This week reports surfaced that a major shift in the SEC enforcement division had taken place – behind the scenes.\u00a0 The timing is quite interesting as the agency\u2019s annual seminar and SEC Alumni dinner will occur at the end of the month.\u00a0 No doubt this will be a topic, among many, of the annual SEC cocktail regulars in DC.<\/p>\n
The reports indicate that the Acting Chairman Michael Piwowar has centralized the power of the enforcement division to \u201cissue subpoenas or formally launch probes,\u201d as Reuters put it.\u00a0 The question that has been asked is \u2013 What does all of this really mean, really?\u00a0<\/p>\n
Historically, the SEC was a bureaucratic and highly centralized agency.\u00a0 Prior to 2009, the authority to commence a formal order investigation rested in Washington, DC.\u00a0 My perception, as a former member of the enforcement division, was that the SEC, unlike criminal law enforcement, was much more selective of the cases that it brought, recognizing the impact that a mere investigation would have on market participants.\u00a0 Within the context of the SEC\u2019s structure, 11 regional offices essentially reported to Washington.\u00a0 The benefit of this approach was a more consistent and, perhaps, uniform approach to enforcement decisions.\u00a0 Meaning, that it did not matter whether the request for an investigation commenced in Philadelphia or Atlanta or Los Angeles.\u00a0 The same person or group of persons were evaluating the cases and understood at a high level how the investigations fit within the overall enforcement mission or priorities.\u00a0 The shift to a central control results in better policy and more predictable enforcement division decisions.\u00a0 In theory, it does not mean the launching of fewer SEC enforcement cases.<\/p>\n
As reported, in 2009, former SEC Chairman Mary Schapiro changed the policy and pushed out the authority to grant formal order subpoena power out to more senior members of the enforcement division who were closer to the action, namely the associate directors of the SEC across the regional offices.\u00a0 The changes were part of the \u201cPost-Madoff\u201d reforms that were designed to reduce the chances that ongoing fraudulent activity would go undetected.<\/p>\n
The Acting Chairman appears to be returning to the roots of the SEC, centralizing the power and oversight back to the most senior ranks of the Enforcement Division and the Commission itself.<\/p>\n
The return to the good old days when I was in the Commission suggest that the SEC will take longer to make enforcement decisions and that fewer cases may be opened, but that is not a foregone conclusion.\u00a0 Data reported by Cornerstone Research suggests that following the 2009 policy changes, there was a significant jump in formal orders from 233 to 496.\u00a0 It may be the case that these numbers were a product of the paranoia of the time.\u00a0 Interestingly, the data that followed the next several years showed a decline in enforcement actions.\u00a0 This comparison reflects that the enthusiasm waned over time or that the policy change acted as a deterrent, or maybe none of the above.<\/p>\n
The bottom line is that the decision to centralize authority in DC may reflect a return to a more traditional role of the Commission \u2013 more regulator and less prosecutor.\u00a0 Perhaps, a particularly revealing decision will be new Chairman\u2019s selection of Enforcement Director; does he select a former prosecutor or a former SEC enforcement attorney?\u00a0 Additionally, we will look to see if the new Chairman rolls back some of the policies borrowed from the DOJ like the use cooperation agreements with individuals.\u00a0 Clearly, the times are changing, to paraphrase Dylan, but the SEC appears to be returning to its roots.<\/p>\n