Delegation and Accountability at the SEC

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday October 7, 2009 at 9:02 am
  • Print
  • email
  • Twitter

(Editor’s Note: This post comes to us from Russell G. Ryan of King & Spalding LLP.)

Investors and lawmakers have been clamoring for a more aggressive and nimble SEC, and it looks like they’re about to get it. But at what cost?

In August, the Commission and its enforcement director announced a series of bold new measures designed to expedite investigations, create specialized units to focus on priority cases, and flatten out management of the enforcement division.

Among those measures was a new SEC rule – adopted for a one-year trial period – which for the first time delegates to the agency’s enforcement director the legal authority to issue “formal orders of investigation” without first getting approval from the politically-appointed commissioners. The director himself announced that he will sub-delegate this new responsibility to other senior officials who report directly to him.

In SEC investigations, “formal orders” are significant mostly because they empower staff investigators to issue judicially enforceable subpoenas that require people and companies to turn over documents and give sworn testimony. Without such an order, the staff must rely entirely on voluntary cooperation to obtain information.

Delegation of authority to issue these orders will undoubtedly serve its intended purpose of enabling SEC enforcement staff to act more swiftly and authoritatively in the early stages of their investigations. But the move represents a dramatic departure from historical SEC practice and raises broader questions about delegation and accountability at independent federal agencies.

Like many independent federal agencies from the New Deal era, the SEC exercises a number of quasi-legislative and quasi-executive functions, yet for the most part operates autonomously from either Congressional or Presidential control. Its five commissioners (including its chairman) are appointed by the President for staggered five-year terms and must be confirmed by the Senate, but neither Congress nor the President can remove commissioners from office at will. By law, no more than three commissioners can be from the same political party at any given time.

Although this structure has been upheld by the courts, independent agencies exercise law enforcement powers on inherently shakier constitutional footing than the Cabinet departments and executive agencies operating under full Presidential control, such as the U.S. Department of Justice. Moreover, a critical safeguard in this structure is the presumption that commissioners of an independent agency – the only personnel tethered to the political process by a presidential appointment and Senate confirmation – will be accountable for significant action taken by the agency and its staff.

When it comes to the SEC, issuing formal investigation orders is a sufficiently important responsibility that it should not be delegated by the agency’s commissioners.

To be sure, in one sense delegating this authority is no big deal. It’s no secret that the SEC commissioners already approve nearly all staff requests for formal orders, appropriately deferring to the staff’s judgment and familiarity with the facts warranting scrutiny. Besides, notwithstanding recent stumbles on a few cases, the high degree of competence and professionalism of the SEC enforcement staff should not be questioned. (Fair disclosure: I’m proud to say I spent 10 years of my career as a member of that staff.)

Still, the power to launch a formal government investigation is an awesome one, and the SEC commissioners should be loath to disperse it.

A formal investigation order from the SEC has real consequences that affect real people and companies. Most obviously, it allows staff investigators to force involuntary compliance with subpoenas that demand private information and sworn testimony. These subpoenas are often burdensome, and they typically require the retention of expensive attorneys. Those who fail to comply can be sued by the SEC in federal court, which brings the investigation into the public record and can ultimately lead to prosecution for contempt.

For a company, issuance of an SEC formal order can also be an event warranting public disclosure, which in turn can trigger a significant stock price decline along with the private lawsuits that often follow.

Perhaps most importantly, however, the approval process for SEC formal orders has historically given the agency’s politically-appointed commissioners their first opportunity to learn about an investigation being conducted on their watch, and to offer their insights and guidance to the investigating staff. After this initial opportunity, a typical SEC investigation proceeds for months or years entirely beyond the control – or even the awareness – of the commissioners. And except for the highest profile investigations and other aberrations, it is usually not until the very end of an investigation that the commissioners get another chance to learn about what was investigated – and even then only if the enforcement staff wants to charge someone with wrongdoing.

In any event, it has never been the need for commissioner approval that significantly slowed down the early stages of staff investigations, but rather the overly bureaucratic processes required to get that approval. Those processes were already dramatically streamlined by the new SEC chairman earlier this year without sacrificing the commissioners’ accountability in any meaningful way. As a result, even before the new rule delegating authority to the enforcement director, the SEC had already issued more than twice as many formal orders this year than it had by the same point last year.

The silver lining in the SEC’s new delegation rule is its one-year sunset provision, suggesting that the agency will reconsider the delegation next summer. In the meantime, given the serious consequences that flow from SEC investigations, the agency should adopt a systematic mechanism to allow its commissioners to monitor the investigations that will now be launched without their formal approval. The commissioners should also consider becoming more proactive than ever in asking questions and offering unsolicited informal guidance to the investigative staff concerning specific investigations. Finally, if the SEC decides to extend its delegation of formal order authority beyond the one-year sunset period, the agency should invite and consider public comments before doing so.

 

Add your comment below:

(required)

(required but not published)

RSS feed for comments on this post. TrackBack URI

 
  •  » A "Web Winner" by The Philadelphia Inquirer
  •  » A "Top Blog" by LexisNexis
  •  » A "10 out of 10" by the American Association of Law Librarians Blog
  •  » A source for "insight into the latest developments" by Directorship Magazine