SEC Enforcement Director Loses Obama-Era Subpoena Authority

The Securities and Exchange Commission’s top brass will exercise stricter control over investigations into US public companies as the Trump administration rolls back a 2009 policy that delegated subpoena power to the securities cop’s enforcement chief.

In a final rule adopted last week, the SEC removed its enforcement director’s authority to issue formal orders of investigation that enabled staff members to slap subpoenas on companies and individuals under investigation. Moving forward, those orders will require a commissioner’s blessing.

“The Commission, by removing sub-delegated and delegated authority, does get earlier insight into what types of investigations are being conducted and early ability to weigh in on whether formal order authority should be granted,” said Akita Adkins, of counsel at Steptoe LLP and a former senior counsel in the SEC’s enforcement division.

The SEC rule change comes after Mark Uyeda—the agency’s acting chairman—asked enforcement staff members earlier this year to declare that a case against multibillionaire Elon Musk over his acquisition of Twitter wasn’t motivated by politics, as reported by Bloomberg News.

Musk, whose Department of Government Efficiency is now looking for ways to slash the SEC, accused the agency under the Biden administration of using its subpoena power to “harass” him.

The SEC had authorized the enforcement director to approve subpoena orders as part of a broader shakeup in 2009, after the agency failed to prevent Bernie Madoff’s Ponzi scheme and faced broader charges of acting sluggishly.

“The Division of Enforcement operated for 40 years without delegated authority,” an SEC spokesman said in an email. “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.”

SEC staff members who handle investigations will still be able to seek voluntary testimony from regulated entities under the new rule, published March 14 without public comment. Companies and individuals are unlikely to object to such requests, given the lingering possibility of a subpoena and such incentives as cooperation credits.

“I do think there is a change in terms of whose desk it lands on, but there is still a requirement that the staff, in seeking a formal order, write a memo detailing the reasons for seeking formal order authority and the alleged violations of federal securities laws they believed to have occurred,” Adkins said.

‘Tightening the Reins’

The final rule cited the SEC’s experience with nonpublic investigations as context for deleting the delegated formal order authority, reversing course on who can empower staff to subpoena witnesses or compel the production of certain information from regulated entities.

“The commission’s decision to revoke delegated authority appears to reflect a desire for it to be more involved in the allocation of resources by the enforcement division,” said Steven Peikin, a partner at Sullivan & Cromwell LLP and former co-director of the division.

“For the past 15 years, the delegation of authority reflected a general deference to the staff’s decision of what matters to investigate,” Peikin said. “This change reflects a move in the other direction.”

Reverting to the pre-2009 norm underscores Uyeda’s aim to focus commissioner oversight more keenly on investigations that may require subpoenas for certain information, while others will continue to rely on voluntary participation.

“They’ve been very focused on improving capital-raising and making the public markets more attractive, and one piece of that is reassuring companies that they won’t be penalized for inadvertent disclosure missteps,” said Liz Dunshee, a shareholder at Fredrikson & Byron PA who focuses on securities law compliance. “Tightening the reins around when a formal investigation is launched probably fits into that overall objective.”

The SEC under Trump-appointed leadership is widely expected to target traditional fraud rather than disclosure-based infractions, setting itself apart from Biden-era Chair Gary Gensler and perceptions he was too aggressive cracking down on climate and other disclosures.

Stripping the enforcement director of the delegated order authority may have the unintended consequence of shifting more investigations toward regulated entities that are already required by the SEC to respond to information requests, according to Melissa Hodgman, a partner at Freshfields LLP and former associate director in the SEC’s enforcement division.

But SEC probes can also accomplish a lot informally without an order, she noted.

“Gary and the commission already took formal order authority off the plates of the associate directors, so it had already been pulled to the director level,” she said. “My teams and I did investigations soup to nuts without getting a formal order.”

Shifting Perception

The new administration has taken several steps to set itself apart from Gensler-era priorities and processes, such as refashioning a unit formerly focused on crypto enforcement actions to a smaller outfit for cyber-related fraud.

“There was a perception during the time that Gary Gensler was chairing the SEC that companies were facing a lot more investigative scrutiny and having to respond to onerous requests based on what some people might call foot-faults,” Dunshee said. “It’s reasonable to think that under the current leadership that they don’t want companies to have that perception.”

Those that do hear from the SEC will likely continue to comply and cooperate with informal requests from agency staff members, even without a formal investigation or subpoena, securities lawyers said.

Regulated entities may also welcome the shift as part of a broader move away from disclosure-based enforcement.

“That’s what people are expecting, that there will be fewer enforcement actions downstream,” Dunshee said. “With delegated authority it could just be a few days for the enforcement director to sign off on it, but seeking formal authority will take longer.”