The SEC Departs from an Important Safeguard

Recently, the SEC made permanent the delegation of its statutory formal order investigation authority to the Director of the Division of Enforcement. This delegation, which the Enforcement Director has sub-delegated to senior enforcement staff, essentially transfers the SEC’s broad authority to invoke its subpoena power to numerous of its enforcement staff without any apparent oversight.

There is a serious question whether the delegation is authorized under the relevant statutes. Congress gave the power to the Commission (not the staff) to define the scope of a formal investigation and to establish limits within which the staff could resort to compulsory process. In short, the requirement of a formal order is a structural mechanism to keep the staff’s subsequent investigation and use of subpoena power within certain confines. Subpoenas are enforceable only to the extent they seek information which is reasonably relevant to matters within the scope of the formal order, but the staff now defines the scope of their own inquiry. As a result of this delegation and other delegations of authority to the Division Director and senior enforcement staff, the staff can start a formal investigation, subpoena anyone for anything, enforce the subpoena judicially and close the matter with no Commission involvement or oversight.

Now that the delegation is permanent, it is incumbent upon the Commission to indicate how it oversees these important investigative processes. For example, are there any formal investigations which the Division Director is required to bring to the Commission for approval? Is there any subsequent reporting to the Commission of the number and types of formal investigations? In a recent administrative proceeding against Morgan Keegan, an ALJ found that the staff improperly issued a formal order in an effort to evade limitations on conducting an investigation of matters already subject to a pending enforcement proceeding. The order by the ALJ illustrates the genuine need for oversight of the staff’s exercise of the delegated power.

Originally, the only reason given for the delegation was to “expedite the investigative process by reducing the time and paperwork previously associated with obtaining Commission formal order authority prior to issuing subpoenas.” In the Release making the delegation permanent the Commission indicates it “considered the increased efficiency in the Division’s conduct of its investigations…” and “the Division’s continued effective communication and coordination in addressing pertinent legal and policy issues with other Commission Divisions and officers when formal order of authority is invoked.” There is no explanation of this latter consideration and it is not at all clear what the Commission meant by it or why expedience should take precedence over the Commission’s involvement in the formal order process.

The formal order delegation is a serious departure from one of the Commission’s important traditional safeguards – the Commission’s oversight of the investigative process. The Commission must provide transparency in how it is carrying out this oversight function in order to ensure there is fairness in the conduct of its enforcement program.