For those in the SEC’s crosshairs, a cooperative stance can help

When the Securities and Exchange Commission comes knocking, cooperation – not combativeness –  is typically the best approach for enforcement defense attorneys and the clients they represent. 

That was a message Kathleen Marcus, a partner at law firm Stradling Yocca Carlson & Rauth, delivered during a panel on SEC enforcement held as part of the National Association of Bond Lawyers’ annual conference earlier this month. Prior to joining Stradling in 2009, Marcus served as senior counsel in the SEC’s Division of Enforcement.

At Stradling, where she co-chairs the firm’s enforcement defense and investigations practice, Marcus has helped clients navigate “a number of SEC investigations in the municipal space,” she said. In addition to municipalities and municipal advisors, Marcus has worked with lawyers, law firms and real estate developers ensnared in such probes. 

An SEC investigation “is not a litigation,” Marcus said during the panel discussion. 

“You want an absolutely cooperative posture and you want lawyers that are going to dig in very early on [and] figure out what’s been going on,” she said. “Your lawyers need to be in front of the SEC staff as far as the learning curve because that’s how they can offer value.” 

An SEC investigation sometimes will begin as an informal inquiry known as a “matter under inquiry” or MUI, Marcus said. In the MUI stage, cooperation is voluntary because the SEC doesn’t yet have subpoena power, she said. 

“They often do this and you want to cooperate at this juncture,” she said, adding that even though cooperation at the MUI stage is voluntary, “it’s time to stand up and get it resolved right away.” 

A firm facing an SEC investigation needs to undertake a rapid internal investigation, conducting interviews and locating key documents, Marcus said. That can help a firm’s attorneys negotiate the scope of a potential SEC subpoena, she said. 

Instead of just waiting to respond to a subpoena, firms should be proactive, Marcus said. 

“You want to be in there, reducing scope, managing costs, talking to the staff, figuring out what their priorities are and then being as useful as possible to them, because they’re going to find out anyway,” she said. 

For a matter to proceed to the formal investigation stage, SEC commissioners need to approve  the issuance of a formal order of investigation that gives the staff “that extraordinary power to subpoena documents and testimony,” Marcus said. 

On March 10, the SEC issued a final rule rescinding the ability of the Enforcement Division director to issue formal orders of investigation. The director had held that power for most of the last 16 years.

While some might suspect that the SEC’s March move could slow things down, the commission meets regularly to approve formal orders of investigation, Marcus said. 

A formal investigation typically takes a couple of years, she said. Typically, as the investigation is nearing its close, “you have a potential for what’s called a pre-Wells settlement discussion,” Marcus said.

A Wells Notice is a communication from the SEC to people or entities under investigation for potential securities law violations. Such notices advise recipients of charges the SEC is intending to bring and affords them an opportunity to provide a response known as a Wells submission.

During her panel comments, Marcus also addressed rumors she’s heard regarding SEC enforcement staff’s willingness to open new investigations. While there are rumors that “the staff can’t have any new investigations so they’re just churning cases and … the morale’s bad out there,” that isn’t true, she said. 

The staff is continuing to open new investigations, Marcus said. 

“They are continuing to do the work, they’re just doing it a lot leaner than they used to,” she said, noting the agency’s reduced headcount. 

Marcus acknowledged, however, that the number of SEC enforcement actions coming out has “dropped materially,” referencing figures included in an Aug. 21 client alert from law firm King & Spalding. 

King & Spalding’s analysis showed a total of 67 new actions filed by the SEC between Feb. 1 and July 31 of this year, which marked a 47% drop from the 127 cases brought during the same period in 2024. 

While the number of SEC enforcement actions coming out has declined,  “I do want folks to know that there are still people in chairs doing real things and they’re not just churning their old cases,” Marcus said during the panel.