SEC empowers more staff to launch investigations

A decision by the Securities and Exchange Commission to allow more of the agency’s staff to launch investigations will put more demands on financial firms’ compliance operations, experts said.

In a statement Tuesday, SEC Acting Chair Allison Herren Lee said she had restored the ability of senior enforcement officers to approve a formal order investigation and to authorize staff to subpoena documents and take testimony. She said the wider delegation of commission authority would enable SEC investigators to act more quickly to detect and stop fraud.

Lee put back in place a policy that existed under the chairmanships of Mary Schapiro and Mary Jo White during the Obama administration. The delegated authority was removed during the Trump administration. The five-person SEC has a political majority that reflects the party in power in the White House.

“This is a return to the Mary Jo White era of the SEC and signals a much more aggressive enforcement division,” said Todd Cipperman, principal at Cipperman Compliance Services.

Compliance departments will have to ensure that they’re keeping careful track of documents and other records and are ready to produce them quickly if the SEC knocks on the door.

“The chances of an enforcement action and subpoena go up dramatically because of this move,” Cipperman said. “This puts more pressure on compliance professionals. Get your ducks in a row.”

Giving about three dozen senior enforcement officers the ability launch a probe instead of limiting the authority to the division’s leaders will make enforcement more agile and effective, said Melissa R. Hodgman, the SEC’s acting enforcement director.

“When the senior officer closest to the facts can issue a formal order, it improves our ability to have real-time enforcement actions, particularly with regard to preventing ongoing fraud and preserving resources.” Hodgman said.

The recent trading explosion in GameStop and other stocks of faltering companies has raised potential investor protection issues that the SEC says it is reviewing. The GameStop frenzy blew up quickly and demonstrates why SEC enforcement needs to be nimble, said Laura Posner, a partner at Cohen Milstein Sellers & Toll.

“People trade in nanoseconds, and agencies that oversee these markets need to be able to move quickly,” said Posner, a former New Jersey Securities Bureau chief.  

Pushing key enforcement decisions down from the commission to the staff level helps achieve that goal. “When  everything has to be approved by someone at the top, it takes longer, it slows down the process and, quite frankly, makes it more political,” Posner said.

Although Lee is temporarily the SEC chair, her decision to empower enforcement is a harbinger of what is likely to come under Gary Gensler, who has been nominated by the Biden administration to chair the commission. “It reflects interest in going back to a more enforcement-centric commission that is focused on rectifying harm to investors as soon as possible,” Posner said.

The SEC brought 405 stand-alone enforcement actions in fiscal 2020, which was down from 526 in fiscal 2019 and the lowest since fiscal 2015, according to agency statistics. But then-SEC Chairman Jay Clayton touted the agency’s ability in fiscal 2020 to obtain a record amount of monetary remedies despite agency staff working remotely as a result of the coronavirus pandemic.

Cipperman said enforcement generally has gotten stronger over the last 17 years, no matter which party is in the SEC majority.

“Don’t spend time gaming what you can get away with,” he said. “Enforcement [and examinations] have been aggressive in every administration.”

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