How the SEC Works With the DOJ

How the SEC Works With the DOJ

The SEC cannot send anyone to prison. That limitation defines the entire architecture of federal securities enforcement and, in particular, the relationship between the Commission and the Department of Justice that most people under investigation fail to account for at the stage when accounting for it would change the outcome.

The two agencies share statutory authority, investigative materials, and, in a number of cases that continues to increase, a timeline. The Supreme Court approved this arrangement in United States v. Kordel, holding that parallel civil and criminal proceedings on the same conduct are permissible absent a departure from proper standards in the administration of justice. That standard, elastic by design, has permitted a degree of coordination that defense counsel encounter as a routine feature of practice and that the subjects of investigation almost never expect.

What the public perceives as a referral, the SEC deciding to hand a case over to the DOJ, is often not what occurs. The formal referral process, in which enforcement staff prepare a criminal reference report for the full Commission, has largely fallen into disuse. The informal process is the operating reality. An enforcement attorney mentions a matter to an Assistant United States Attorney. The AUSA requests access to the investigative file under the Commission’s rules. The file moves. In many cases, the criminal investigation was already underway when the conversation between the two agencies began.

The Informal Referral

Under Rule 2 of the Commission’s Rules Relating to Investigations, SEC staff may discuss a nonpublic investigation with DOJ prosecutors after obtaining approval from a Division official at the associate director level or above. The decision to share information with criminal authorities can be made well below the level of the full Commission. These conversations happen in hallways and over phone calls between attorneys who have worked across from each other for years. The formal machinery exists. The informal channel carries the weight.

The result is that in many parallel proceedings, the SEC’s civil investigation and the DOJ’s criminal case run from an early stage on the same set of facts and, frequently, the same set of witnesses. The SEC collects testimony under its civil subpoena authority. The DOJ, which would require a grand jury subpoena to compel the same testimony, benefits from the SEC’s broader discovery powers. Information flows from the civil side to the criminal side with almost no procedural resistance; the securities laws authorize this sharing in explicit terms.

And the subject of the investigation is often unaware that the criminal inquiry exists.

The Ninth Circuit addressed the permissibility of covert coordination in United States v. Stringer, holding that the government’s decision not to conduct a criminal investigation openly did not constitute deceit. A four-page form, SEC Form 1662, was deemed sufficient notice that information provided to the SEC might end up in the hands of criminal prosecutors. The court reached this conclusion despite the fact that the SEC had instructed court reporters not to mention the DOJ’s involvement and had declined to answer defense counsel’s direct question about whether it was working with any other federal department.

Whether one regards that outcome as a reasonable application of existing doctrine or as something less defensible depends, I suspect, on which side of the conference table one has spent the most time.

Form 1662 and the Routine Uses Clause

Every witness in an SEC investigation receives Form 1662, titled “Supplemental Information for Persons Requested to Supply Information Voluntarily or Directed to Supply Information Pursuant to a Commission Subpoena.” The title itself suggests the document was not composed to be absorbed quickly.

The form advises witnesses of their right to counsel, the penalties for perjury and document falsification under 18 U.S.C. §§ 1001 and 1519, and what the SEC terms “routine uses” of the information provided. Among those routine uses is making the information available to federal and state criminal law enforcement agencies. The form states that testimony may be used against the witness in criminal proceedings. It states that the witness may invoke the Fifth Amendment.

It does not disclose whether a criminal investigation is already in progress.

The form operates, in practice, the way a smoke detector operates in a building where the fire has already started: it confirms the existence of a warning system without communicating the urgency of what is happening on the other side of the wall. Witnesses sign the acknowledgment, often minutes before testimony begins, having read the dense paragraphs without the benefit of counsel to explain what the language means in operational terms. The form documents that the SEC said what it was required to say, and from the Commission’s perspective, that is sufficient.

The Fifth Amendment in Parallel Proceedings

The constitutional architecture of parallel proceedings produces a problem that has no clean resolution.

In a criminal case, invoking the Fifth Amendment carries no penalty. The jury cannot draw an inference from silence, and a prosecutor who comments on a defendant’s refusal to testify risks a mistrial. The protection is absolute and functions within the criminal system exactly as the Framers intended.

In a civil case, including an SEC enforcement proceeding, that protection erodes. The Supreme Court held in Baxter v. Palmigiano that the Fifth Amendment does not prohibit adverse inferences against parties who refuse to testify in response to probative evidence in civil actions. A witness who invokes the privilege before the SEC may find that silence treated as evidence of the very wrongdoing the privilege was meant to guard against. I am less certain than many practitioners that the case law has produced a tolerable equilibrium here, though the courts appear satisfied.

