SEC Commissioner Piwowar Wags A Finger At Formal Investigations

November 29, 2013

Today's BrokeAndBroker blog offers two companion pieces that I recommend you read in conjunction. Both articles present recent commentary from Securities And Exchange Commissioners ("SEC") Michael S. Piwowar and Kara M. Stein.  Commissioner Piwowar raises provocative questions as to whether the SEC had ceded too much power to its staff -- and if such a relinquishment may now impinge upon due process protections. Commissioner Stein asks the often-voiced and increasingly pertinent question of whether the gatekeepers in the financial services community have historically been given far too much deference by the SEC in terms of sanctions for their misconduct.

On November 22, 2013, SEC Michael S. Piwowar delivered a speech before the Los Angeles County Bar Association Securities Regulation Seminar.  In commenting on the SEC's enforcement program, Commissioner's Piwowar remarked that (footnotes omitted):

a Commissioner "should never suggest, vote for, or participate in an investigation aimed at a particular individual for reasons of animus, prejudice, or vindictiveness."  I view this command to mean that we cannot allow public outcry, agency morale, politics, or jurisdictional turf battles to be reasons for pursuing, or not pursuing, an enforcement action.

Respectful Debate

It is refreshing and encouraging to see that a sitting SEC commissioner is mindful of the significant due process concerns that sometimes impede regulation -- that tension is part of the process and provides a critical check-and-balance against inappropriate enforcement activities.  It remains to be seen whether Piwowar's musings were merely intended to be provocative or may reflect a developing trend by him, Commissioner Gallagher, and others to impose more fairplay upon what some have seen as the SEC's wayward ways.  I welcome the robust debate likely to be engendered by Piwowar's speech, and applaud its lack of hyperbole and absence of incivility. In recent times, the infighting among the SEC's chairs and commissioners has tarnished the professionalism of that body.

Asking Some Fair Questions

Among the more provocative points raised by Piwowar was this section of his speech (footnotes omitted):

Delegated formal orders

My first observation relates to the Commission's issuance of formal investigative orders.  The Commission's power and authority to investigate under the federal securities laws is very broad.  Our Canons of Ethics recognize that the mere existence of an investigation - even without taking any subsequent enforcement action -"carries with it the power to defame and destroy."

As many of you are aware, the Commission staff can conduct an investigation either formally or informally.  In an informal investigation, the staff generally must rely on voluntary cooperation to obtain information.   Formal orders of investigation, however, authorize designated members of the staff to exercise the Commission's statutory powers to conduct investigations.  These statutory powers include the authority to administer oaths and affirmations, to subpoena witnesses and compel their attendance, to collect evidence, and to require the production of any documents the Commission deems relevant or material to the inquiry. Failure to comply with a request made pursuant to a formal order can result in being sued by the Commission in federal court and could result in prosecution for being in contempt.

Historically, formal orders have been approved by the Commission.  This process usually required the staff to prepare a memorandum for the Commission containing a summary of the case and any possible violations, and recommending issuance of the order.  Although it was rare, if ever, for the Commission to deny a request for a formal order, the process brought forth a certain level of focus and review from not only the Division of Enforcement, but also staff in the Office of the General Counsel as well as the other divisions, such as Corporation Finance, Trading and Markets, and Investment Management.

But in a significant departure from past practice, in August 2009, the Commission delegated the authority to issue formal orders to the Director of Enforcement, on the grounds that such delegation would expedite the investigative process by reducing the time and paperwork previously associated with obtaining Commission authorization prior to issuing subpoenas. This authority was in turn sub-delegated to all supervisors in the Division of Enforcement at or above the level of Associate Director or Associate Regional Director.

The initial delegation of authority was for a one-year period, in order to allow the Commission to review the Division of Enforcement's exercise of formal order authority.  Subsequently, in August 2010, the Commission made permanent the Division's authority to issue formal orders of investigation. In making this determination, the Commission cited the increased efficiency in the Division's conduct of its investigations permitted by the delegation, and the Division's continued effective communication and coordination in addressing pertinent legal and policy issues with other Divisions and Offices when formal order authority was invoked.

After the delegation, the number of formal orders jumped significantly - almost doubling between fiscal year 2008 and fiscal year 2012, with a high of 578 in fiscal year 2011. It is without doubt that obtaining a formal order has been made easier by removing the Commission from the approval process.  However, I question whether the processes currently in place are sufficient for the Commission to exercise the appropriate level of oversight of the formal order process.

I note that the initial review covered the one-year pilot program.  I am unaware of any subsequent reviews that have been performed to evaluate the continued propriety of using delegated authority for formal orders with the benefit of two additional years of operating history.  For instance, when delegated authority was initially granted, the Director of Enforcement indicated that, in appropriate circumstances, recommendations for a formal order might be submitted to the Commission for review.  However, I am not aware of any criteria and procedures for determining when such a submission would be made.  I believe a periodic review and evaluation of the formal order process using delegated authority is appropriate and necessary to effectuate Commission oversight.

Finally, the delegation of authority for approval of formal orders was deemed by the Commission to relate solely to agency organization, procedure, and practice, and therefore not subject to the notice and comment process under the Administrative Procedure Act.  The mere fact that we can institute certain rules without obtaining comment from the public does not necessarily mean that we should.  Given the significant ramifications for persons who are on the receiving end of a subpoena issued pursuant to a formal order, we should make sure that public comment is allowed on any review of the formal order process.

READ the full-text Speech.

READ the companion piece: "SEC Commissioner Stein Says Fish Stink From Head Down" (, November 28, 2013 . . . to be uploaded at 1 p.m. ET)

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