October 3, 2022

Volume XII, Number 276


October 03, 2022

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7 FINRA/SEC Wells Notice Step-by-Step Response Strategies

The Financial Industry Regulatory Authority (FINRA) and U.S. Securities and Exchange Commission (SEC) investigate companies, investment firms, and individuals for a broad range of federal securities laws and other securities-related violations. While FINRA’s oversight is limited to the investment advisory and brokerage industries, the SEC conducts investigations targeting all forms of securities fraud as well as other statutory and regulatory violations that harm investors. 

While there are certain unique aspects to all FINRA and SEC investigations, and while there are different paths these investigations can follow, SEC or FINRA investigations are largely a formulaic affair. Both authorities adhere to a stringent set of rules and procedures, and both have a limited (though still expansive) set of tools at their disposal. 

One of these tools is the Wells Notice. When FINRA or SEC staff determine that the target of an investigation has violated relevant laws, rules, or regulations, they submit a recommendation to their higher-ups who make the final determination as to whether enforcement action is warranted. Before making this recommendation, FINRA and SEC staff have the option to issue a formal Wells Notice (in the case of a FINRA investigation, the Wells Notice is typically preceded by a Wells Call). A Wells Notice informs the subject of the investigation of the staff members’ conclusions, and it provides an opportunity—but does not impose an obligation—to respond. 

While responding (referred to as making a Wells Submission) to the Wells Notice can be beneficial in some cases, it also carries risks. As a result, targets of FINRA and SEC investigations or the Wells Notice recipients must weigh their options carefully. If responding makes sense, the Wells Submission must be crafted carefully as well, and all information contained in the Wells Submission must serve a discrete and identifiable purpose. 

“Since responding to a Wells Notice is often a target’s last chance to convince FINRA or the SEC not to pursue enforcement action, many people (lawyers included) assume that making a Wells Submission is the best approach in all cases. But, this isn’t necessarily true. There are several factors to consider; and, in many cases, the risks involved with submitting a response will outweigh the benefits.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C. law firm.

Keep in mind, that a Wells Notice should not come as a surprise. The issuance of a Wells Notice is generally the last step before enforcement staff turns a case over to their supervisors—and a FINRA or SEC investigation is usually a lengthy process of which the target is well aware. If an investigation appears likely to culminate with FINRA or SEC staff recommending enforcement action, the target should address this likelihood head-on—and this begins with determining whether a Wells Submission is warranted. 

7 Key Considerations for Making a Wells Submission to FINRA or the SEC

With all of this in mind, there are several key considerations involved in weighing the pros and cons of a Wells Submission. Some examples of the steps targets should take when determining whether to submit a Wells Notice response (and, if so, how to craft their response) include: 

1. Assessing the Likelihood that a Wells Submission Will Impact FINRA’s or the SEC’s Decision Regarding Enforcement Action 

Generally, the purpose of responding to a Wells Notice is to try to persuade FINRA or the SEC not to pursue enforcement action. This is particularly true in light of the risks involved with making a Wells Submission, as discussed below. So, if making a Wells Submission is unlikely to achieve this outcome in light of the current state of FINRA’s or the SEC’s investigation, then submitting a response may be ill-advised. 

How can targets make this assessment? Evaluating the potential benefits of making a Wells Submission is something that must be done on a case-by-case basis in light of the unique circumstances presented. FINRA and SEC enforcement staff will typically only recommend enforcement action when they have strong evidence to support their recommendation—and this is important to keep in mind as well. Have enforcement division staff overlooked relevant facts? Have they misinterpreted the law? Are there strong policy arguments against pursuing enforcement action in this particular case? These are the types of issues that may warrant a Wells Notice response focused on persuading the individuals who will make the final enforcement decision. 

2. Considering the Risks Involved with Submitting a Wells Notice Response 

While responding to a Wells Notice can have benefits, making a Wells Submission does entail risks. For example, Wells Submissions are not privileged or confidential. This means that not only can the information contained in a Wells Submission be used in subsequent enforcement proceedings, but it can also potentially be made public. Wells Submissions are also discoverable in private civil litigation. 

Additionally, submitting a Wells Notice response provides FINRA or the SEC with insight into the target’s defense strategy. While this defense strategy will come to light eventually if the investigation leads to enforcement action, disclosing a target’s defense strategy at this early stage of the process can be less than ideal. It gives FINRA’s or the SEC’s lawyers an additional leg up when they may already have the upper hand. 

