Ruling on Disclosure of Wells Notices Under Federal Securities Laws

Public companies have long faced a dilemma of whether and when to disclose the receipt of a Wells Notice from the Division of Enforcement Staff of the Securities and Exchange Commission. Until recently, companies had little formal, or even informal, guidance to consult. On one hand, the SEC had never brought an action in connection with the failure to disclose receipt of a Wells Notice, and no court had weighed in on whether a company has a duty to do so under the securities laws.

On the other hand, Regulation S-K, Item 103 provides that a public company must “[d]escribe briefly any material pending legal proceedings…known to be contemplated by governmental authorities.” 17 C.F.R. §229.103. While a Wells Notice may signal an increased risk of an enforcement action in that it means the staff is likely to recommend that the commission vote to approve an enforcement action, the commission is solely responsible for initiating an enforcement action, not the staff, and has in some instances declined to approve the staff’s recommendation.