Defending a Series 7 Registered Representative in a SEC Investigation – One More Thing to Worry About

It is challenging enough representing an individual in a SEC investigation, but the complexities are amplified when the subject of the investigation is a Series 7 FINRA registered individual.  Why?  Because FINRA securities registered representatives must disclose the receipt of a SEC Wells Notice on their Form U4, thus alerting FINRA of the SEC investigation, as well as their firms (to the extent not already aware).  And, this notification is required regardless of whether the SEC ultimately brings an enforcement action, thus creating a scenario where the mere act of disclosure can lead to a FINRA investigation and/or termination from the employing securities firm for alleged conduct that may either never be charged by the SEC or, alternatively, successfully defended in litigation.  The above also holds true for a FINRA Wells Notice.

To be clear, though, there is no such disclosure requirement for non-licensed individuals.

So, how does an SEC defense attorney deal with this issue?  Let’s unpack it step-by-step.

What is a SEC Wells Notice?

A SEC Wells Notice is a formal communication from the SEC Staff advising that it intends to recommend an enforcement action against the targeted individual.   The Wells Notice is typically issued after the SEC Staff has completed its investigation, reviewed the evidence, and internally vetted charging decisions.   As a matter of practice, the SEC Staff will contact counsel via telephone to advise of its intention to recommend charges and will usually provide the factual and legal basis for its recommendation.  This is then followed up by a letter confirming, which is called a Wells Letter.    Once the SEC issues a Wells Notice, the clock starts ticking as it must file an enforcement action, or drop the matter, within 180 days.

The purpose of the Wells Notification is to put the target on notice and provide him, through counsel, the opportunity to persuade the Enforcement Staff to either drop the charging recommendation or, quite often, modify (lessen) the charges and relief sought (whether monetary or injunctive, or both) in order to settle the matter before a contested enforcement action is filed in federal court or in an SEC administrative proceeding.  Counsel can do so through a meeting and/or through a written submission, called a Wells Submission, articulating the reasons why an enforcement action is unwarranted.  However, a written Wells Submission is not covered by the settlement privilege and can be used by the SEC against the target if the case proceeds to litigation.  It should also be noted that the SEC is under no legal obligation to provide a Wells Notice but typically does.  In my experience, it is only when the SEC views the conduct as fraudulent, ongoing and posing a threat to investor funds that it will decline to issue a Wells Notice and proceed directly and expeditiously to court.

Are FINRA Licensed Individuals Required to Disclose a SEC Wells Notice?

Yes.  FINRA requires individuals licensed in the securities industry to promptly disclose on their Form U4 the receipt of a written Wells Notice.  The Form U4 is the Uniform Application for Securities Industry Registration or Transfer.

What is the Purpose of the Form U4 Disclosure Requirement?

The obligation of a registered representative to promptly report a written Wells Notice on the Form U4 is designed to ensure that the securities regulators and current and future employers are aware of the matter.  The purported justification is to maintain the integrity of the securities industry by providing transparency as to individuals who may have violated the federal securities law (even though at the time of disclosure there has been no official determination that the individual has actually committed a violation!).  Unjust as this policy is in my professional opinion, it nonetheless is a requirement.

What are the consequences of not disclosing a SEC Wells Notice?

Not disclosing, or failing to promptly disclose, a Wells Notice could lead to disciplinary actions by the employing securities firm against the registered representative, including suspension or possibly termination.  Additionally, both the securities firm as well as the registered representative could face penalties from securities regulators, namely FINRA, for not making the disclosure, or failing to promptly make it.

What, if any, strategic considerations come into play when defending a securities licensed individual in a SEC investigation given the requirement that a Wells Notice be disclosed on the Form U4?

To address this issue, I typically ask the SEC Enforcement Staff to provide me with an advance “heads up” before issuing an official Wells Notice.  Call it a “pre-Wells Notice”, but effectively it allows me to discuss the concerns the SEC has about my client’s conduct and any potential charges before an actual Wells Notice is issued thus triggering my client’s Form U4 disclosure obligation, as well as the start of the 180 day clock within which the SEC must file or decline prosecution.  While the SEC Staff is under no legal obligation to do so, I have found that they are typically amenable to doing so as it also gives them some flexibility to discuss and potentially resolve matters before they are under the time pressure of the 180-day clock.  I have been successful in persuading the SEC to not pursue charges before issuing a Wells Notification, thus avoiding not only a needless, potentially damaging Form U4 disclosure for my client, but also the prospect of having to defend a public enforcement action that will be expensive, drawn-out and uncertain in outcome.

Why Hire David R. Chase?

Former SEC Enforcement Attorney

Mr. Chase began his legal career as a lawyer in the SEC’s Enforcement Division, where he conducted complex securities fraud investigations. His experience gives him unique insight into how the SEC builds its cases and, accordingly, how to dismantle them.

Dedicated SEC Defense Law Practice

After leaving the SEC, Mr. Chase established a law practice devoted to representing clients facing SEC enforcement.

Nationwide Representation

Mr. Chase represents securities licensed individuals around the nation in SEC investigations.

Strategic, Individualized Approach

Every case is personally handled by Mr. Chase, who creates a tailored legal strategy to defend your rights and preserve your reputation.

Contact SEC Defense Lawyer David R. Chase, Esq. Today

If you’re facing an SEC investigation or have been served with a SEC subpoena, don’t wait. Early involvement of a skilled SEC defense attorney can dramatically affect the outcome of your case.

Call David R. Chase, Esq. today toll free at 800-760-0912 for a confidential consultation. Visit www.securitiesfrauddefense.net to learn more about his experience, practice areas, and successful case results.  He is also available by email at: david@davidchaselaw.com.