SEC’s New Barrier to Formal Investigation Orders May Slow Pace

The Securities and Exchange Commission published a final rule last week reversing a 15-year-old policy that permitted the director of enforcement to issue formal orders of investigation. The rule returns the SEC to its pre-2009 methodology, in which requests for formal orders of investigation must be presented to and approved by a vote of the commissioners.

The rule, issued March 10, will likely have several ripple effects—including investigations that stay in the informal stage for longer periods of time and changes to the pace and scope of SEC investigations—but in most cases will result in compliance with the staff voluntary requests to avoid negative consequences of not cooperating.

A formal order of investigation allows the SEC staff broad authority to investigate alleged securities law violations through the issuance of subpoenas for documents and testimony. After the SEC’s failure to timely detect and address Bernie Madoff’s Ponzi scheme, the agency in 2009 decentralized its investigative power by delegating authority to issue formal orders of investigation to the director of enforcement, who subsequently delegated that power to certain senior personnel. The SEC aimed to conduct investigations more quickly and nimbly, without the need to wait for commissioners to approve or deny a request for a formal order.

This isn’t the first time that the SEC under President Donald Trump limited the delegating authority to issue formal orders. After Trump first took office, former acting SEC Chair Michael Piwowar in February 2017 withdrew the sub-delegation power to allow only the director of enforcement to approve the issuance of formal orders—though he didn’t go so far as to entirely withdraw the delegation of power. Former acting SEC Chair Allison Herren Lee then reversed this change at the start of former President Joe Biden’s term.

The new final rule strips the Enforcement Division’s director and senior officers of their ability to issue a formal order of investigation. Now, SEC enforcement staff must present the commissioners with enough factual information to allow the panel to approve the issuance of a formal order. The SEC stated the final rule “is intended to increase effectiveness by more closely aligning the Commission’s use of its investigative resources with Commission priorities.”

Although a formal order is required to issue a subpoena for documents, the SEC enforcement staff often begins with an informal investigation or a Matter Under Inquiry, both of which allow the staff to conduct a preliminary analysis to determine “whether the facts underlying the MUI show that there is potential to address conduct that violates the federal securities laws.”

During this informal stage of the investigation, staff can request the voluntary production of documents and voluntary creation of documents, such as chronologies. The staff can’t subpoena documents or testimony without the issuance of a formal order.

“Voluntary” may be a somewhat misleading term for these inquiries, though, as failure to cooperate with enforcement staff often negatively affects the company. Noncompliance could raise negative inferences about what a company or individual may be trying to conceal from the SEC—possibly forcing the staff to seek a formal order and subpoena power to compel a company to provide information.

Lack of cooperation also starts the company’s relationship with SEC staff off on negative footing, as the staff weighs degree of cooperation in considering negotiation and resolution of the matter.

With the new rule’s added hurdle to issuing a formal order, investigations may now idle in the informal stage for longer than they previously have. Enforcement staff will likely feel obligated to build a strong factual foundation before requesting a formal order from the SEC. This informal stage does present an opportunity for counsel to engage in dialogue with the staff, foster a good working relationship, and make presentations to the staff.

The new rule may also affect the pace and scope of the SEC’s investigations. Investigations may move more slowly, and companies may need to respond to more informal requests for information before a subpoena is ever issued. It’s also likely formal orders that are issued will more closely align with the SEC’s broader enforcement agenda, as they may face more scrutiny and public attention.

It’s unclear whether the rule will embolden companies and individuals not to comply with a voluntary request, thus compelling commissioner approval of formal orders solely to gain subpoena power to force compliance. Commissioners likely wouldn’t deny the issuance of a formal order against companies or individuals who refuse to cooperate with the staff’s voluntary request for information.

As a practical matter, this new rule changes the procedural landscape under which the SEC will receive information from targets of an investigation. But in most cases, a company or individual’s response to a voluntary request for information will be the same as its response pursuant to a subpoena—it will cooperate with the staff and provide documents or information to reach a favorable outcome of the investigation, whether it’s formal or informal.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Douglas Paul is partner in Akerman’s white collar crime and government investigations practice and a former branch chief in the SEC’s Division of Enforcement.

Ashley Akapo is an associate in Akerman’s white collar crime and government investigations practice.

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