Criminal Defense Lawyers

Difference Between SEC Inquiry and Enforcement Action

The Question You’re Really Asking

The question isn’t “what’s the difference between an SEC inquiry and an enforcement action.” The question is “have they already decided I’m guilty, or am I still being evaluated?” An inquiry is the SEC gathering facts to make a decision. An enforcement action is the SEC announcing the decision they’ve already made. The difference isn’t procedural stages on a flowchart. The difference is whether you’re still influencing the outcome or just watching it unfold.

The Three Stages (What They Tell You)

Here’s what every law firm website will tell you about SEC investigations. Stage one is a Matter Under Inquiry (MUI) – informal fact-gathering where the SEC requests documents voluntarily and has no subpoena power. Stage two is a formal investigation – the SEC gets authorization to issue subpoenas for documents and testimony. Stage three is enforcement action – they file administrative proceedings or civil lawsuits in federal court. That’s the flowchart version. That’s not wrong. But it’s like describing a cancer diagnosis as “stage one, stage two, stage three” without mentioning what’s actually happening to your body at each stage.

The Three Decision Points (What They Don’t Tell You)

What they don’t tell you is that between those three stages are three decision points where specific people make specific choices that determine your entire trajectory. Decision Point One: A staff attorney decides whether to convert your MUI to a formal investigation. That’s one person, writing one memo to their supervisor, deciding whether you get subpoenaed. Decision Point Two: SEC headquarters decides whether to authorize the formal order. As of 2024, that requires Commissioner approval – not automatic, not rubber-stamp. Decision Point Three: After the investigation, staff decides whether to recommend enforcement action to the Commission. These aren’t procedural milestones. These are human beings making judgment calls that shape the next two to five years of your life.

The 60-Day Deadline That Doesn’t Exist

OK so lets talk about the MUI stage first. SEC policy says a Matter Under Inquiry must be resolved within 60 days – staff either converts it to a formal investigation or closes it. Thats the rule. Heres the reality: the 60-day clock is internal guidance, not a legal requirement. Theres no statute. Theres no regulation. Theres no enforcement mechanism. If your MUI sits for six months past the “deadline,” nothing happens to the staff attorney handling it. The 60-day policy exists to prevent cases from languishing forever, but its routinely ignored when staff needs more time to build there case. Your sitting there thinking “its been 90 days, they must be closing it soon” – and there thinking “we need three more witness interviews before we escalate.”

The Cooperation Trap

During the MUI stage, you have a choice: cooperate voluntarily or stay silent. Most lawyers will tell you cooperation helps – show good faith, build credit, demonstrate you have nothing to hide. And thats true if the investigation closes. But if it escalates to formal investigation, everything you “voluntarily” provided during MUI becomes evidence they dont have to subpoena. Every document you handed over. Every witness interview you facilitated. Every explanation you gave. You were cooperating to prevent an investigation. Instead, you funded it. The SEC rewards cooperation – but only if your cooperating in a case they’ve already decided to bring. If you cooperate early and they use it to build the case they weren’t sure they had, you get no credit. You built there closing argument.

The Formal Order Authorization Bottleneck

If staff decides to escalate your MUI to a formal investigation, they need a formal order of investigation. Thats the document that grants subpoena power. To get it, a staff attorney writes a memo explaining the potential violations, the evidence gathered so far, and why a formal investigation is warranted. The memo goes to the Director of Enforcement. Historicaly, approval was delegated – nearly automatic. But as of 2024, SEC staff must get Commissioner-level approval for all formal orders. That means five Commissioners reviewing whether your matter warrants formal investigation. This sounds like good news – more oversight, higher bar for escalation. But its created a bottleneck. MUIs that would have converted to formal investigations in 30 days now sit for months waiting for Commission authorization. The 60-day MUI clock keeps ticking, but the holdup isnt the staff attorney anymore – its the Commissioners schedule.

The Irreversibility Threshold

Heres the question nobody answers: at what point does SEC scrutiny become irreversible? When does “were looking into this” become “we’ve decided your guilty”? The procedural answer is the Wells Notice – thats when staff formaly recommends enforcement action. But the practical answer is much earlier. The irreversibility threshold is the moment the staff attorney drafts the memo recommending MUI conversion to formal investigation. Once that memo is approved and subpoenas go out, the institution has committed resources. They’ve told there supervisors this matter warrants investigation. Theyve put it in the tracking system. Theyve started the clock on a two-year process. At that point, closing the investigation without charges looks like a mistake – like they wasted resources, misjudged the evidence, pursued the wrong target. The incentive structure flips. Before the formal order, staff success means finding the truth. After the formal order, staff success means justifiying the decision to investigate.

