The SEC Departs from an Important Safeguard

by Wayne M. Carlin for The Harvard Law School Forum, September 2nd, 2010.

Recently, the SEC made permanent the delegation of its statutory formal order investigation authority to the Director of the Division of Enforcement. This delegation, which the Enforcement Director has sub-delegated to senior enforcement staff, essentially transfers the SEC’s broad authority to invoke its subpoena power to numerous of its enforcement staff without any apparent oversight.

There is a serious question whether the delegation is authorized under the relevant statutes. Congress gave the power to the Commission (not the staff) to define the scope of a formal investigation and to establish limits within which the staff could resort to compulsory process. In short, the requirement of a formal order is a structural mechanism to keep the staff’s subsequent investigation and use of subpoena power within certain confines. Subpoenas are enforceable only to the extent they seek information which is reasonably relevant to matters within the scope of the formal order, but the staff now defines the scope of their own inquiry. As a result of this delegation and other delegations of authority to the Division Director and senior enforcement staff, the staff can start a formal investigation, subpoena anyone for anything, enforce the subpoena judicially and close the matter with no Commission involvement or oversight.

Now that the delegation is permanent, it is incumbent upon the Commission to indicate how it oversees these important investigative processes. For example, are there any formal investigations which the Division Director is required to bring to the Commission for approval? Is there any subsequent reporting to the Commission of the number and types of formal investigations? (continue reading… )


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