The arithmetic is merciless. Testify in the SEC proceeding, and the testimony becomes evidence available to DOJ prosecutors in the parallel criminal case. Invoke the Fifth, and the SEC draws an adverse inference that strengthens the civil action, which in turn generates findings and sanctions that prosecutors may reference. FINRA, for its part, has imposed automatic industry bars on registered persons who invoke the privilege in response to a FINRA investigation (which defenders of the current system will note is technically a contractual obligation, not a constitutional question, though the practical result is indistinguishable from a penalty for exercising a constitutional right).

The witness is asked to choose between self-incrimination and self-destruction, and the system presents this choice on a printed form, with a line for a signature.

One response is to seek a stay of the civil proceeding pending resolution of the criminal matter. Courts weigh the interest of the plaintiff in proceeding, the burden on the defendant, the convenience of the court, the interests of third parties, and the public interest. The DOJ frequently supports such stays because the broader civil discovery available to a defendant in the SEC action could provide access to materials that the more restrictive criminal discovery rules would not permit.

Stays are not guaranteed. In at least one case involving simultaneous SEC and DOJ filings, the court found it difficult to credit the government’s position that a stay was necessary to prevent the defendant from gaining a procedural advantage when the U.S. Attorney’s Office had, itself, coordinated with the SEC in bringing the actions at the same time. The coordination that created the problem was offered as the reason to solve it.

The practical reality for most individuals facing parallel exposure is that consequential decisions about testimony and cooperation must be made before the full scope of the investigation is visible to them. The SEC appears first. The civil subpoenas arrive. The tone is cooperative. The DOJ, meanwhile, gathers material in the background. The sequencing has been consistent for long enough that it would be difficult to regard it as accidental.

The 2026 Enforcement Manual

In February 2026, the Division of Enforcement released the first major update to its Enforcement Manual since 2017, formalizing a criminal referral framework that had been outlined in the Commission’s June 2025 Policy Statement. That Policy Statement was itself a response to Executive Order 14294, which declared that criminal enforcement of regulatory offenses is disfavored, particularly strict liability offenses, and that prosecutions should focus on defendants alleged to have known their conduct was unlawful.

The Manual now identifies six factors staff must consider when evaluating whether to refer potential violations to the DOJ: the harm or risk of harm to investors; the potential gain to the defendant; whether the defendant held specialized knowledge or licensing; the defendant’s awareness that the conduct was unlawful; whether the defendant is a recidivist; and whether DOJ involvement would provide meaningful additional investor protection. Staff are generally directed not to refer conduct that implicates only strict liability civil offenses.

The procedural change that carries the most weight is structural. The Enforcement Director must now be notified of all criminal referrals, and in non-urgent matters, staff should not make a referral until the Director provides authorization. Before this revision, referrals could be made at the associate director level with practices varying across the Division and, in many cases, without input from senior management. The new requirement centralizes a decision that had been, for decades, diffuse and inconsistent.

The Manual also narrows the circumstances under which staff may withhold a Wells notice when a parallel criminal investigation is pending. Previously, any parallel criminal matter could justify withholding the notice. The 2026 revision limits this to situations where the parallel investigation is covert. The distinction matters because a Wells notice is often the first formal indication a subject receives that enforcement action is being considered, and withholding it while both civil and criminal investigations proceed left subjects without meaningful information about their exposure.

Whether these reforms alter outcomes or document what experienced enforcement staff were already doing is a question the next several enforcement cycles will answer. The six factors articulate considerations that seasoned staff weighed before they were written down. The Director notification adds a layer of oversight without altering the underlying statutory authority to share information with prosecutors. The covert-investigation carve-out is, in my judgment, the most consequential change, because it closes a window that was open for a long time, perhaps longer than it should have been.

What This Means in Practice

The first conference call with the SEC determines the trajectory of everything that follows, including proceedings that have not yet been disclosed. Counsel retained at the outset of a civil inquiry must evaluate the matter as though a criminal investigation is already running, because the cost of that assumption being wrong is negligible, and the cost of it being right is the difference between a defensible posture and one that cannot be repaired.

The timing of testimony, the scope of document production, the decision to cooperate or invoke, the substance of any Wells submission: all of these require assessment against both civil and criminal exposure. This work cannot be staged sequentially. It must happen from the first subpoena.

The 2026 Manual tells practitioners more than it has before about the criteria the staff will apply. Firms have already begun treating the six referral factors as a diagnostic, running clients through each element the way a physician performs a review of systems. The instinct is understandable. But the coordination between the SEC and the DOJ was never as methodical as the Manual now suggests. It was, and remains, a relationship between institutions and between individual attorneys within those institutions who share professional networks and who understand that the credibility of civil enforcement depends, at some level, on the possibility of criminal prosecution.

The Manual codifies the criteria. It does not capture the relationship.

A conversation with counsel who understand both regimes is where this assessment begins, and it should begin before the first document leaves the building. Our firm consults at no cost on matters involving SEC inquiries and potential parallel criminal exposure, because the initial assessment is where the consequential decisions are made, and they do not wait.