What is a Wells Notice?

A Wells notice is a letter informing a company that it is under investigation for possibly committing a violation related to finances or financial reporting. The letter is not a necessity, but in the United States, the Securities Exchange Commission (SEC) and National Association of Securities Dealers (NASD) make it a standard part of their procedure. The Wells notice is often used as the first step in enforcing provisions under the Sarbanes-Oxley Act of 2002 and other similar regulatory laws.

The Wells notice includes many key pieces of information. It first tells the company what violations a regulatory agency believes has taken place. The notice may provide what the possible penalties are for the suspected violation. It also provides a way for the company's administrators to get into contact with the individual who will be reviewing the violation.

Typically, the Wells notice deals with violations that are considered to ethical in nature, such as misreporting spending, profits or other key financial information. It may not be sent if regulators believe a company may have simply made a mistake in its reporting. Therefore, a Wells notice is a key indicator that the SEC or NASD believe the company committed purposeful fraud.

Should a company to respond to a Wells notice, the first step is to gather all necessary information about the case. Next, the company must contact the person who will be making the decision. This person's contact information is listed on the notice. This is usually done via a letter, though verbal conversations may also take place during the process from time to time. If a company fails to respond to the notice, it will likely be found in violation of the charges and subjected to civil penalties.

If administrators believe the company has been wrongfully convicted and assessed fines after receiving a Wells notice, the next step is to take the matter to a court. The jurisdiction of such matters typically lies in a federal court, rather than a local or state court. Most laws dealing with financial matters are passed on the federal level.

Only publicly-traded companies will receive a Wells notice because its main purpose is to protect investors from fraudulent practices. If a privately-held company is engaged in fraudulent activity, that is likely to be handled by another agency, such as the Internal Revenue Service. Private companies are still subject to some of the same requirements as public companies, but procedures for enforcement could be slightly different, depending on the situation.