The SEC’s enforcement division investigates potential violations of securities laws and regulations. Several triggers can lead to an SEC investigation:
Tips and Complaints: The SEC often receives tips and complaints from whistleblowers, investors, industry insiders, or the public. If these tips suggest potential securities law violations, the SEC may investigate.
Market Surveillance: The SEC monitors the financial markets for unusual trading activity or patterns that could indicate market manipulation or insider trading. Unusual trading volume, rapid price fluctuations, or other anomalies may trigger an investigation.
Corporate Disclosures: Inaccurate or misleading information in a company’s financial statements, annual reports, or other filings with the SEC can prompt an investigation. This can include fraudulent accounting practices, revenue recognition issues, or other forms of financial fraud.
Insider Trading: Suspicious trading by corporate insiders, such as officers, directors, or employees, ahead of significant company news or events can lead to an SEC investigation. If it is based on non-public information, trading is illegal.
Market Manipulation: Activities designed to manipulate the price of securities or create artificial trading activity, such as “pump and dump” schemes, can trigger SEC investigations.
Regulatory Violations: Violations of securities regulations or failure to comply with SEC rules can result in investigations. These can include violations related to registration requirements, disclosure obligations, or brokerage firms’ handling of customer funds.
Initial Public Offerings (IPOs): The SEC reviews the registration statements and offering documents for companies proposing, or conducting an IPO to ensure compliance with securities laws. If there are concerns about the accuracy or completeness of these documents, an SEC investigation may be initiated.
Whistleblower Reports: The SEC has a whistleblower program that encourages individuals knowledgeable about securities violations to come forward. Whistleblower tips often lead to SEC Investigations. Whistleblowers who provide credible information can be eligible for rewards, and their reports can lead to investigations.
Enforcement Priorities: SEC investigations often begin based on its enforcement priorities, which can shift over time based on market conditions, emerging risks, and policy objectives.
Market Events: Major market events, such as financial crises or significant corporate scandals, can lead to broader investigations into systemic issues or specific companies and individuals involved.
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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.
