SEC Formal vs. Informal Investigation

SEC Formal vs. Informal Investigation: Why “Informal” Is the Dangerous Word

The word “informal” is the SEC’s most dangerous lie. When the SEC opens an informal investigation – technically called a Matter Under Inquiry or MUI – they have no power to compel you to do anything. No subpoenas. No mandatory testimony. No forced document production. That sounds protective. It’s not. Because the SEC has no legal power during the informal phase, they rely entirely on voluntary cooperation. And most people cooperate because “informal” sounds harmless. They answer questions without counsel. They produce documents trying to be helpful. Then the investigation converts to formal, and everything they voluntarily provided becomes the foundation of the case against them.

The informal phase isn’t separate from the formal phase. It’s the setup. The SEC uses the informal investigation to gather evidence they couldn’t compel from you legally. By the time you learn the investigation has “escalated” to formal, you’ve already handed them what they need. Your own words. Your own documents. Your own explanations – all given freely because nobody told you the truth about what “informal” actually means.

Understanding the difference between formal and informal SEC investigations isn’t about legal technicalities. It’s about survival. The distinction determines what the SEC can force you to do, what your cooperation actually means, who approves the investigation, and when your company’s name ends up in a press release. Most people learn these differences too late. You don’t have to be one of them.

What “Informal Investigation” Actually Means

An informal SEC investigation – the Matter Under Inquiry or MUI – is the first phase of most SEC enforcement actions. The threshold for opening an MUI is intentionaly low. The SEC recieves tens of thousands of tips every year. If something looks suspicious enough to examine, they open an MUI. Thats it. No formal approval process. No threshold determination that a law was broken. Just “this looks worth a closer look.”

Heres the critical distinction. During an MUI, the SEC cannot subpoena you. They cannot compel you to produce documents. They cannot force you to testify. Everything they get during the informal phase comes from voluntary cooperation. That sounds like protection. Its actualy the trap.

The SEC’s enforcement manual explains the purpose of the MUI phase: gather additional facts to evaluate wheather a full investigation would be an appropriate use of SEC resources. Notice what that means. Their using the informal phase to figure out if you should be investigated formaly. And the primary tool they have for figuring that out is getting you to voluntarily tell them everything before you realize whats happening.

SEC Enforcement has roughly 1,500 staffers handling about 1,500 open investigations at any given time. Your MUI competes for attention with 1,499 others. It might sit dormant for months. It might progress rapidly. You have no control over the timeline and often no visibility into were you stand. All you know is that the SEC asked for something “voluntarily” and your trying to figure out wheather to provide it.

The 60-Day Deadline That Doesn’t Exist

In theory, the SEC is supposed to decide within 60 days wheather to close the MUI or convert it to a formal investigation. That sounds reasonable. Sixty days of uncertainty, then you get an answer. Heres the problem: the 60-day timeline is basicly fiction.

SEC audit data revealed that 460 of 580 MUIs examined had been open longer then 60 days. Thats 79 percent. Nearly four out of five informal investigations exceed the timeline that’s supposed to protect you. The 60-day “deadline” isnt a deadline. Its a guideline that gets ignored in the vast majority of cases.

What does this mean for you? Your informal investigation can drag on for months – potentialy years – while you remain in limbo. The SEC keeps asking for voluntary cooperation. You keep providing it becuase you dont want to look uncooperative. The investigation never formaly begins, so you never get the procedural protections of a formal investigation. But the evidence gathering continues indefinately.

And heres the brutal irony. The SEC found there are “significant differences in MUI processing times across regional offices.” Your timeline dosent depend on the strength of your case or the seriousness of the allegations. It depends on which regional office is handling your investigation and how backlogged they are. Its bureacracy, not justice.

No Miranda, No Warning, No Protection

Heres something that shocks most people. Theres no Miranda warning in SEC investigations. The SEC is a civil regulatory agency, not law enforcement making an arrest. They dont have to tell you that anything you say can be used against you. They dont have to tell you that you have the right to remain silent. They dont have to do anything except ask questions and accept your voluntary answers.

But here’s the thing. Just becuase they dont have to warn you doesnt mean your words arent being used. Everything you say during an SEC interview – even a “voluntary” informal interview – becomes part of the investigation record. That testimony can be shared with the Department of Justice. It can be used to build a criminal case. It can be read aloud at your criminal trial years later.

SEC investigators are trained interrogators. They know how to ask questions that seem innocuous but contain legal traps. They know how to get you to make admissions you didnt intend to make. They know how to use your own words to build their case. And becuase its “informal” and “voluntary,” most people walk into these interviews thinking their just explaining themselves. Their actualy testifying against themselves.

