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Subpoenaed to Testify Before the SEC? Here’s What to Expect

defending sec complaints

If you’ve been subpoenaed to testify before the U.S. Securities and Exchange Commission (SEC), you need to make sure you are thoroughly prepared. Testifying before the SEC can be a daunting experience—even for seasoned securities industry veterans and company executives. Since testifying is typically an all-day event, it can be exhausting as well, and it is common for subpoena recipients to start making mistakes as the day progresses.

Preparing thoroughly can mitigate this risk. So can knowing what to expect. With this in mind, This article provides a step-by-step overview of the process of testifying before the SEC.

8 Steps: What to Expect When Testifying Before the SEC

While different interviewers will have different preferences and tendencies, SEC testimony typically follows an 8-step progression. Here is what to expect when you appear to testify (either in person or via teleconference) in response to an SEC subpoena:

1. Video and Microphone Check

If you are testifying via teleconference, the SEC will make sure that everyone is visible on the computer. This is important, because SEC interviewers like to have a good view of witnesses to assess their credibility when answering questions. The SEC will also do a quick microphone check to make sure that the witness’s and counsel’s computer audio is audible and clear.

2. Overview of the Process of Providing Testimony

Next, the SEC’s interviewer will briefly explain how the process will move forward over the course of the day. This typically involves providing a quick overview of the formal order, rules for testimony, counsel’s role, witness background questionnaire, interview questions, and opportunity for final remarks. In most cases, this overview is provided off of the record, as it is largely procedural in nature.

3. Going on the Record

After the off-the-record overview, the interview will go on the record. At this point, everything said will be transcribed by a court reporter and will become a part of the record. The SEC will ask the witness if they are represented by counsel and will then ask counsel to introduce themselves and provide the name of their firm and firm´s address for the record.

4. Review of the Formal Order

Once the interview is on the record, the SEC’s interviewer will show the witness a copy of the Formal Order. This will either be done physically (for in-person testimony) or virtually (for remote testimony). The Formal Order states the SEC’s authority to begin its fact-finding investigation, the SEC’s powers to subpoena witnesses for documents and/or testimony, and the alleged statutory violations that are at issue in the SEC’s investigation. For example, this may include selling unregistered securities or misleading investors in violation of the Securities Act of 1933 and Exchange Act of 1934, or providing investment advice without registering or misusing client funds in violation of the Investment Advisers Act of 1940.

5. Rules for Testimony

In addition to reviewing the Formal Order, the SEC’s interviewer will also review the rules for the witness’s testimony. The interviewer will explain the role of counsel and how counsel and the witness may communicate privately if requested, and he or she will also explain to the witness that everything is being transcribed by a court reporter

6. Review of the Background Questionnaire

Before you are scheduled to testify, you will receive a Background Questionnaire to complete in advance. The Background Questionnaire will require you to disclose personal information (name, spouse, and children); phone numbers and residences from the past three years; social network profiles; your involvement in any publicly or privately-held companies; securities accounts; bank accounts; whether you have been involved in any prior proceedings; and your educational, professional (i.e., licensing), and employment histories.

When you appear to testify, the SEC’s interviewer will ask the following questions regarding your completion of the Background Questionnaire:

  • Did you fill out the Background Questionnaire?
  • Did you have any help filling out the Background Questionnaire?
  • Is everything in this Background Questionnaire truthful and accurate?
  • Do you have anything to add to the Background Questionnaire?

7. Testimony

It is at this stage that your true testimony will begin. Typically, SEC interviewers’ questions will follow a timeline of events.

For example, the interviewer may first ask how you first got involved with other key individuals involved in the case or the company at issue in the case. After establishing the connection and relationship you had with other individuals and companies, the SEC will try to assess your involvement and responsibility levels within the company. This difference between managerial level responsibilities versus ministerial/administrative level responsibilities or the difference between being a substantial equity holder versus passive investor is crucial. If you are considered far-removed from key aspects such as financial, compliance, or operational duties, the SEC will be less interested in you.

The interviewer will also ask about your thought processes and opinions. Depending on the nature of the SEC’s investigation, other key questions during your testimony may include the reasons for your investment, how your duties changed, key communications with investors, and access to investor solicitation documents.

8. Opportunity for Final Remarks

At the conclusion of questioning, the SEC’s interviewer will give the witness the option to present any final remarks. This is often a good opportunity for the witness to reiterate the strongest points of their case as well as expand on any issues painted in an unfavorable light due to the scope of the questions asked. Counsel also has the opportunity to make statements, ask the witness questions, and make any immediate clarifications to the record.

After the interview, counsel and the witness can – and should – purchase a copy of the transcript. Witnesses have a limited number of days to correct the record by making modifications or clarifications to their testimony. As a result, upon receiving a copy of the transcript, it is important for witnesses and their counsel to review the transcript in its entirety and determine whether any modifications or clarifications are needed.

What Else Do You Need to Know When Testifying Before the SEC?

So, that’s an overview of the SEC interview process. But, the reality is that this only scratches the surface of what SEC subpoena recipients need to know. Here are a few examples of additional insights that should inform how witnesses approach their SEC testimony:

  • Use of Exhibits – SEC interviewers will often show witnesses exhibits during their testimony. These exhibits may include documents, series of emails or text messages, bank account statements, or pictures. The purpose of showing exhibits to witnesses is to obtain context or additional details—assuming the witness recalls details of the exhibit in the first instance.
  • Periodic Breaks – There will, of course, be periodic breaks as well as a longer lunch break. Before everyone departs for a break or lunch, SEC staff will make clear that everyone is taking a break and that everyone is going “off the record.” Prior to resuming the interview, SEC staff will announce that everyone is going back “on the record.” The interviewer will then confirm that there have been no substantive conversations between the witness, SEC staff members, and counsel. Counsel will typically be asked to confirm this as well.
  • Post-Interview Debrief with Counsel – The SEC’s interviewer may request that counsel stay after the interview has concluded and after the witness has left in order to clarify certain issues, request additional documents, and address other miscellaneous items. Having counsel who is experienced in handling post-interview debriefs and who has an intimate understanding of the procedural and substantive issues involved in SEC investigations is imperative—as mistakes at this stage can prove costly for witnesses and their businesses.

Preparing Your SEC Testimony

Given the potential risks involved with providing testimony in connection with an SEC investigation, it is critical that subpoena recipients prepare for their interviews thoroughly. Going into an SEC interview unprepared is inadvisable for a variety of reasons—including most significantly the fact that providing incomplete information and appearing to be evasive or uncertain are both major red flags for the SEC. Don’t forget, the interviewer will be intimately familiar with the subject matter of the investigation and the specific reason (or reasons) why you are being asked to testify. Preparing levels the playing field, while going in unprepared puts witnesses at a significant disadvantage.

What does it take to prepare effectively to provide SEC testimony? Among other things, witnesses should work with their counsel to anticipate questions and craft appropriate responses. Witnesses should review potential exhibits as well; and, if there are any concerns that the witness could face prosecution as a result of the investigation, interview preparations should be part and parcel of a broader defense strategy.

Speak with an SEC Defense Lawyer at Oberheiden P.C.

If you have received an SEC subpoena, our lawyers can help you prepare, and we can represent you throughout the SEC’s ongoing investigation. To speak with an SEC defense lawyer at Oberheiden P.C. in confidence, please call 888-680-1745 or request a consultation online today.

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