Regulatory Enforcement Actions: A Special Brand of Commercial Litigation

In today’s world, businesses and their owners need to be prepared for legal threats from various sources. For example, competitors may engage in various conduct to obtain an unfair business advantage. Former employees may attempt to compete directly with their former employer in violation of restrictive covenants. Business owners may have partners that cause more harm than good to the operations of their business. And customers may elect not to pay for the goods or services received from these businesses. All of these legal risks are contemplated and weighed by businesses and their owners every day, especially when the issues escalate to the point of litigation. However, there is one source of legal risk that is often overlooked, but with potentially the most harmful impact. That risk is an investigation or enforcement actions commenced by regulatory bodies. Many businesses and their owners are not aware of the harm that can be caused from a regulatory investigation or enforcement action and as such, are not prepared for that harm when an investigation or enforcement action is commenced.

Regulatory bodies oversee the operations of most businesses throughout Minnesota. For example, the Minnesota Department of Commerce has jurisdiction over the licensing and operations of many business throughout Minnesota including those engaged in real estate, insurance and construction. The Securities and Exchange Commission (SEC) has authority over investment advisory firms and securities brokers doing business in Minnesota. The Financial Industry Regulatory Authority (FINRA) has jurisdiction and authority over registered representatives and registered broker / dealer firms registered with FINRA and doing business in Minnesota. Many businesses operating throughout Minnesota fall under the authority of multiple regulatory bodies. Therefore, everyone doing business in Minnesota must first know which regulatory bodies have authority over their licensing and operations.


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The primary regulatory body overseeing the licensing and operations of businesses located in Minnesota is the Minnesota Department of Commerce (DOC). Under Minnesota Statutes, Section 45.027, the DOC has broad investigative authority over certain types of businesses and owners operating throughout Minnesota. For example, Section 45.027, grants the DOC with the authority to commence investigations, require persons to make underoath statements in connection with investigations and examine certain records in connection with investigations. Depending on the results of the investigation, the DOC is also vested with the authority to seek and obtain injunctive relief, cease and desist orders, civil penalties and license revocation when it is determined that certain laws have been violated.

The SEC has similar authority for investigations and enforcement actions against those accused of violating federal securities laws. For example, the SEC has authority, under the Securities and Exchange Acts of 1933 and 1934, to subpoena documents from individuals without first obtaining a court order for production. The SEC also has the authority to compel an individual to appear for under-oath testimony (referred to as an OTR) in connection with an investigation governed by the Securities and Exchange Acts of 1933 and 1934. If, as a result of the investigation, the SEC has reason to believe that federal securities laws have been violated, the SEC is authorized to commence suit in federal court seeking injunctive relief, restitution, civil penalties and license revocation. Furthermore, it is not uncommon for the SEC to work closely with the U.S. Postal Service, IRS, Department of Justice and other federal government agencies with authority to seek and obtain additional relief, including the exchange of documents and testimony obtained as a result of an investigation governed by the Securities and Exchange Acts of 1933 and 1944.

Unlike the Minnesota Department of Commerce and the SEC, FINRA is a self-regulatory organization with limited authority over members of FINRA. Although FINRA’s jurisdiction is limited, its investigative and enforcement authority is similar to the Minnesota Department of Commerce and SEC. For example, FINRA has the authority to compel the production of documents and under-oath testimony in connection with an investigation of its members. If it is determined that FINRA rules have been violated, FINRA is authorized to commence enforcement action against its members for various relief including injunctions, penalties and license suspension or revocation. Much like the SEC, it is not uncommon for FINRA to work closely with other regulatory agencies where appropriate violations are alleged. FINRA is just one self-regulatory organization with governmental-like authority over its members; there are several other self-regulatory organizations with similar authority over their members in Minnesota.


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Given the broad scope of these regulatory bodies and the harm that may result from their investigations and enforcement actions, defending against such investigations or actions must be done with surgical-like precision. For example, documents produced or statements made under oath during an investigation, can and will be used against the business and business owners in the event an enforcement proceeding is commenced following an investigation. Furthermore, if the documents produced or statements made under oath become part of a public record in connection with an enforcement action, then they can also be used against the investigative target in lawsuits commenced by third parties who may claim to have suffered damages as a result of the same conduct that triggered the investigation or enforcement action.

It is not uncomment for criminal actions to be commenced against the investigative target, depending on the seriousness of the allegations. Most important is a thorough understanding of the applicable rules and procedures to ensure that information or testimony is only provided when absolutely required.


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