Vol 14 (2017) - Issue 3

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Role of the Expert in US SEC Enforcement Proceedings

Due to post-financial-crisis law changes in the United States, many non-US investment advisers located throughout the world are now required to register with the US Securities and Exchange Commission ('SEC'). The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ('Dodd-Frank Act') significantly restricted exemptions from registration available to foreign investment advisers, causing more advisers to register with the SEC. In addition, even prior to enactment of the Dodd-Frank Act, foreign broker-dealers transacting with US customers likewise needed to register.
Given the passage of time, foreign investment advisers and broker-dealers now hopefully understand when and how they need to register with the SEC, but they may not understand how the SEC enforces its rules and regulations. Foreign advisers and brokers registered with the SEC are subject to investigative and legal proceedings that may be quite different than those of their respective home countries. This article addresses this information void to better prepare foreign advisers and brokers, and their legal counsel, should encounters with the SEC become adversarial.


SEC investigation and the Wells Notice
If the SEC suspects a violation of US securities laws, the agency may conduct a 'cause examination' by its Office of Compliance Inspections and Examinations ('OCIE') or an investigation by attorneys and accountants in the Division of Enforcement ('Enforcement'). Cause examinations or investigations may arise due to a customer complaint or from a whistleblower working for the investment adviser or broker-dealer. Cause examinations may also arise from routine periodic examinations
conducted by OCIE staff. If OCIE determines from a cause examination that issues identified require further review, it may refer the matter to Enforcement to conduct an investigation. If an adviser or broker determines that he or she is the target of an investigation, legal counsel should be retained.
Investigations likely involve collection and review of significant quantities of documents and may include on-the-record ('OTR') interviews of adviser or broker personnel by Enforcement staff. Those interviews are recorded and later turned into transcripts for further review by SEC staff. Enforcement staff may also interview customers of the adviser or broker, as well as other parties, including foreign regulators. Depending on the complexity of the issues, this process may continue for a period of months or even years.
If the findings of the preliminary investigation indicate a potential violation, Enforcement staff will prepare a recommendation to the five commissioners who preside over the SEC to institute a proceeding. Before the recommendation is sent to the commissioners, Enforcement staff may request a written response from the target of their investigation so that the response can accompany the staff’s recommendation when submitted to the commissioners. In this process, the SEC commissioners receive findings from the staff as well as a rebuttal from the person(s) potentially subject to any proceeding.