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SEC Provides Fewer Warnings of Potential Civil Action

26/10/2020 9:59am

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By Mark Maurer 

Fewer companies are receiving warnings of potential civil-enforcement actions from the Securities and Exchange Commission as businesses under investigation increasingly opt to defend themselves before receiving a "Wells notice."

The notices -- like the one General Electric Co. said it received in September over its accounting for reserves related to an insurance business it has been trying to shrink for years -- are letters of a possible enforcement action against the recipient for a securities violation, and offer the recipients a chance to respond.

But many companies are providing a defense to the SEC ahead of the Wells notice by submitting a white paper, requesting a meeting with the enforcement division or both.

"There is an equally robust pre-Wells process that has become the norm," said Jacob Frenkel, chair of government investigations and securities enforcement at law firm Dickinson Wright PLLC and former senior counsel in the SEC's enforcement division.

The SEC sent at least six Wells notices to public companies during its fiscal year ended Sept. 30, according to research firm Audit Analytics' review of corporate disclosures. During the previous fiscal year, companies disclosed no notices at all.

In the three full fiscal years under Chairman Jay Clayton, between October 2017 and this past September, the SEC sent out an average of 4.7 letters to companies, based on corporate disclosures. In the preceding 16 years -- from 2002 to 2017 -- Wells notices averaged about 14 a year, Audit Analytics data show. Over the past two decades, companies disclosed the highest number of Wells notices in the mid-2000s, when they reported a combined 55 letters in fiscal years 2004 and 2005.

Companies are required to disclose material information, but some Wells notices that are deemed immaterial may go unreported.

An SEC spokeswoman said it isn't informative to draw conclusions from the number of disclosed Wells notices, because investigations can play out in many different ways. "What is clear from a look at the cases brought to date is the vigorous work of the women and men of the SEC's Enforcement Division to combat wrongdoing, compensate harmed investors, and maintain confidence in the integrity and fairness of our markets," she said in a written statement.

Disclosure of a Wells notice informs investors that the SEC's enforcement division believes it has enough material to build a case against a company that goes beyond just an investigation. Such notices also serve as the last stage before the start of formal litigation. The Wells process and submission afford the SEC a chance to gain insight into likely defenses the company would mount, if a case were to go forward, Mr. Frenkel said.

The Wells notice usually isn't a surprise to the company under investigation. The SEC and a company's counsel have usually spoken extensively by that point. In recent months, large companies such as General Electric and Under Armour Inc. have received these warnings.

GE has fully cooperated with the SEC's investigation, a spokeswoman said in a statement. "We strongly disagree with the recommendation under consideration by the SEC staff and will provide a response through the Wells notice process," she said. GE declined to comment on its defense before receiving a Wells notice.

Sportswear maker Under Armour this summer received a Wells notice related to its past accounting practices. The company declined to comment on whether it had provided any defense to the SEC before the formal action.

Lawyers say some companies under investigation still prefer to receive a formal Wells notice in order to make a Wells submission and put their defenses and arguments directly in front of the commission.

A Wells submission, in which the recipient provides a legal defense, goes directly to the enforcement division staff, who can respond in their memorandum recommending enforcement action. Enforcement staff members send the Wells submission to the commission along with their recommendation memorandum.

The SEC decides whether to proceed with an enforcement action usually within 180 days of issuing the notice. The Wells process could lead to the SEC shaving or adjusting charges or even deciding to terminate the case.

Still, the noticeable drop in Wells notices also coincides with the regulator's shift away from a rules-based approach to disclosure.

The SEC, in the latest fiscal year, said it brought more than 700 enforcement actions. The actions may include charges, settlements and delisting proceedings related to delinquent filings. The total estimated figure marks a drop from 862 actions during the previous fiscal year, though the regulator said a significant percentage of the enforcement activity occurred during the pandemic.

Write to Mark Maurer at mark.maurer@wsj.com

 

(END) Dow Jones Newswires

October 26, 2020 05:44 ET (09:44 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.

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