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Tense meeting with SEC investigatorsWhen the staff at the Securities and Exchange Commission (SEC) has made the decision to recommend taking an enforcement action against a person or firm, the commission will often issue a Wells Notice. This notice informs the potential target of a proposed enforcement action of the commission’s plans and provides for a response. Not every person investigated by the SEC receives a Wells Notice, and many recipients of Wells Notices choose not to respond, but the Wells Notice is an important stage in the process of a civil enforcement action and provides an opportunity for both sides to present important elements of their cases before the matter becomes public.

If you’re concerned about or need help with SEC regulations and rules, a financial advisor can provide invaluable advice.

Wells Notice Background

Stack of legal and financial documents

The Wells Notice gets it name from John Wells, who in 1972 was named by then-SEC Chairman William Casey to head a committee charged with examining and evaluating the way the commission was handling enforcement actions. One of the outcomes of that committee was a recommendation to start issuing advance warnings to people and companies being investigated by the SEC. This recommendation was adopted and the alerts became known as Wells Notices.

The Wells Notice may be sent to an individual, such as a broker or to a firm, such as a brokerage. It lays out the meat of the investigation and its results, including the charges, such as insider trading, and the likely recommendations of the investigation staff. The Wells Notice comes after the SEC investigators have finished their investigation but before the staff submits its written report to the SEC recommendation that the enforcement action be taken. It’s a final step before the filing of a formal legal action.

Not every target of an investigation gets a Wells Notice. In cases where there is a risk that advance warning of a possible enforcement action would prompt an investigation’s target to destroy important evidence, for example, SEC staff may proceed with the enforcement without a Wells Notice.

A Wells Notice may be oral, such as a telephone call, or written. The content usually includes the substance of the allegations being raised against the individual or firm and the specific securities laws that are said to have been violated. It will often lay out the punishments that the SEC is after, which may include being barred from the securities industry, paying penalties, being enjoined from some action or having to repay ill-gotten profits plus interest.

Wells Submission

After getting a Wells Notice, the recipient has a chance to respond. Usually, this response, called a Wells Submission, has to be returned to the SEC within two weeks. The Wells Submission may be written or oral. Wells Notice recipients don’t always respond. One reason for this is that the Wells Submission is generally restricted from arguing that the facts of the case as uncovered by investigators are in error.

The Wells Submission arguments are typically limited to trying to convince SEC staff that the enforcement action should not proceed because they have misinterpreted securities law or SEC policy. A Wells Submission, whether provided by an institutional investor or a retail investor, is also viewed as risky, because the contents of the submission can later be used against the target of the action if and when it goes to court.

The Wells Submission does have potentially important uses, however. The submission can help to bring to the SEC’s attention additional facts that are relevant to the case. It can be used to negotiate a settlement and perhaps an agreement to acknowledge lesser offenses than are alleged in the Wells Notice and accept less painful punishments. At best, the process of responding to the Wells Notice can convince the SEC staff to drop the investigation and not proceed with the enforcement action.

Bottom Line

Briefcase and newspaper

A Wells Notice is an official alert from federal securities investigators that an official enforcement action against a broker or firm is going to be recommended. It is usually sent to targets of investigations just before the launching of a legal proceeding. It describes the essentials of the investigations, including its findings of fact, the specific alleged violations of securities laws and the punishments that are being sought. A Wells Submission reply gives the target of an investigation a chance to convince the SEC not to proceed with the enforcement action and resolve the matter.

Tips on Investing

  • An individual or firm that has received a Wells Notice is facing a potentially serious enforcement action from the Securities and Exchange Commission. It’s important to have expert advice when dealing with a Wells Notice. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
  • The SEC requires registered investor advisor firms (RIA) to disclose information about their operations that can be useful to investors considering professional help. RIAs are required to disclose any and all relevant information pertaining to their business practices or disciplinary actions on their Form ADV. It’s also helpful to use tools like FINRA’s Broker Check to take a closer look at an advisor’s professional background.

Photo credit: ©iStock.com/skynesher, ©iStock.com/fstop123, ©iStock.com/ChuckStryker

Mark Henricks Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
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