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Types of SEC Investigations.
1. Informal Inquiries.
a. Frequently, SEC investigations begin with a request for informal cooperation by corporation in providing information to the SEC staff. While a corporation and its employees are under no obligation to comply with such a request, it is usually in the company's interest to do so. First, voluntary cooperation will put the company in the best light in the consideration of the issues posed by the investigation. Secondly, voluntary cooperation may encourage the SEC staff not to seek a formal order of private investigation and may possibly reduce the company's requirement to disclose the investigation in its periodic filings. Third, voluntary cooperation gives the issuer some greater degree of control over the scope of the investigation.
b. In addition, and as more fully discussed below, cooperation may enable the company to make an earlier presentation to the staff with regard to the underlying basis for its decisions .
2. Formal Investigations.
a. The securities laws permit the SEC to issue subpoenae to compel the production of documents by company or by individuals and to compel witnesses to appear and to testify under oath in connection with investigations of possible violations of the federal securities laws. The commissioners do not, of course, conduct these investigations themselves. Thus, they delegate their authority to issue subpoenae to identified members of the staff. This delegation is accomplished by the issuance of a "formal order of private investigation" which recites the factual predicate for issuing the order, the statutory sections which may have been violated, and which authorizes designated Commission employees to issue subpoenae and compel witnesses to appear under oath. A formal order is not a finding of a fact nor a form of adjudication. It is akin to a corporate board resolution. Nevertheless, it is a document which asserts the possibility of a violation of law by the issuer, and it may include within its scope a wide variety of persons.
b. Typically, SEC investigations commence with a broad request for the production of documents covering an arbitrarily selected time period. This request can be narrowed by negotiation in order to prevent an undue burden and the production of irrelevant documents.
c. Once documents are collected, if the SEC staff continues to have questions, it will frequently call witnesses to appear to testify regarding the matters at issue. In a financial disclosure case, witnesses from a company usually include its controller, its chief financial officer and other accounting and finance personnel.
d. Because financial disclosure investigations frequently turn on the treatment of transactions between the issuer and third parties, the SEC will likely issue subpoenae to other relevant persons. Depending upon the nature of the case, these may include the following:
(1) The company's independent auditors;
(2) customers, vendors, and suppliers:
(3) business or strategic partners; and
(4) financial analysts.
e. The SEC takes the position that it is not required to give the company notice of the persons to whom the subpoenae are issued; thus, one of the frequent side effects of an SEC investigation is the fact that it will cause persons with whom the company does business to receive a surprise subpoena in the investigation, with concomitant effects upon the company's reputation and business relationships.
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