The Wells Notice Reality: 80% Theater

Look, lets talk about Wells Notices. If SEC staff decides to recomend enforcement action, they send you a Wells Notice – a letter saying “were planning to charge you, and you have 30 days to submit a written response explaining why we shouldnt.” This is presented as an oportunity. A chance to be heard before the Commission makes a final decision. And technicaly, thats true. But heres the numbers: between 2011 and 2013, 80% of people who recieved Wells Notices ended up facing charges. Eighty percent. Your spending $50,000 to $100,000 on a legal brief that has a 20% success rate. The Wells submission process isnt genuine reconsideration. Its procedural cover. It allows the SEC to say “we gave them a chance to respond” before filing the charges theyd already decided to file. Think about that success rate. If 80% of Wells Notices result in enforcement actions, the Wells process isnt a decision point – its a countdown.

The Venue Selection Game (Post-Jarkesy)

Once the Commission votes to authorize enforcement action, staff has a choice: file administrative proceedings before an SEC Administrative Law Judge (ALJ), or file a civil lawsuit in federal district court. For years, conventional wisdom said SEC picks administrative proceedings for minor cases and federal court for serious fraud. That was never true. The real logic was simpler: SEC picked administrative proceedings when they wanted home-field advantage. Administrative proceedings ment an SEC-employed ALJ hearing the case, with the Commission itself handling any appeals. They picked federal court when they needed injunction power or wanted criminal referrals to run parallel. But then came the Jarkesy decision in June 2024. Supreme Court ruled that securities fraud cases seeking civil penalties must be tried before a jury in federal court – the SEC cant adjudicate them administratively. Now the venue choice reveals something diferent: there confidence in the evidence. If SEC files administrative proceedings, there seeking remedies other than fraud penalties (cease-and-desist, industry bars, disgorgement). If they file in federal court, there confident enough to face a jury. The venue tells you how strong they think there case is.

The Real Timeline and Cost

Lets talk about what this actually costs. The average SEC investigation – from formal order of investigation to enforcement decision – takes 24 months. Thats the average. Complex cases take three to five years. During that entire time, your paying lawyers. Document review costs $200-$400 per hour for contract attorneys. Partner-level defense work costs $800-$1,200 per hour. A thorough internal investigation before the SEC even finishes its work runs $100,000 to $500,000. Responding to subpoenas, preparing witnesses for testimony, drafting a Wells submission – your looking at $500,000 to $2 million in legal fees before the SEC even decides wheather to charge you. And thats just if your an individual defendant. If your a company, multiply it. Now add the business cost: clients leave, investors pull out, employees get nervous, regulators scrutinize every other aspect of your operations. You can be financialy destroyed before charges are ever filed. The investigation itself is the punishment. And if the SEC ultimatly decides not to bring charges – if they send you a termination letter after two years – theres no refund. No apology. No public announcement clearing your name. You just stop being investigated.

The Parallel Proceedings Nightmare

Heres something almost nobody mentions: the moment the SEC opens a formal investigation, your not defending one case anymore. SEC enforcement triggers parallel proceedings. State securities regulators get notified. FINRA (if your in the industry) opens its own investigation. If the conduct involves potential criminal violations, the SEC refers it to the Department of Justice. One SEC formal order becomes three or four simultaneous investigations, each with seperate document requests, seperate witness interviews, seperate legal teams. Your not just paying one set of lawyers. Your coordinating defense strategy across multiple agencies that dont share information with each other but are all investigating the same conduct. The SEC investigation might take two years. The DOJ criminal investigation might take four. FINRA might suspend you while the others are still pending. And heres the trap: you cant settle with one agency without considering how it affects your position with the others. Admitting facts in an SEC settlement can be used against you in a DOJ criminal trial. Refusing to cooperate with FINRA can hurt your SEC cooperation credit. Your playing three-dimensional chess were every move affects multiple boards.

