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Several sources have reported that Acting SEC Chair Michael Piwowar recently issued a directive mandating that only the Acting Director of the Division of Enforcement can authorize the issuance of formal orders of investigation, the means by which the SEC authorizes its investigative staff to issue subpoenas. [1] The change—which reportedly strips approximately 20 Enforcement Division senior officers of the power to authorize formal orders—was not announced publicly and is not reflected in the SEC’s Enforcement Manual.
If these reports are accurate, however, what lessons may be drawn from the change? Initial reactions have largely focused on whether centralizing formal order authority with the Acting Division Director reflects an effort to slow the pace of SEC investigations. But this assertion seems incomplete at best, and may largely miss what is really going on. It’s hard to draw definitive conclusions from a non-public action of an Acting Chair without the input of the Commission’s full five-member complement; but we believe the reasons underpinning this reported interim effort are more nuanced than a simple desire to roll back enforcement:
- First, this change may be driven in part by the two sitting Commissioners’ basic desire to have better visibility into the SEC’s enforcement program. Under the current system, the SEC Chair appoints the Enforcement Director, largely controls the Commission’s enforcement agenda, and therefore has tremendous visibility into nuts and bolts decisions within the Enforcement Division. By contrast, the other four Commissioners’ involvement in enforcement investigations is practically constrained to voting on the recommendations on actions placed before them. It is now safe to say that Acting Chair Piwowar (a Republican) and Commissioner Kara Stein (a Democrat) will have tighter control and oversight of decisions regarding formal order authority flowing from a single, high-level official.
- Second, it is likely too simplistic to assert that the Acting Chair Piwowar acted solely to slow the pace of enforcement. His concern may well also be animated by the time and expense imposed on recipients of sweeping subpoena demands. Centralization of formal order authority may impose some weighing of costs and benefits before the staff employs compulsory process.
- Third, even if the full Commission ultimately reclaims formal order authority, the impact on enforcement actions may not be as significant as some project. While the issuances of formal orders increased significantly since the Commission delegated authority in 2009, the total number of enforcement actions—the more relevant metric—grew at a much slower pace and average investigation time has flat-lined over the past several years. Thus, it is not clear that more formal orders result in more significant, or faster, enforcement outcomes. Plus, many regulated entities (such as broker-dealers) are required by law to produce documents to the staff even absent a subpoena, and many non-regulated entities view it in their interest to comply voluntarily with information requests. These factors, together with the hesitancy of any post-Madoff Commission to stand in the way of thoughtful efforts by staff to gain subpoena authority, mean that even a reversion to full Commission review may not have much impact.
Time will tell if this is a one-off change to recent SEC practice or if the SEC will take additional steps to centralize enforcement decision making. The views of Jay Clayton, President Trump’s nominee to head the SEC, on this subject are unknown. What seems clear is that one Commissioner with more than two years left on his term believes that, at a minimum, the Commission should have a greater role in overseeing formal order authority, and he is unlikely to be shy about sharing his views with the incoming Chair.
Endnotes
1From 2009, formal order authority had been delegated to the Division Director and approximately 20 senior officers in the Enforcement Division. Prior to 2009, only the Commission could authorize the issuance of a formal order.(go back)
