SEC Reportedly Centralizing Authority to Issue Formal Investigation Orders

According to a report in the Wall Street Journal, the acting Chairman of the Securities and Exchange Commission has centralized authority to issue formal orders of investigation – a critical authority that triggers the ability of SEC staff attorneys to issue subpoenas.  The move, which was not publicized by the SEC, would curb existing powers of the Commission’s enforcement staff.

Since 2009, the power to issue formal orders of investigation had been “sub-delegated” to about 20 senior attorneys within the SEC’s Enforcement Division. However, according to the Journal report, acting SEC Chairman Michael Piwowar ordered the authority to be centralized exclusively with the Director of Enforcement.

History of the Delegation

Prior to 2009, formal orders of investigation had to be approved by a vote of the Commissioners themselves. In 2009, the Commission adopted a temporary rule that delegated authority to issue formal orders to the Director of Enforcement, who then “sub-delegated” it to regional and associate directors and unit chiefs within the Enforcement Division.  Then-Director of Enforcement Robert Khuzami said at the time that the sub-delegation was part of an effort to streamline internal processes in the wake of the finance crisis, and was designed to “expedite [the] investigation process” by granting autonomy to those “closest to the facts.”  In 2010, the Commission made the delegation of authority to the Director of Enforcement permanent under 17 CFR 200.  Under the new arrangement, the number of SEC formal orders of investigation increased dramatically, from 233 in 2008 to nearly 700 in 2016.

Acting Chairman’s Piwowar’s apparent directive to keep the authority exclusively with the Director of Enforcement is consistent with the Commission’s delegation under 17 CFR 200. It only appears to prevent the Director of Enforcement from delegating it further.

Potential Implications

It is possible that revocation of the sub-delegated authority could result in more aggressive or longer “informal” SEC investigations, which the agency calls Matters Under Inquiry (“MUI”). MUIs are typically the initial phase of an SEC investigation, when staff investigators conduct preliminary actions such as sending out requests for information to potential targets or others with relevant information.  The purpose of a MUI is for the staff to gather sufficient facts to determine whether evidence warrants seeking a formal order of investigation.

Critically, the staff cannot issue a subpoena during the MUI phase; it requires a formal order to do so. While the staff can compel production of certain records from such regulated entities as broker-dealers or registered investment advisers, compliance with a request for information by non-regulated entities is generally voluntary during the MUI phase.

Additionally, the SEC Enforcement Manual states that MUIs should generally be closed or converted into a formal investigation within sixty days.  Centralization of the authority to issue formal investigation orders to the Director of Enforcement could make it more difficult for staff investigators to obtain formal orders within the prescribed timeline.

What’s Next?

Time will tell if the issue of formal investigation orders arises during the confirmation hearings of President Trump’s nominee for Chairman of the SEC, Jay Clayton.  As of this post, the Senate Banking Committee has yet to schedule Clayton’s hearings, but when it does we’ll be watching closely to see if Clayton is questioned about this change or any other potential changes to the Commission’s investigation process.