Tuesday, February 21, 2017

The Piwowar Kerfuffle

Bloomberg reports that the acting Chair of the (at present, 2-member) SEC, Michael S. Piwowar, has requested an examination of delegated authority to the Staff. Delegated authority is authority nominally vested with the 5-member Commission that the Commission delegates to specific staff members.

The SEC has the statutory authority to conduct investigations of possible violations of the federal securities laws or rules, by issuance of subpoenas for documents and testimony. That authority, under the law, can be exercised by "any member of the Commission or any officer designated by it." 

The staff (since 1972 in the centralized Division of Enforcement ) has long since been delegated the authority to conduct investigations, and to suggest otherwise would be scandalous. The issue is whether the Commission should decide what to investigate with subpoena power.

Under 17 CFR § 202.5(a), formal orders of investigation are issued on a case-by-case basis to authorize the issuance of subpoenas. Until 2009, formal orders were issued by the Commission. The Staff would have to submit a memorandum recommending the issuance of the formal order and detailing the evidence, and perhaps the legal theory, justifying the necessary conclusion that it is possible that the securities laws have been or about to be violated. Formal orders were usually obtained within 3 weeks. Rarely, if ever, was the request turned down. Emergency situations requiring immediate action resulted in approval on a "walk-around" (the Commissioners' offices) "seriatim" consideration. I was involved in SEC investigations, on its Enforcement Staff, from 1973 to 1981, and never found the extra effort required to obtain Commission approval of a formal order to be a deterrence to effective enforcement. It added an extra set of eyes to review this very formidable exercise of power--not, generally, a bad thing at all.

In 2009, the Commission was in the midst of the great financial crisis and, not coincidentally, the well-deserved scandal resulting from the abject failure of the Commission Staff to recognize the Madoff fraud. Undoubtedly looking for a way to divert attention from the Madoff (and Sanford) frauds and to make it appear the Commission was "tough," the Commission issued an order delegating, for a one-year trial period, to the Director of Enforcement the authority to approve formal orders of investigation. A year later, the delegation was made permanent. The SEC said that the purpose of this delegation  to "expedite the investigative process by reducing the time and paperwork previously associated with obtaining Commission authorization prior to issuing subpoenas." Perhaps. Meanwhile, the Director "sub-delegated" the power to issue formal orders to a host of senior staff within the Division.

In my opinion, as a former supervisor in the Enforcement Division (1973-1981), Acting Chairman Piwowar is doing no harm by inquiring into the issue of delegation, and there would be nothing wrong, assuming the good faith (and willingness to enforce the laws vigorously) of the Commissioners, with bringing back issuance of formal orders to the Commission. 

A bigger and more important, if less sexy, question is whether the Acting Chairman wants to get to the bottom of what has been a chronic problem, at least in years past, with Enforcement: getting the facts right. Staff recommendations to sue someone have to be approved by the Commission itself. These recommendations are contained in a staff "action memorandum," which describe the factual and legal basis for bringing a particular case against a particular individual or entity. 

The Commission frequently gets the facts wrong in its suits. Why? Because the factual assertions in action memoranda--the content of documents and witness statements--are not always carefully reviewed by supervisors before these action memoranda are sent to the Commission. I required my staff--including the later Director of the Division of Enforcement, Bill McLucas--to annotate their draft action memoranda to the evidence, and I checked the evidence. I do not believe that this is the uniform practice even today, in the age of electronic documentation. It positively should be required, and, if that change were effected, whoever got that done would deserve hearty praise.

Getting the facts wrong is bad for the Commission and bad for the individual or entity that may be falsely accused. Getting it right is the moral thing to do.

Unfortunately, when I left a message with Acting Chairman Piwowar's office seeking to speak with his office and pass on this observation, I got a call back not from his staff but from the Commission's Public Affairs office (apparently because I had said on the phone message that I authored a blog). The flack, smarmily, said "no comment." 

Too bad for Acting Chairman Piwowar. He was on the right track.

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