What To Do At the MUI Stage

So what do you actualy do at each stage? If you recieve a letter or call from SEC staff requesting documents or an interview – thats likely an MUI. Your in the informal inquiry stage. Do not respond directly. Do not “cooperate” by handing over documents or answering questions without counsel. The staff attorney will tell you cooperation looks good. Thats true – if the investigation closes. But if it escalates, everything you provide becomes there evidence. Hire a securities defense attorney immediately. Let them make contact with SEC staff, determine the scope of the inquiry, and negotiate what cooperation looks like. If the SEC is requesting specific documents, your lawyer can negotiate which documents are responsive and assert privilege were appropriate. If they want witness interviews, your lawyer prepares witnesses and attends the interviews. The goal at MUI stage is not to prove your innocence. The goal is to avoid giving them enough to justify a formal investigation. Your not building a defense yet. Your trying to stay below the irreversibility threshold.

What To Do At the Formal Investigation Stage

If you recieve a subpoena – your past MUI. The SEC has a formal order of investigation and subpoena power. Now the calculation changes. Your already past the irreversibility threshold. They’ve committed resources. There building a case. Your goal shifts from “prevent investigation” to “shape the outcome.” This is were cooperation credit actualy matters – but only the right kind of cooperation. Providing documents pursuant to subpoena is not cooperation, its compliance. Real cooperation means substantial assistance: self-reporting violations they dont know about yet, producing witnesses they havent identified, conducting internal investigations that reveal problems before the SEC finds them. That kind of cooperation can reduce penalties if charges are filed. But heres the tension: the more you reveal through cooperation, the stronger there case becomes if they do charge you. Your trading information for leniency – but only if they were gonna charge you anyway. If your cooperation reveals conduct they wouldnt have discovered otherwise, youve turned a weak case into a strong one. This is why you need lawyers who understand SEC enforcement strategy, not just securities law. The question isn’t “what did we do wrong.” The question is “what do they already know, and what can we use as cooperation credit versus what should we protect.”

What To Do At the Wells Notice Stage

If you recieve a Wells Notice, you have 30 days to submit a written response. Should you? The statistics say probly not – only 20% of Wells submissions successfuly prevent charges. But the calculus isnt purely about success rate. A Wells submission creates a record of your defense before charges are filed. It forces SEC staff to adress your arguments in there recommendation memo to the Commission. If the case goes to trial or settlement, youve already established your position. The submission also buys time – the 30-day window extends the timeline before enforcement action. And in some cases, a Wells submission identifies weaknesses in the SECs theory that cause staff to narrow the charges or reduce the penalties theyll seek. But its expensive. A thorough Wells submission costs $50,000 to $100,000 in legal fees. Your paying for a brief that four out of five times dosent prevent charges. The decision depends on wheather your preparing for trial (in which case the submission is part of your defense strategy) or preparing for settlement (in which case the submission is leverage). Do not waste a Wells submission arguing “we didnt do anything wrong.” Use it to argue “even if we did what you think we did, its not a violation” or “the penalties your considering are disproportionate to the conduct.” Your not writing for innocence. Your writing for negotiating position.

What To Do At the Enforcement Action Stage

If the SEC files enforcement action – administrative or civil – your in litigation. The advice here is the same as any litigation: evaluate settlement versus trial based on the strength of there evidence, the potential penalties, and your tolerance for risk. But there are two SEC-specific considerations. First, post-Jarkesy, you have the right to demand a jury trial in federal court if the SEC is seeking civil penalties for fraud. If they filed administrativly and your facing fraud penalties, challenge the venue. Make them take you to federal court. Juries are more skeptical of agency overreach than ALJs. Second, if you settle, understand the new landscape: the SEC is increasingly requiring admissions of guilt rather than allowing settlements “without admitting or denying” allegations. In fiscal year 2024, 34 enforcement actions included admissions. If you admit facts in an SEC settlement, those admissions can be used against you in private securities litigation, shareholder lawsuits, and potentialy criminal proceedings if DOJ is still investigating. Settling with the SEC no longer ends your exposure – it can create new exposure. Every settlement term has to be evaluated for how it affects your liability in other forums. This is why parallel proceedings make SEC enforcement exponentially more complicated. Your not just settling one case. Your making decisions that affect cases you might not even know exist yet.