Wells Notice – What it is, definition and concept

A Wells notice is the notice issued by the SEC and NASD, which is intended to notify a listed company that it will be investigated because there is evidence or the possibility that it has violated the law.

In the United States, the Securities and Exchange Commission (known by its acronym in English, SEC) and the National Association of Securities Dealers (for its acronym in English, NASD) are the bodies that regulate and ensure that no listed company can break the law.

When these bodies consider that a company may have violated the law and wish to initiate an investigation to clarify the facts, both bodies send a letter to the company they are going to investigate, which we know as a “Wells notice.”

In a way, Wells’ notice is part of the procedure these bodies follow when launching an investigation. In a way, it is the first step in such an investigation.

What is a Wells notice?

Wells’ notice is a formal notice, so it is served through a letter issued by the SEC and NASD.

In this letter, the addressee, the company, is informed that infractions have been detected after a preliminary investigation, and that it is intended to initiate a thorough investigation to take action against the company for breaching the regulations.

Let’s imagine a company that has made up its accounts, so that they do not offer a true vision of the company, at the same time that it can mislead investors.

These infractions are described in the notice, and the process that the SEC and NASD propose to sanction this company is described. Sometimes the possible sanctions that could be taken against you are even described.

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Likewise, the notified person is offered the possibility of defending himself against these accusations. To do this, offering you the possibility to do so by presenting Wells, which we will see later.

Who can get a notice from Wells?

Wells’ notice can only be received by listed companies, that is, listed on the US stock market.

Therefore, if the company is not public, it can never receive a notice from Wells.

In any case, you could receive a similar notice, but this would not be issued by the SEC and NASD, but would be issued by another body, and under a different name.

Wells presentation

When a business receives a notice from Wells, it may not agree with what it reports.

In case the company does not agree, it has 30 days to write a legal document and justify the facts before the corresponding bodies.

If the company decides to submit the brief, this writing by the company is known as a “Wells filing.”

In this, the company must justify, with arguments, that the actions described in the notice have not been carried out, or that, if they do, the actions carried out have not violated the law.

In this way, if the legislation has not been violated, the SEC could drop the charges. In practice, however, the SEC rarely sends a Wells notice if it is not clear that Wells has violated the regulations. For this reason, we speak of a reliable indicator that a company has committed a crime.

To give us an idea, 80% of those who received a Notice from Wells during the period 2011-2013 committed violations.

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When this occurs, all information is public, so interested parties can refer to Wells’s notice and presentation, as well as the entire process.

Origin of the Wells notice

Wells’ notice is named after the name of the committee charged with reviewing the enforcement policies and practices of the Securities and Exchange Commission (SEC), the Wells Committee.

Also, this committee was so named due to the fact that it was chaired by John Wells.

The Wells Committee began its activity in 1972, after being approved by the then president of the SEC, William J. Casey.

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