“To disclose, or not to disclose” – that is the question your good client Hamlet puts to you. He is the General Counsel of Polonius, Inc., and this time he is trying to figure out whether Polonius should disclose receipt of a Wells notice. Here’s how you can help Hamlet sort through his dilemma.

What is a Wells notice?

A Wells notice is a key milestone in an SEC enforcement investigation. In a Wells notice, which typically is provided orally and in writing, Staff members of the SEC’s Division of Enforcement:

• notify a person involved in an SEC investigation that the Staff intends (at least tentatively) to recommend that the SEC bring an enforcement action against that person;
• describe the potential violations that might be included in the Staff’s recommendation; and
• describe the opportunity the recipient has to submit evidence and argue against such a recommendation in a “Wells submission.”

For more information on the Wells process, see Section 2.4 of the Enforcement Manual published by the Division of Enforcement.

What are a public company’s disclosure obligations in connection with a Wells notice?It’s ultimately a question of materiality, which depends on all of the facts and circumstances, including whether the company or an individual officer or director received the Wells notice.

The decision to disclose receipt of a Wells notice aimed at a company could flow from a number of considerations, including judgments as to anti-fraud and overall materiality. Regulation S-K may also be relevant, since it requires disclosure of “material pending legal proceedings,” including “information as to any such proceedings known to be contemplated by governmental authorities.”

By contrast, the answer may differ if an individual officer or director received the Wells notice. Although Item 401(f) of Regulation S-K requires disclosure of certain legal proceedings involving directors, director nominees or executive officers, it does not (unlike Item 103 of Regulation S-K) require disclosure of legal proceedings “known to be contemplated by governmental authorities” against individuals.

To be sure, Hamlet may come to the conclusion that materiality considerations tip the balance in favor of disclosure. Under both scenarios, companies may decide to update prior disclosure relating to an investigation.

Anything else I should know?

Yes. Before you suffer the slings and arrows of the Wells process, be sure to coordinate with your litigation colleagues. They will be all over the issues in the Wells notice – which comes after the enforcement process has been underway for some time – and can provide helpful counsel in sorting the disclosure would look like. After all, there are more things in heaven and earth than are dreamt of in your philosophy.