The SEC issued a rule amendment removing the enforcement director’s authority to issue formal orders of investigation.
“This amendment is the result of the Commission’s experience with its nonpublic investigations,” the rule, issued March 10, states. “The amendment is intended to increase effectiveness by more closely aligning the Commission’s use of its investigative resources with Commission priorities.”
The SEC first delegated the authority to issue such orders of investigation to the enforcement director in 2009, according to the rule.
However, the amendment removes that authority.
"The Division of Enforcement operated for 40 years without delegated authority," an SEC spokesperson said in an emailed statement. "We are returning to how the Division operated for most of its existence, ensuring the Commission has the utmost insight into the cases we bring throughout the process.”
However, "I would like to see a better explanation for why this is necessary," said Urska Velikonja, a law professor at Georgetown University Law Center. As the rule amendment notes, the enforcement director has had such authority since 2009, "and I haven't heard a case for what's wrong...such that an abrupt change is necessary at this time."
The issuance of the rule amendment follows a recent report from Reuters that SEC lawyers now must seek permission from commissioners before issuing a formal order of investigation — a change in procedure that could slow down the investigations process.
“The Commission issues formal orders of investigation that authorize specifically-designated enforcement staff to exercise the Commission’s statutory power to subpoena witnesses and take the other actions authorized by the relevant cited provisions,” the rule states.
According to Velikonja, the move indicates that "if the SEC comes after you and starts investigating, all you need to do is to say no" and not cooperate with the request, as the enforcement staff then has to go to the commission to gain approval for a formal investigation, which would allow for actions such as a subpoena.
Requiring the commission's approval for a formal investigation will likely "reduce the number of investigations," and "also reduce the number of complicated investigations" because it would require enforcement staff to explain that complexity to the commission, according to Igor Rozenblit, managing partner at Iron Road Partners, a regulatory and compliance consulting firm, and former SEC staffer from 2010 to 2021.
Under former Chair Gary Gensler, Republicans and those in the cryptocurrency industry often criticized the SEC for what they called a “regulation by enforcement” approach to crypto, given the agency filed enforcement actions against many crypto firms and exchanges.
Republican Commissioner Hester Peirce, who leads the agency’s new crypto task force, said March 5 that the SEC is “trying to move away” from that approach and focus on policymaking.
On Feb. 27, the commission announced it dismissed its lawsuit against crypto platform Coinbase, and Peirce publicly supported the move.
Velikonja said the recent change to enforcement authority is likely not driven by the crypto world, however, and more likely focused on the "bread and butter cases that the SEC regularly brings" against investment advisers, investment funds and public companies.
"It's much easier for the commission, who do not directly work with these (enforcement) staff, to say, 'No, we're not going to issue a formal order of investigation. You haven't given us enough,'" Velikonja said. Ultimately, she speculated that a significant motivation behind the order was to "disempower staff."
