The new SEC barrier for formal investigation commands can slow down the pace

The Securities and Exchange Commission published a final rule last week in which a 15-year guideline was reversed, which enabled the enforcement director to enable formal examination orders. The rule returns the SEC to its methodology before 2009, in which applications for formal examination commands must be submitted and approved for a coordination of the commissioners.

The rule issued on March 10 will probably have several ripple effects -including studies that remain in an informal level over longer periods and changes to the speed and the scope of SEC examinations -but in most cases the voluntary inquiries from employees will lead to avoiding negative consequences of non -cooperation.

A formal examination regulation enables the SEC personnel to examine the broad authority of alleged violations of securities rights by issuing preloads for documents and certificates. After the failure of the SEC to recognize and address the Ponzi program of Bernie Madoff in good time, the agency in 2009 decentrally its authority to investigate, by delegating the authority, the director of the enforcement, which then issued this authority to certain high -ranking personnel. The SEC aimed to carry out investigations faster and nimble without the commissioners having to approve or refuse an application for a formal arrangement.

This is not the first time that the SEC under President Donald Trump limited the delegating authority to issue formal arrangements. After taking the first take office, the former incumbent SEC chairman Michael Piwowar withdrew in February 2017, in order to only enable the enforcement director, to grant the issue of formal commands-he did not go back as far as to completely withdraw the delegation of power. The former Schauspiel -Sec Chairman, Allison Herren Lee, then reversed this change at the beginning of the term of office of former President Joe Biden.

The new final rule exceeds the director of the enforcement department and high -ranking civil servants of their ability to issue a formal investigation order. Now the SEC enforcement employees have to provide the commissioner enough factual information so that the committee can approve the granting of a formal arrangement. The SEC explained that the final rule should “increase the effectiveness by using the commission's use of its investigative resources with the priorities of the Commission”.

Although a formal arrangement is necessary to issue a summons for documents, the SEC enforcement employee often begins with an informal examination or an examined matter that enables the staff to carry out a preliminary analysis to determine whether the facts on the basis of the MUI are the potential to combat the Federal Saving Laws.

During this informal phase of the study, employees can request the voluntary production of documents and the voluntary creation of documents such as chronologies. Without the granting of a formal arrangement, the staff cannot be charged or certificates.

“Voluntarily” can be a somewhat misleading term for these inquiries, since the failure to work with the enforcement employee often affects the company negatively. Failure to comply could cause negative conclusions about what a company or a person tries to hide from the SEC to force the staff to find a formal order and force a summons to force a company to provide information.

The lack of cooperation also begins the relationship between the company and SEC employees on negative feet, since the staff burdens the cooperation and solution to the matter.

With the additional hurdle of the new rule for the granting of a formal arrangement, the investigation can now be undertaken longer in the informal phase than before. The enforcement staff will probably feel obliged to build a strong factual foundation before requesting a formal arrangement of the SEC. This informal phase offers the lawyer the opportunity to promote good work relationship with the staff to dialogue and to make presentations to the staff.

The new rule can also influence the pace and scope of the investigations of the SEC. The investigation can move more slowly, and companies may have to react to informal information inquiries before a summons are ever issued. It is also likely that formal arrangements that are granted agree to the wider enforcement agenda of the SEC, since they may check more and have public attention.

It is unclear whether the rule will encourage companies and individuals not to comply with a voluntary request, which convinces the approval of formal arrangements by the Commissioner exclusively to preserve prayers to comply with compliance with the regulations. The commissioners would probably not refuse to grant a formal order against companies or people who refuse to work together with the personnel request for information.

In a practical matter, this new rule changes the procedural landscape under which the SEC receives information from targets of an investigation. In most cases, the reaction of a company or a person to a voluntary information request is in line with his reaction in accordance with a summons – it will work with the staff and provide documents or information to achieve a favorable result of the examination, be it formally or informal.

This article does not necessarily reflect the opinion of the Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax or its owners.

Author information

Douglas Paul is a partner in Akersmans White Callar Crime and Government Investigations Practice and former branch in the SEC enforcement department.

Ashley Akapo is Associate in the practice of Akermans White Callar Crime and Government Investigations.

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