Reuters is reporting exclusively that, according to its sources, under the new Administration, some Enforcement staff at the SEC “have been told they need to seek permission from the politically appointed leadership before formally launching probes,” marking a “change in procedure that could slow down investigations.” According to Reuters, some Enforcement staff have recently “been told that they will need to seek the Commission’s approval for all formal orders of investigation, which are required to issue subpoenas for testimony or documents.” Previously, Reuters reported, authority to formally launch investigations had been delegated to Enforcement directors or other senior staff, including even supervising attorneys; during the first term of the current Administration, the “SEC required approval by its two enforcement [co-]directors to formally launch probes.” However, the article indicates, Enforcement staff may still conduct informal investigations, including requesting information. The article indicates that Reuters was unable to determine whether these new instructions were the result of a formal SEC vote to “revoke the delegation of that authority, or who ordered the change.” Reuters suggested that “the change does not necessarily mean fewer investigations will be launched, but it means the Commissioners are taking more control over enforcement earlier in the process.” Reuters speculates that the move might reflect an effort to end the “weaponization” of government. Or, perhaps this move might also presage a “lighter touch” by SEC Enforcement under the new Administration?
As you know, the SEC currently has only three commissioners—two Republican appointees and one Democratic. According to Bloomberg, the “SEC is unlikely to adopt big rules or roll back old ones until another Republican joins the agency. Caroline Crenshaw, the SEC’s lone Democratic commissioner, effectively holds a veto over agency rulemaking….A three-member commission can only advance a regulation if all the commissioners participate in a vote to do so, unless there’s a recusal or disqualification, according to SEC quorum rules.” As a result, it likely won’t be until the new nominee to head the SEC, Paul Atkins, is confirmed that we begin to see the full impact of the new Administration on Enforcement.
And there is every indication that, under new management, the SEC will have a different approach to Enforcement. This article from Reuters reports that, according to a review of records for 28 months during 2006 to 2008, Atkins’ final years as a commissioner, he “voted against at least 10 enforcement actions punishing individuals and companies”—including some well-known, very large companies—votes that “defied his fellow Republican agency chairs.” The article suggests that “Atkins disapproved of more than twice as many actions as Democratic commissioner Roel Campos, while Democrat Annette Nazareth and Atkins’ fellow Republican Kathleen Casey did not dissent on enforcement matters at all during those months.” (Of course, dissents were certainly less common during that period than they seem to be in today’s more partisan climate.) Three former SEC Enforcement staff told Reuters that “Atkins was fastidious, scrutinizing proposed enforcement actions word by word and frequently pushing back on SEC staff who recommended bringing charges.” One former SEC official told Reuters that “Atkins would negotiate corporate penalties with staff, often pushing for a focus on fines for individuals over companies.” As a commissioner, “Atkins made no secret of his mistrust of much of the SEC’s process for probing and disciplining rule-breakers, arguing that corporate fines unfairly penalize shareholders and that the SEC should focus on individual fraudsters. He became well-known for his industry-friendly views, even as the agency grappled with the fallout” from major accounting scandals and the financial crisis during the period. Atkins “also argued that enforcers often pursued minor infractions, suggesting in a 2008 speech that they did so to pad enforcement figures, and that enforcers were not transparent about the evidence they had on targets. ‘Where there are serious violations, enforcement action is necessary, but the goal should be to work with firms to build their internal compliance,’ he said.” The WSJ also reported that, in 2006, “Atkins supported a set of SEC guidelines that suggested sparing use of penalties against public companies. He favors suing individual wrongdoers instead, arguing that forcing companies to pay fines hurts shareholders.” Under Atkins, Reuters contended, the “SEC will likely focus on misconduct that causes direct investor losses, such as scams, rather than corporate malfeasance where the harm is not always immediately obvious, the sources said. Critics say such an approach is dangerous because big companies can pose systemic risks and are capable of large-scale harm to investors.”
As noted above, more recently, dissents from commissioners have become much more common, providing a clearer indication of their views—and prefiguring their potential positions on similar issues during the new Administration. With regard to Enforcement matters, Commissioner (now Acting Chair) Mark Uyeda and Commissioner Hester Peirce have often issued dissenting statements. For example, they dissented in a series of actions against companies adversely affected by SolarWinds, arguing against charging victims of the cyberattack over omission of disclosure that the dissenters considered immaterial, in effect, a kind of regulation by enforcement. (See this PubCo post.) Similarly, the two Commissioners dissented in a matter charging McDonald’s with failure to disclose that the company exercised discretion in terminating its CEO “without cause,” allowing him to “retain substantial equity compensation.” The dissenters viewed McDonald’s as “the victim” of deception by the CEO, not as a “securities law violator,” contending that the SEC invoked “a novel interpretation of the Commission’s expansive executive compensation disclosure requirements.” They were concerned that the SEC’s action “creates a slippery slope that may expand Item 402’s disclosure requirements into unintended areas—a form of regulatory expansion through enforcement.” (See this PubCo post.) In another example (see this PubCo post), they dissented regarding charges against a company for inadequate internal accounting controls, contending that the SEC was interpreting the term too broadly—a kind of Swiss army knife—a “multi-use tool handy for compelling companies to adopt and adhere to policies and procedures that the Commission deems good corporate practice.” (See this PubCo post.)
And, in her recent prescription for a “path back to normal” (see this PubCo post), Commissioner Peirce suggested that the SEC should “refrain from using enforcement actions to override managerial decision-making.” In this context, she was referring to the use by the SEC of enforcement to potentially “become a subtle mechanism for the Commission to insinuate itself into corporate management.” Examples she cited here were the SEC’s “aggressively broad interpretation of Exchange Act Section 13(b)(2)(B)’s internal accounting controls provision” and broad use of Rule 13a-15(a), “disclosure controls and procedures,” especially in the absence of any charges against the company for misleading disclosures. (Charging a 10b-5 violation, she noted, would have required a finding of scienter.) “By requiring companies to establish disclosure controls for information that is not important for disclosure purposes,” she argued, “the Commission ‘seeks to nudge companies to manage themselves according to the metrics the SEC finds interesting at the moment.’…Restoring the internal accounting controls and disclosure controls and procedures requirements to their important, but limited intended purposes is a change in the right direction to rein in the scope of enforcement actions.” (See this PubCo post, this PubCo post, this PubCo post, this PubCo post, this PubCo post and this PubCo post.)