3. Reviewing the Wells Notice In Its Entirety 

Another key, yet surprisingly often overlooked, consideration for deciding whether to make a Wells Submission is a careful review of the Wells Notice itself. All Wells Notices are not alike. As the SEC explains in its Enforcement Manual, a Wells Notice should fully, “(1) inform[] the person the staff has made a preliminary determination to recommend that the Commission file an action or institute a proceeding against them; (2) identif[y] the securities laws violations that the staff has preliminarily determined to include in the recommendation; and (3) provide[] notice that the person may submit to the [SEC] concerning the proposed recommendation.”

FINRA and SEC enforcement division staff craft Wells Notices with their specific goals in mind. They will choose the allegations they want to put forward based on the evidence they have obtained and based on FINRA’s or the SEC’s current enforcement priorities. As a result, while a Wells Notice may be presented as an opportunity to respond, in practice this “opportunity” could be severely limited by the tactics underlying its drafting and submission. 

4. Examining the Guidelines (and Understanding the Rules) for a Wells Submission 

Enforcement division staff can reject a Wells Submission if it does not comply with the guidelines stated in the Wells Notice or otherwise comply with the relevant rules. For example, in the case of an SEC investigation, a Wells Submission may be rejected if: 

  • The Wells Submission exceeds the length approved in the Wells Notice

  • The Wells Submission is late 

  • The Wells Submission “seeks to limit (including y reserving the right to limit)” its admissibility under the Federal Rules of Evidence or the SEC’s enforcement regulations 

  • The Wells Submission “contains or discusses a settlement offer”

FINRA follows similar guidelines regarding acceptance and rejection of Wells Notice responses. 

There is no point in making a Wells Submission if enforcement division staff are going to dismiss it out of hand. So, if the decision is made to move forward with a Wells Submission, the target’s defense counsel must ensure strict adherence to all pertinent requirements—unless the defense counsel obtains written approval to deviate from the requirements following an appropriate request submitted to the SEC (or FINRA). 

5. Considering the Alternatives to Making a Wells Submission 

When considering the prospect of making a Wells Submission, it is also important to consider the alternatives. At this point, the investigation is not over and the decision to pursue enforcement action has not been made. This means there are still opportunities available to steer the matter toward a favorable result. 

As alluded to in the SEC’s list of grounds for rejecting a Wells Submission, one option is to pursue a settlement. FINRA and the SEC routinely settle cases with companies, firms, and individuals. If a Wells Submission is unlikely to change the trajectory of a case and there is a real risk that the target will face penalties in the event of prosecution, then submitting a settlement offer instead of responding to a Wells Notice may be a sound defense strategy. 

6. Crafting an Appropriate Response and Making a Timely Wells Submission 

If the decision is made to submit a Wells Notice response, then the response must be crafted very carefully. The target’s defense counsel or the securities fraud defense lawyer must strategically select the grounds asserted in the Wells Submission as well as all supporting evidence. Making a timely submission is critical as well (as FINRA and the SEC can both reject late submissions); and, if there is not sufficient time to craft an effective response, this may mean that the defense counsel’s efforts are better spent elsewhere.

7. Preparing for the Next Stages of FINRA’s or the SEC’s Investigation and Enforcement Efforts 

Finally, when going through the steps discussed above, it is critically important to look ahead to the next stages of the investigation. Evaluating the benefits of a Wells Submission is just one of several steps defense counsel will need to undertake simultaneously. Even a well-crafted Wells Notice response is not likely to result in immediate termination of FINRA’s or the SEC’s inquiry. As a result, all decisions made regarding a potential Wells Submission need to take into account the target’s broader defense strategy. 

Oberheiden P.C. © 2022 National Law Review, Volume XII, Number 209

About this Author

Nick Oberheiden Criminal Defense Attorney Oberheiden PC
Federal Criminal Defense Attorney

Dr. Nick Oberheiden focuses his litigation practice on white-collar criminal defense, government investigations, SEC & FCPA enforcement, and commercial litigation. He has defended clients in PPP Loan Fraud cases and COVID-19 investigations. Nick also directs internal corporate investigations and he leads defense teams in whistleblower actions, corporate defense cases, as well as cases involving national security and elected officials.

Clients from more than 45 U.S. states have hired Nick to seek effective protection against government...