Building on recently announced changes to its settlement and waiver process, discussed here, U.S. Securities and Exchange Commission (SEC) Chair Paul Atkins last month outlined changes he plans to implement in the SEC’s Wells process to ensure greater fairness and transparency for potential enforcement respondents. These include expanded opportunities to engage with SEC leadership before the Wells notice, increased transparency of the evidence underlying a Wells notice, and an extended timeframe for respondents to prepare and submit their responses.
Overall, Atkins’s remarks indicate that SEC leadership is placing greater emphasis on having an open, informed, and thoughtful dialogue with respondents before and during the Wells process. Notably, however, even with these changes, the SEC staff retains substantial discretion, particularly over the scope and type of information they may be willing to share with potential respondents.
The Wells Process
A Wells notice is a formal communication from SEC staff to an individual under investigation, indicating a preliminary decision to recommend enforcement action for specific securities law violations. It offers the recipient an opportunity to respond with a submission to the Enforcement Division and the SEC. Before issuing a notice, or proceeding without one, staff must obtain approval from an associate or regional director within the SEC’s Enforcement Division. The decision to issue a Wells notice depends on factors such as the completeness of the SEC’s investigation, urgency of investor protection, risk of alerting other potential defendants, and potential impact on any parallel criminal proceedings.
Recipients of a Wells notice often request access to nonprivileged portions of the investigative file to more fully understand the facts underlying the alleged violation. Under the SEC’s Enforcement Manual, those requests are left to the discretion of the SEC staff handling the investigation, guided by whether access to the requested information would assist both parties in assessing the strength of the evidence, the recipient’s level of cooperation during the investigation, and potential impacts on ongoing testimony or parallel proceedings. Wells recipients may also seek a meeting with staff to discuss the proposed recommendation, but these meetings are generally limited to a single session and require supervisory consultation.
At the final stages of the Wells process, respondents have an opportunity to be heard and will often make a Wells submission presenting factual information, legal arguments, and other factors they believe should preclude the filing of an enforcement action. In recent years, a two-week deadline from the date of the Wells notice has applied to Wells submissions. The staff responsible for the investigation incorporates the substance of a Wells submission in a formal action memo to the SEC before proceeding with an enforcement action.
Atkins’s Proposed Changes to the Wells Process
Providing respondents with a full and fair opportunity to be heard in the Wells process is essential to protect their rights and interests and to ensure the integrity of the SEC’s decision-making in enforcement actions. As Atkins succinctly stated, SEC enforcement is “an exercise of government power that must be tempered by fair process, good judgement, integrity, and rectitude.”
Building on those principles, Atkins outlined several measures and standards designed to reinforce fairness and accuracy in the Wells process.
- Pre-Wells Engagement. Although the Wells process usually occurs at the end of the SEC’s investigation, respondents should have the opportunity to engage with the staff early on to address a mistaken view of the facts or law and to discuss the overall direction of an investigation. As Atkins observed, engaging outside the Wells process via detailed written submissions, known as “white papers,” may advocate for a respondent’s position and often seeks to avoid the Wells process entirely. This is particularly advantageous for respondents that may feel obligated to publicly disclose a formal Wells notice but still need an opportunity to address concerns with the SEC’s investigation.
- Evidentiary Transparency. Atkins emphasized that SEC staff “must be forthcoming about material in the investigative file” and, apart from information subject to restrictions on disclosure, they “must make every effort to share information that [the SEC] has gathered,” including key documents and testimony. In justifying the broader disclosure respondents may be entitled to, Atkins described the SEC’s role: “Our objective is to get to the truth of the matter and hold people accountable in major, federal cases for significant violations. Ours should not be a ‘gotcha’ game.”
- Expanded Timeframe for Responses. Respondents will now have at least four weeks to make Wells submissions, with additional reasonable periods of time warranted in appropriate cases.
- Full Commission Engagement. While Atkins observed that, in the past, commissioners did not receive actual copies of Wells submissions, today, they receive all submissions in contested cases, and it is Atkins’s expectation that commissioners read each submission in both settled and contested cases. Staff recommendations must also explain the absence of a Wells submission.
Practical Takeaways
These salutary changes to the Wells process, articulated by the most senior official at the SEC, are a benefit both to respondents and the SEC. Respondents will now have expanded opportunities to influence SEC decisions during investigations. This not only includes opportunities to advocate for a declination of enforcement but also more efficient advocacy of settlements and waivers.
A more clear-eyed view of the evidence before an enforcement action is initiated allows respondents to decide whether to settle or maintain their defenses when they have greater financial resources at their disposal. Similarly, early and more informed cross-examination by respondents of the SEC’s evidence allows the staff to conduct more effective investigations, including, most importantly, possibly walking away. And if a settlement is warranted, the parties are able to avoid informational asymmetries that have historically—and unnecessarily—increased the time and expense of arriving expeditiously at a fair and just resolution.
If you have any questions, or would like additional information, please contact one of the attorneys on our White Collar, Government & Internal Investigations team.
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