The Securities and Exchange Commission recently enacted a rule revoking its 2009 policy that enabled the Director of Enforcement to independently issue formal orders of investigation. The procedural change reverts authority back to the SEC commissioners, requiring their vote for such orders to be issued. This decision is anticipated to extend the duration of informal investigations and potentially alter the pace and scope of SEC enforcement actions.
A formal order authorizes the SEC’s staff to issue subpoenas for documents and testimony, serving as a critical tool in probing alleged violations of securities laws. Prior to the change in 2009, delays in obtaining formal orders had hindered the SEC’s investigative agility, contributing to high-profile failures such as the Bernie Madoff Ponzi scheme. The decentralized approach was initially introduced to expedite investigations and delegate authority down the hierarchy.
The update to the rule underscores the SEC’s intent to ensure that its investigative resources are aligned with its strategic priorities. Though the effect of this change remains to be fully realized, the guidelines expect enforcement staff to conduct more comprehensive unofficial inquiries before seeking commissioner approval for a formal order. This procedural shift potentially places companies and individuals under prolonged informal examination, challenge them to respond to voluntary requests for information more promptly.
There is speculation that the rule could lead to more rigorous scrutiny of formal orders aligned with the commission’s enforcement priorities, possibly resulting in formal orders that carry increased public attention. However, whether this will embolden subjects of investigation to resist informal requests for information remains uncertain. Analysts suggest that enforcement staff might encounter more deliberate attempts by subjects to inject delays, in anticipation of a more burdensome formal order process.
Despite this added procedural hurdle, what remains unchanged is the necessity for companies and individuals involved in SEC investigations to actively engage with staff during the informal phase. Adhering to voluntary requests and fostering a collaborative relationship with enforcement officers could mitigate any adverse impacts of protracted inquiries. For a more detailed discussion, see the analysis by Douglas Paul and Ashley Akapo from Bloomberg Law.