SEC Regulatory Handbook Overview 3: Initiating the Inquiry and Investigation Process

I. Inquiry (MUI)

Matters Under Inquiry (MUIs) are basic and are usually conducted when the information is incomplete. Because the purpose of the inquiry is to gather additional facts to help assess whether further investigation is required, the threshold for deciding whether to open the inquiry procedure is low. To start the inquiry procedure, you generally need to go through the following three steps:

Step 1: Determine whether the inquiry may have found a sanctionable violation

SEC staff, under the guidance of an Assistant Director, shall determine whether there is sufficiently reliable information or facts indicating that the inquiry may find violations of federal securities laws that require sanctions. The basic factors to be considered in making the foregoing judgment include, but are not limited to:

• laws or regulations that may be violated;
• the heinousness of the potential violation;
• The magnitude of the possible violation;
• Potential loss or harm to the investor;
• Whether the potential victim group is a specific vulnerable or risk-tolerant group
• Whether the violation continues;
• whether the offence can be effectively investigated and completed within the statute of limitations prescribed by law;
• Whether other enforcement agencies, including federal or state law enforcement agencies, may be better suited to investigate the matter.

In particular, the question of whether U.S. investors are involved does not in itself affect whether inquiries are opened.

Step 2: Assess who is in charge of the appropriateness

It is up to the staff assigned to the assessment to determine whether their organization is fit to take charge of this matter based on existing resources. Factors to be considered in making the foregoing judgment include, but are not limited to:

• The place where the violation occurred;
• The location of the potential offender;
• The location of the headquarters of the issuer, enterprise or related institution;
• The location of the majority of witnesses or victims;
• Law enforcement agencies themselves have the resources and expertise.

If a staff member considers that he or she is more suitable to conduct an investigation than other agencies responsible for similar investigations, he or she should communicate with the other agencies to decide which agency is responsible for the investigation. Exceptions include those related to prior investigations or insufficient resources to support investigations.

If a survey is found to be centered around a specific area while ongoing, consideration needs to be given to whether to transfer responsibility to the regional office or to investigate jointly with the regional office.

Step 3: Formally handle the opening inquiry

In accordance with the regulations, the procedures for opening the inquiry matter will be handled online, and the opening of the inquiry procedure will eventually be approved by the assistant director, regional director or department head according to different matters and regions.

An inquiry procedure is generally closed or transferred to an investigation procedure within 60 days of its initiation.

Investigation

Investigations are initiated through two channels, one is from inquiries to the investigation procedure, and the other is to open the investigation procedure directly.

(1) How to decide to open the investigation procedure

Analysis of whether to open the survey procedure is different from determining whether to open an inquiry, the inquiry can be opened based on very limited information, but the investigation may only be opened after additional information collection and analysis. To determine whether a survey is open, the following questions need to be considered:

1. Do the available facts show that there was fraud or other serious violations of federal securities laws?

2. If so, whether the resources invested match the following:

(1) The magnitude or nature of the illegal act;

(2) The number of victims;

(3) Potential or incurred losses of investors;

(4) the amount of profit or avoidance of loss for potential insider trading;

(5) For potential financial reporting violations, what is the significance?

3. If yes, then whether the following circumstances exist for this illegal act:

(1) Ongoing; or

(2) Within the statute of limitations.

In addition to the above questions, the determination of the seriousness of an offence can also be determined by the following supporting factors:

• Is it necessary to take immediate steps to protect investors?
• Does the violation affect the fairness or liquidity of the U.S. securities market?
• Does the SEC or regulatory authorities believe the matter needs to be prioritized?
• Will this case achieve the SEC and regulatory phased goals?
• Does this case involve a widely adopted practice within the industry that should be identified?
• Does this provide an opportunity for the SEC to learn about the SEC in a region unfamiliar with the protections provided by the SEC or securities laws?
• Does this case provide a very good opportunity to cooperate with other civil and criminal law enforcement agencies?

In addition, whether a U.S. investor is involved in it does not in itself affect whether a survey is opened.

Formal Oders of Investigation

U.S. securities laws give the SEC or any SEC-authorized officer the power to summon witnesses to provide documentation and affidavit as detailed in Section 19(c) of the Securities Act, Section 21(b) of the Securities Exchange Act, Section 209(b) of the Financial Advisers Act, and Section 42(b) of the Investment Companies Act. The SEC authorizes staff to act as officers exercising investigative powers on behalf of the SEC by issuing a Formal Order of Investigation.

Formal investigation orders have two important functions:

1. describe the nature of the investigation authorized to be conducted;
2. Specific officials expressly authorized to exercise investigative powers on behalf of the SEC, staff members inscribed on formal investigation orders have the authority to administer oaths and oaths, call witnesses and force witnesses to be present, gather evidence, and request documents and other information within the scope of the investigation.

The SEC empowers the Director of Regulatory Affairs to decide whether to issue a formal investigation order. Formal investigation orders are issued by the Secretariat with the approval of the Head of The Ministry of Control.

SEC Rule 7(a) on Investigations provides that a person who is compelled or required to provide documents or testify in a formal investigation procedure has the right to request that a formal investigation order be presented to him. However, a copy of the formal investigation order may not be provided for the aforementioned person for his or her retention unless approved in writing by the Assistant Director or a higher-ranking official.