The good news: you have the right to have an attorney present during any SEC interview. The bad news: nobody is required to tell you that. Many people learn about this right only after theyve already said things they can never take back.

How Your Cooperation Becomes Your Conviction

The cascade from informal cooperation to formal conviction follows a predictable pattern. Understanding it might save your career – or your freedom.

Step one: you recieve a “voluntary” document request during an informal investigation. The letter is polite. Its not a subpoena. You could technicaly refuse. But the letter makes clear that refusing might result in the SEC opening a formal investigation. So you cooperate, becuase non-cooperation “looks like your hiding something.”

Step two: the SEC reviews your documents and decides they want to talk to you. Again, the request is voluntary. Again, you could refuse. But refusing would definately trigger formal investigation. And besides, you want to explain yourself. You didnt do anything wrong. If you just explain, theyll understand. So you agree to a voluntary interview.

Step three: during the interview, you answer questions trying to be helpfull. Nobody told you that your answers are being recorded and preserved. Nobody told you that everything your saying will be analyzed by lawyers looking for inconsistencies. Nobody told you that the friendly investigator is actualy building a case against you.

Step four: the investigation converts to formal. The SEC now has subpoena power. But they dont need it for what you already gave them voluntarily. Your own documents, your own testimony, your own explanations – all provided freely during the “informal” phase – are now the foundation of the enforcement action against you.

Step five: you hire a lawyer and learn, to late, that everything you said voluntarily can be used against you. The attorney privilege you could of claimed? Waived by your voluntary disclosures. The Fifth Amendment protection you could of invoked? Never available becuase you already talked. Your own cooperation destroyed your defense.

When “Formal” Begins: The Commissioner Vote

In March 2025, the SEC fundamentaly changed how formal investigations begin. Previously, the Director of the Division of Enforcement could approve formal orders of investigation. They had this authority since 2009, when the Obama administration delegated it to speed up enforcement. One person could authorize subpoena power.

That changed. The SEC rescinded the 2009 delegation by a partisan vote – two Republican commissioners voting yes, one Democrat voting no. Now, all three Commissioners must vote on every single formal order of investigation. Your fate depends on presidential appointees and political dynamics, not just enforcement staff recommendations.

What does this mean practicaly? Formal orders might take longer to obtain. Enforcement staff now has to build a stronger factual foundation before requesting Commissioner approval. Investigations may idle in the informal stage longer then they previousily would have. This could be good or bad depending on your situation.

The bigger point: the line between informal and formal is now a political line. Three commissioners – currently two Republicans and one Democrat – decide wheather your investigation gains subpoena power. The dynamics of that vote may matter more then the facts of your case.

The Press Release That Destroys Everything

Heres something nobody mentions about the formal/informal distinction. When the SEC issues a formal order of investigation for a public company, they typicaly also issue a press release. Your company’s name is now publicly associated with an SEC investigation. Before any charges. Before any determination of wrongdoing. Before any opportunity to defend yourself.

The stock price impact is immediate and brutal. Research shows companies under SEC investigation see stock price drops averaging 40 percent from revelation to resolution. Customers flee. Partners reconsider. Board members panic. Executives get fired – often before anyone knows wheather theyre actualy guilty of anything.

During the informal phase, investigations remain private. The SEC conducts all investigations confidentialy. But the moment the investigation goes formal – the moment they vote to give staff subpoena power – the confidentiality often ends. The formal order isnt just a legal tool. Its a reputational bomb.

Three Mistakes That Turn Informal into Prison

People destroy themselves during informal investigations in three predictable ways. Avoiding these mistakes dosent guarentee survival, but making them almost guarentees destruction.

Mistake one: treating informal as harmless. The word “informal” makes people drop their guard. They talk without counsel. They produce documents without review. They think their “just helping” and theyll sort it out later. By the time they realize informal was the most dangerous phase, their own cooperation has built the case against them.

Mistake two: thinking refusal protects you. Yes, you can refuse voluntary cooperation during informal investigation. But refusal often triggers formal investigation and subpoena power. The SEC’s enforcement manual makes clear: “failure to comply may result in the SEC opening a formal investigation.” Refusal dosent make them go away. It escalates.

Mistake three: cooperating without strategy. The right answer isnt automatic cooperation or automatic refusal. Its strategic cooperation – working with experienced counsel who understands what to provide, what to protect, and how to cooperate in ways that dont destroy your defense. Blind cooperation is self-incrimination. Strategic cooperation is survival.

Get an experienced SEC defense lawyer before you respond to any request – even a “voluntary” one. The difference between informal and formal isnt about legal technicalities. Its about wheather your cooperation helps you or buries you. Your future is being decided right now, during the phase that sounds harmless. Dont make the mistake of beleiving the word “informal.”