Wells Notices in SEC Enforcement

Students interested in the SEC enforcement process could benefit from reviewing the Brooklyn Law School Library’s copy of The Securities Enforcement Manual: Tactics and Strategies (2d ed.) published by the ABA (Call #KF1439 .S417 2007). The manual provides comprehensive coverage of techniques for dealing with an enforcement threat from the SEC, self regulatory organizations, or state securities regulators. It describes the enforcement investigations and proceedings and provides strategies to influence the outcome of an investigation and prevent or minimize the adverse effects of enforcement actions. Chapter 3 (SEC Investigations: The Heart of SEC Enforcement Practices) explains the use of Wells Notices by the SEC with material on Wells Submissions: The Critical Step at an Investigation’s Conclusion, the Historical Background of Wells Submissions, Pre-Wells Submissions and Meetings, the Wells Submission Process, the Determination Whether to File a Wells Submission, the Wells Submission’s Role in the Settlement Process, the Preparation of a Wells Submission, Filing a Wells Submission and the Staff’s Reply, the Post-Wells Process, and the Use of Wells Submissions in Subsequent Actions.

A Wells Notice is a notification from the SEC or another regulator like FINRA or NASD sent to a respondent when the regulator intends to recommend that enforcement proceedings be commenced against it. The Wells Notice provides the respondent with the opportunity to present a case against the commencement of these proceedings. Providing a Wells Notice is not legally required but it usually the practice for regulators to do so. See Section 2.4 of the SEC Enforcement Manual for more on the Wells Process.

The use of Wells Notices dates to 1972, when SEC Chairman William J. Casey appointed a committee chaired by John Wells, commonly known as the Wells Committee, to examine and evaluate the SEC’s enforcement policies. Among the recommendations made by the Wells Committee in its Report of the Advisory Committee on Enforcement Policies and Practices was the following:

Except where the nature of the case precludes, a prospective defendant or respondent should be notified of the substance of the staff’s charges and probable recommendations in advance of the submission of the staff memorandum to the Commission recommending the commencement of an enforcement action and be accorded an opportunity to submit a written statement to the staff to be forwarded to the Commission together with the staff memorandum.

Recent newsworthy instances of the use of Wells Notices include Standard & Poors, the largest U.S. credit-rating firm, which acknowledged last September that it had received a Wells Notice from the SEC warning the firm it could face civil enforcement action for its ratings actions in a 2007 collateralized-debt obligation, a pool of subprime mortgages and other assets sold in slices to investors. S&P said it was cooperating with the SEC on the probe and that the Wells notice was “neither a formal allegation nor a finding of wrongdoing.” More recently, Puda Coal, a Chinese company facing regulatory scrutiny over its financial reporting, received a Wells Notice from the SEC that it intends to recommend administrative proceedings to suspend or revoke the registration of its securities for failure to comply with certain rules under the Securities Exchange Act of 1934. The SEC offered Puda an opportunity to make a Wells Submission no later than January 16, 2012 setting forth any reasons of law, policy or fact why it believes the administrative proceedings should not be brought.