A notice from Wells is not a final determination of guilt or wrongdoing, which means that the recipient has an opportunity to respond and present a case before any administrative action is initiated. However, the Wells notice procedure is a hint that the SEC is considering action, and how it turns out could have a major impact on the recipient and tied investors.
Consider the case where the SEC is investigating possible insider trading offenses in a publicly traded company. The SEC suspects that one of the company's officials may have engaged in prohibited stock transactions before a significant announcement was made based on nonpublic information.
The SEC would issue a Notice of Wells to the suspected employee in this situation, alerting the individual to the investigation against trade violations and giving them an opportunity to refute the charges before deciding whether to take enforcement action. So what happens after a Wells notice is issued? Typically, Wells' notice would list the precise charges against the person and provide a deadline to respond to the SEC, as outlined in the steps below.
This is how the Wells notification process normally works:
Investigation
To determine whether there is good cause to take enforcement action, the SEC investigates possible violations of securities laws.
Notification
The SEC will issue a Wells notice to the person or company in question if it decides there is sufficient evidence of possible misconduct. Wells' notice will typically list the particular allegations and provide the recipient with an opportunity to respond, known as a "Wells Response."
For example, Coinbase received a notice from Wells in March 2023 from the SEC, who identified potential securities law violations in connection with some of its listed digital assets, Coinbase Earn bet service, Coinbase Prime and Coinbase Wallet. The SEC issued Wells' notice after conducting a preliminary investigation.
Answer
The recipient of Wells' notice may respond in writing or request an in-person meeting with the SEC to discuss the charges and present a defense. This response may contain supporting arguments or data to support the defense, as well as any relevant mitigating circumstances.
Decision
The SEC will decide whether to move further with the enforcement action based on the response and any other data collected. The SEC can file a complaint in federal court seeking fines or other remedies if it decides to pursue legal action or securities fraud charges.
