully. SEC investigations can present substantial risks, and responding to a subpoena effectively is often a critical first step toward avoiding unnecessary consequences.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.
In recent years, the SEC has increased its use of subpoenas to compel the production of documents and testimony. Complying with the demands of an SEC subpoena is complex, time-consuming, and multifaceted. Recipients must also work quickly to ascertain their role in the SEC’s investigation (i.e., whether they are being subpoenaed as a target or witness) and assess whether they have grounds to challenge the SEC’s subpoena, either in whole or in part.
As a result, if you received a subpoena from the SEC, time is of the essence. Strict deadlines apply, and failing to meet these deadlines can potentially lead to contempt or obstruction of justice charges, among other consequences. Ignoring an SEC subpoena or responding superficially is not an option. This article explains the SEC’s enforcement authority and subpoena power and then provides an overview of seven key steps for responding to an SEC subpoena appropriately.
The Scope of the SEC’s Enforcement Authority
The SEC enforces a long list of federal statutes, including the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, the Investment Company Act of 1940, and the Foreign Corrupt Practices Act (FCPA), among many others. It also enforces an extensive—and constantly changing—list of regulations promulgated under its rulemaking authority.
Under these statutes and regulations, SEC enforcement proceedings can involve either (i) civil actions in which the Commission asks a federal court to impose sanctions or (ii) administrative actions in which the Commission seeks sanctions before an administrative law judge ("ALJ"). If an SEC investigation uncovers evidence of intentional fraud, the SEC can also work with the U.S. Department of Justice (DOJ) to pursue criminal charges.
The Breadth of the SEC’s Subpoena Power
The SEC has broad authority to investigate companies, firms, and individuals suspected of violating federal securities laws and the SEC’s regulations. It uses subpoenas to compel the production of documents and testimony to further its investigative efforts. Like court-issued subpoenas, SEC subpoenas can take two primary forms:
- Subpoena ad testificandum: This is a demand for the recipient to provide testimony. The request may order written or verbal testimony, state the date and time the recipient will appear, and provide such testimony.
- Subpoena duces tecum: This is a demand for the recipient to produce documents, records, or other evidence by the date specified in the subpoena.
Receiving either type of subpoena from the SEC means the Commission has reason to believe that you have (or your company or firm has) information relevant to a current or impending SEC investigation. However, the nature of the investigation and the recipient’s role is usually unknown. The subpoena will not state whether the investigation involves civil or criminal charges or whether the recipient is a target or witness in the SEC’s inquiry. As a result, discerning these two pieces of information is a critical first step for making informed decisions during the response process.
7 Key Steps After Receiving an SEC Subpoena
Favorably resolving an SEC investigation requires a prompt and strategic approach. With this in mind, here are seven more key steps to take after receiving a subpoena from the SEC:
1. Hire a Securities Law Defense Attorney
The attorney you choose to assist with your SEC subpoena response should have substantial experience representing clients during SEC investigations. An experienced SEC defense attorney should be able to help you determine how to respond, what information you need to provide (and what information you are entitled to withhold), and whether you have grounds to challenge the subpoena’s validity.
2. Be Careful to Protect Privileged Information
Information protected under the attorney-client privilege includes conversations with your (or your company’s or firm’s) legal counsel and attorney work product. Even if privileged information is responsive to an SEC subpoena, it generally is not subject to disclosure. Note, however, that preserving the attorney-client privilege may involve producing redacted documents in some cases.
3. Carefully Review the SEC Subpoena with Legal Counsel
As discussed above, an SEC subpoena will state the deadlines you need to meet and procedures you need to follow when submitting responsive documents and providing testimony. It is critical to meet all deadlines imposed by a SEC subpoena, unless you obtain the SEC’s approval (or a court’s order) for a different date. The SEC has a zero-tolerance policy for failing to comply with its subpoenas. If you do not promptly comply with the subpoena or provide fraudulent documents or testimony, you could face serious consequences—up to and including contempt charges that carry federal prison time.
4. Start Planning Your Response
The SEC drafts its subpoenas requests broadly, and its document requests can span multiple years. If voluminous ESI is involved, complying with an SEC subpoena can quickly become overwhelming. As a result, it is important to identify and locate responsive documents immediately. Likewise, if you have been subpoenaed to provide testimony, you will want to begin working with your legal counsel early to anticipate potential questions and formulate your responses.
5. Avoid Discussing the SEC’s Investigation with Anyone
You should not discuss the SEC’s investigation with anyone except your company’s or firm’s legal counsel (or your legal counsel if you are under investigation). Discussing the investigation with colleagues, acquaintances, or others could lead to the issuance of additional witness subpoenas. In most circumstances, casual conversations are not protected, and anyone with whom you share information about the investigation could be called upon to disclose this information to the SEC.
6. Conduct a Confidential and Privileged Risk Assessment
SEC subpoena recipients should also promptly begin working with their legal counsel to conduct a confidential and privileged risk assessment. Whether you have been subpoenaed as a target or a witness, you need to know whether the SEC’s investigation has the potential to lead to administrative, civil, or criminal enforcement action. If so, this will play a central role in how you formulate and present your response.
7. Respond to the SEC’s Subpoena
After taking all necessary preparatory steps, it is time to respond to the SEC’s subpoena. Depending on the circumstances, this may involve producing responsive documents, providing testimony, or both. For both targets and witnesses, this can be a high-risk endeavor—and, once again, a cautious, informed, and strategic approach is essential.
Understanding the Risks of Failing to Comply with an SEC Subpoena
SEC subpoenas are often extremely broad and require the production of extensive amounts of information covering many years. This breadth often makes it difficult for subpoena recipients to discern what is (and isn’t) required. Yet, despite this uncertainty, failing to respond to an SEC subpoena appropriately can have serious consequences, up to and including contempt charges, as discussed above.
Additionally, if a subpoena recipient intentionally omits requested documents or misrepresents information to the SEC during its investigation, this, too, can lead to criminal prosecution and imprisonment. Under U.S.C. Section 1001, anyone who knowingly and willfully falsifies, conceals, or covers up a material fact; makes a false or fraudulent statement; or makes or uses a document that contains false information during a federal investigation “shall be fined under this title, imprisoned not more than 5 years... or both.” Thus, even if a target or witness is not at risk based on the subject matter of the SEC’s investigation, noncompliance with an SEC subpoena can still be extremely risky.
The SEC is a powerful agency responsible for investigating companies, firms, and individuals for violations of federal securities laws and regulations. In recent years, it has increased its investigative efforts to uncover all forms of fraud and misconduct harming U.S. investors. In conducting investigations, the SEC will subpoena companies, firms, and individuals who are either targets of a forthcoming investigation or who may have knowledge of the matter at issue. Responding to an SEC subpoena requires a careful and strategic approach, as mistakes can have adverse consequences regardless of the subject matter of the SEC’s investigation. Hiring experienced SEC defense attorneys who can help you guard against these risks is essential, and it is one of the first steps toward executing an informed response.
