Tasked with regulating the U.S. securities market and protecting millions of investors from fraud, the U.S. Securities and Exchange Commission (SEC) is among the most active agencies in the federal government when it comes to enforcement activity. The SEC vigorously enforces the Securities Act of 1933, Securities Exchange Act of 1934, Sarbanes-Oxley Act, and the numerous other federal statutes and regulations that fall within its jurisdiction, and it routinely initiates investigations into companies, firms, and individuals involved in all aspects of the U.S. securities market. 

Among its many investigative tools, the SEC often relies heavily on its subpoena power. As the agency states on its website, “With a formal order of investigation, the [SEC Enforcement] Division's staff may compel witnesses by SEC subpoena power to testify and produce books, records, and other relevant documents.” While SEC subpoenas are not issued by a judge, they can be judicially enforced, and entities and individuals that fail to comply with SEC subpoenas can face contempt proceedings and other consequences. 

“The SEC has been extremely active in its enforcement efforts in recent years. Through the process of initiating a formal investigation and issuing subpoenas, SEC personnel can compel testimony and voluminous document production in support of investigations targeting subpoena recipients as well as other individuals and entities.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C. 

What are the Steps Involved in Responding to an SEC Subpoena? 

With all of the above in mind, receiving an SEC subpoena is a serious matter, and it needs to be handled accordingly. Here is an overview of what needs to be done following the receipt of a subpoena from the U.S. Securities and Exchange Commission: 

1. Understand the Significance of the SEC Opening a Formal Investigation 

The SEC only issues subpoenas in connection with formal investigations. Most SEC investigations begin informally, and are typically the result of either (i) tips or complaints from the public, or (ii) issues identified in a company’s public filings. The SEC conducts informal investigations as a matter of course, and many of these efforts conclude without further steps being taken. 

As a result, the institution of a formal investigation is a significant step in itself. It indicates that SEC personnel have determined there are sufficient concerns to devote agency resources to a more in-depth inquiry. While it is possible to resolve a formal SEC investigation without civil or criminal charges being filed, favorably resolving a formal investigation generally requires more than achieving a similar result during an informal inquiry. 

2. Determine the Response Date

Upon being served with an SEC subpoena, it is imperative to identify and docket the response date. This deadline should not be missed unless efforts have been successfully undertaken to negotiate an alternate response date with SEC personnel beforehand. As with other types of subpoenas, failing to timely respond to an SEC subpoena can have significant negative consequences, and SEC personnel will often have little sympathy for individuals’ and entities’ post hoc claims that they need more time to comply. 

Determining the response date should be fairly simple. It should be stated under the caption on the first page of the SEC subpoena, along with the specific time and location at which the response must be provided. Once the response date has been identified, efforts should be commenced promptly to work backward from the response date and develop a plan for submitting a compliant response on time. 

3. Determine What Type of Response is Required 

Similar to judicial subpoenas, SEC subpoenas can request documents (a subpoena duces tecum), testimony (a subpoena ad testificandum), or both. The nature of your response obligation should be evident from the face of the subpoena as well. If the SEC is requesting documents (as will often be the case), the subpoena may include an attachment which lists the documents that need to be provided by the response deadline. 

Upon reviewing this attachment, you may have more questions than answers. The SEC often requests extraordinary amounts of information during formal investigations, and submitting a compliant response can present a substantial burden. But, even if this is the case, unless you are able to successfully challenge the subpoena (more on this below), you will need to devote the time and resources necessary to collect and produce all responsive hardcopy and electronic documents. 

4. Determine Why You Have Been Subpoenaed by the SEC

Next, you need to determine why you have been subpoenaed by the SEC. This involves answering two very different, but equally important, questions: (i) Are you being subpoenaed as a target, suspect, or witness in the SEC’s investigation? (ii) Are you being subpoenaed in your individual capacity or as a corporate representative or custodian?

You may be able to answer the first of these questions from the language of the subpoena itself. The subpoena will state that it is “In the Matter of” a specific individual or entity (or group of specific individuals or entities). If you, your company, or your firm is listed here, then you know that the SEC is looking into your (or your company’s or firm’s) practices. If it is not, then it may be the case that you have been subpoenaed as a witness, although you will want to confirm this as soon as possible. 

With regard to the second question, this should be evident from the face of the subpoena as well. Depending on the capacity in which you have been subpoenaed, you may need to provide different records or testimony in response. As a result, this is a crucial detail that cannot be overlooked, and it is a detail that you will want to confirm before you begin the process of gathering records in response. 

5. Assess the Viability of Challenging the Subpoena

As mentioned above, submitting a compliant response to an SEC subpoena can present a substantial burden. As a result, it is worth considering whether – and to what extent – you may be able to challenge the subpoena. While the federal courts generally defer to the SEC’s subpoena authority and investigative expertise, it is possible for an SEC subpoena to go too far. Frequently, however, if grounds to challenge an SEC subpoena exist, the best that can be hoped for is a reduction in scope—and not quashing of the subpoena in its entirety. 

6. Begin Preparing the Response 

In parallel with assessing the viability of a challenge, it will be important to begin preparing the response. This will take time, and it will require significant resources. In order to ensure that no responsive records or information go overlooked, it will be necessary to implement systems and take a structured approach; and, as a general rule, this is a process that should be managed and overseen by outside counsel. 

For SEC subpoenas that require testimony, preparing the response will involve anticipating questions and doing adequate research in order to provide compliant responses. What is required in terms of research will depend on the scope of the audit and the capacity in which you have been subpoenaed, among other factors. As a general rule, it is better to be overprepared than being underprepared, as you can withhold any information that is not specifically solicited, and not having answers that you should can lead to follow-up inquiries and legal proceedings. 

7. Conduct an Internal SEC Compliance Audit 

When faced with an SEC subpoena, it is also important to conduct an internal compliance audit. While this is particularly true for suspects and targets, it will often prove to be a worthwhile exercise for witnesses as well. If there is a risk that you (or your company or firm) could be targeted for federal securities law violations, you need to know what the SEC might find so that you can proactively execute a response. 

8. For Subpoenas Duces Tecum, Review the Response Prior to Submission 

Prior to submitting documents in response to a subpoena duces tecum, it is imperative to review the documents to ensure that no privileged information is being disclosed. This includes any documents that may be protected by (i) the attorney-client privilege, or (ii) the privilege against self-incrimination. Once privileged documents have been disclosed, the privilege can be deemed waived, and this can make it far more difficult to defend against allegations of securities fraud or other federal securities law violations.  

9. Be Prepared for Follow-Up from the SEC 

Regardless of the adequacy of your response, you can expect to hear more from the SEC. You should prepare accordingly—which should include, among other things, discussing next steps with your legal counsel. 

10. Develop and Execute a Defense Strategy as Necessary 

Finally, if there is a risk of facing charges as a result of the SEC’s investigation, it will be important to begin working on your (or your company’s or firm’s) defense strategy immediately. While the SEC has broad enforcement authority and can pursue charges under a broad range of circumstances, there are many defenses to alleged securities law violations as well. Once your defense counsel has a clear understanding of the scope of the investigation, the allegations involved, and the consequences that are at stake, your defense counsel can engage with the SEC’s personnel and begin steering the investigation toward a favorable resolution.