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The Importance of Securities Enforcement

Although the SEC has many essential duties, its whistleblower and investigation programs are perhaps its most prominent functions. These divisions investigate potential violations of federal securities laws and corporate governance. While securities regulation is vital, it is also a fine line between promotion and regulation. Overzealous enforcement can erode investor confidence and damage the market more than the behavior it seeks to punish. A recent case in point is the investigation into Arthur Andersen, a global accounting firm with approximately 85,000 mostly blameless employees worldwide. The firm is a global firm, but the aggressive legal tactics of the SEC and the firm have weakened its credibility in an emerging economy with less-than-stable firms.

SEC’s whistleblower program

Anyone with information about potential securities fraud can file a tip with the SEC’s whistleblower program. Tips are investigated by the SEC’s enforcement division and may be eligible for substantial awards. Whistleblowers need not be employees of a company; they can also be attorneys, corporate officers, auditors, or other third parties. To qualify, an individual or group must provide original information, offer a voluntary tip, and prove that they obtained the data through a process that resulted in a successful enforcement action.

The SEC must establish an office dedicated to working with whistleblowers. Depending on the whistleblower’s information, this office may target private equity firms and other sectors where securities fraud is prevalent. In addition, the whistleblowers’ motivation may influence the decision to file a report. While whistleblowers can benefit from an incentive to report fraud, the SEC may be putting employees at risk of losing their jobs.

The whistleblower program has been designed to protect investors by punishing violators who have provided original information about securities fraud. Successful whistleblower information must result in a successful SEC action or related action and have monetary sanctions over $1 million. A whistleblower can submit the information alone or jointly with others. The company is not regarded as a whistleblower if it is the data source.

Investigations into potential violations of federal securities laws

An investigation into possible violations of federal securities laws begins when an SEC staff member receives information regarding a potential breach. The staff may issue subpoenas to witnesses or gather voluntary information. After collecting the necessary information, the team makes an initial recommendation about enforcement action. Settlement discussions may take place before or after the SEC proposes charges. After the SEC has completed an investigation, the Commission must approve the proposed enforcement action.

In addition to receiving referrals from the public, the Enforcement Division also investigates companies if it finds evidence of illegal conduct. Enforcement staffs have broad discretion to pursue the investigation, and public companies don’t have any judicial remedies to appeal. Therefore, companies may want to conduct investigations internally before pursuing SEC processes. Here are some guidelines for a company to follow in a study. At the same time, there are many phases in the investigation life cycle and some overlap.

In some cases, the SEC may initiate a formal investigation after developing evidence of a potential violation. This action may involve civil actions, as well as administrative sanctions. On the other hand, an administrative proceeding can result in a cease-and-desist order or executive action. For instance, the SEC may choose to initiate an investigation after a company has violated the federal securities laws.

Investigations into violations of corporate governance

SEC enforcement actions often involve monetary sanctions. These sanctions are typically three separate parts: civil penalties, disgorgement, and prejudgment interest. The amount of each element in the total sanction will depend on the company’s culpability. Companies often face significant monetary penalties for committing violations of SEC rules. To avoid the potential for severe financial damage, companies should seek settlements as quickly as possible.

One area on which SEC staff are likely to focus is SPACs, which have a high number of companies going public. This gives rise to the possibility of accounting fraud, misstatements, and poor governance. SPACs are also ripe for securities violations, given their high valuations and a short timeline to complete the transaction. Therefore, a skilled securities attorney will be critical to the investigation and defense of your company.

In-house counsel should know the procedures and expectations of the Securities and Exchange Commission staff before an SEC investigation begins. The investigation aims to conclude as quickly as possible with minimal disruption to the company. Competently navigating the investigative process will minimize the impact of any sanctions and help senior management focus on operating the business. This Guide outlines how to manage expectations. You can make this process work in your favor by understanding the securities laws and the SEC staff.

Red Note: 30 September 2022

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