Who Gets Investigated? Unpacking SEC Enforcement
How does the SEC decide which potential cases to investigate before any wrongdoing is proven?Ìý
Leeds Associate Professor Nathan Marshall breaks down using FOIA data that reveals how signals of noncompliance, private‑sector scrutiny, and public trigger events shape early-stage regulatory decisions. It shows how resource constraints influence which leads are pursued, why some investigations are far more likely than others to result in enforcement actions, and how internal career incentives within the SEC affect case selection.Ìý
Nathan Marshall: I'm Nathan Marshall. Along with my colleagues Eric Holzman at Indiana University and Brent Schmidt at Penn State, we set out to understand how the SEC decides which investigations to open.
Most public attention focuses on SEC enforcement actions, but those come later. The more fundamental and often less visible decision is which leads the SEC chooses to pursue in the first place.
Understanding that process matters not just for firms, but for investors who rely on regulators to allocate scarce enforcement resources effectively.
To study this question, we built a new data set of formal SEC investigations using FOIA records. This allows us to observe investigations the public never sees, including cases that end quietly without charges, instead of only observing who gets charged.
We can now see who gets investigated from more than a decade of data. Three consistent patterns emerge.
First, indicators of potential regulatory noncompliance matter a great deal. The SEC is more likely to investigate firms with greater exposure to newly enacted regulations, those that engage in complex or innovative activities, or those facing greater pressure to beat earnings expectations. Together, these signals suggest higher case merit and stronger deterrence value.
Second, firms that attract private sector scrutiny are more likely to be investigated when analysts, the media or litigators raised concern the SEC faces higher reputational costs if it fails to act, making investigations more likely even when misconduct is uncertain.
Third, the SEC responds strongly to public trigger events, restatements, late filings, litigation, executive departures, and negative credit rating actions all sharply increase the likelihood of investigation.
Restatements and litigation in particular, stand out as especially strong triggers.
The SEC operates under real capacity constraints when regional offices are busy, investigation rates fall. Under these conditions, noncompliance signals and private sector scrutiny matter even more. While public triggers remain important regardless of workload, constraints don't change what the SEC values, but they shape what it can realistically pursue.
Importantly, the reason an investigation is opened also helps predict what happens next.
Cases driven by noncompliance signals or clear public triggers are far more likely to result in enforcement actions.
By contrast, investigations prompted primarily by private sector scrutiny are less likely to result in charges. This is consistent with the SEC opening some investigations to avoid the risk of appearing negligent, even when case merit is less clear.
Finally, we examine internal incentives. Career outcomes for SEC attorneys are more strongly linked to opening investigations, rather than to how those cases ultimately conclude.
Higher investigation rates are associated with more promotions and lower turnover, while enforcement outcomes themselves have little impact. This highlights the importance of avoiding perceived in action, and helps explain why some lower probability cases are still pursued.
By looking not just at who gets charged, but who gets investigated, we gain a clearer picture of how regulatory enforcement decisions are actually made.