SEC Curtails Enforcement Leadership’s Investigation and Subpoena Power, Signals Greater Commissioner Oversight Over Enforcement

On Monday, the U.S. Securities and Exchange Commission (SEC) published a final rule eliminating the SEC Director of Enforcement’s longstanding authority to issue formal orders of investigation, signaling increased commissioner control over enforcement decisions. Previously, the SEC’s enforcement director could issue formal orders of investigation to permit staff to open investigations and issue related subpoenas. That power now rests solely with the Commission itself. Though the SEC offered little explanation for the change, it stated that it seeks to “increase effectiveness by more closely aligning the commission’s use of its investigative resources with commission priorities,” based on its “experience with its nonpublic investigations.” It further stated that the rule will ensure “the utmost insight” into new cases.

In the wake of the new rule, SEC enforcement staff will need to obtain investigation and subpoena authorization directly from the Commission. This is likely to both slow and potentially reduce SEC investigations. First, it will lengthen the process for obtaining formal orders, by creating the step of seeking Commission approval to open an investigation. Second, it will concentrate the power to initiate an enforcement investigation activity in the hands of the Commission. This could raise the bar that the enforcement staff must meet prior to initiating an investigation.

The new rule passed by a contested vote, with the SEC’s Republican majority (consisting of acting Chair Mark Uyeda and Commissioner Hester Peirce) voting in favor, and lone Democratic Commissioner Caroline Crenshaw voting against. President Trump’s nominee for SEC chair, Paul Atkins, awaits a Senate confirmation hearing. If confirmed, his appointment would bring the Republican commissioner count to three. As evidenced by the current political composition of the Commission, the new formal order rule, and a spate of voluntary case dismissals in recent months, the SEC appears poised to significantly shift its enforcement priorities and operations. Though the SEC’s new regulatory agenda remains largely undefined, it has signaled a reduced appetite for enforcement in recent months, especially in the cryptocurrency space, and will likely adopt a more business-friendly posture and a lighter regulatory hand at large.

Following Monday’s rulemaking, businesses and individuals should be aware that, while SEC enforcement activity may move more slowly and with less frequency than in recent years, enforcement staff may nevertheless request the informal or voluntary production of witness statements or documents. If contacted with such a request, it is important to seek counsel, including on the advisability of voluntary cooperation with the SEC absent a formal order.