SEC enforcement division granted permanent subpoena powers

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By Zachary A. Goldfarb
Washington Post Staff Writer
Thursday, August 12, 2010

The Securities and Exchange Commission on Wednesday quietly made permanent a vast expansion of the power of its enforcement division's ability to subpoena documents and compel testimony.

The move should ensure that investigators can move swiftly to pursue cases of financial wrongdoing. But some securities lawyers warn that it could lead to excessive costs as well as unfair treatment for the executives and companies that are targets of SEC probes.

Until last year, members of the enforcement division usually had to appear before the agency's five commissioners to request permission to issue a subpoena. Many investigators said this policy slowed down work on important cases because investigators would sometimes have to wait weeks to get such approval.

Last August, the SEC announced a one-year trial program in which the commissioners delegated subpoena power to the enforcement director, Robert Khuzami. He subsequently gave that authority to a number of deputies.

"This means that if defense counsel resist the voluntary production of documents or witnesses, or fail to be complete and timely in responses or engage in dilatory tactics, there will very likely be a subpoena on your desk the next morning," Khuzami said at the time.

On Wednesday, the agency made the delegation of subpoena power permanent, saying it has led to "increased efficiency" as and improved "communication and coordination in addressing pertinent legal and policy issues."

Technically, the enforcement division has gained the power to issue formal orders of investigation, which allow for the serving of subpoenas. Without such an order, subjects of SEC probes cannot be forced to testify under oath or furnish documents. Still, the agency conducts many probes on an informal basis, and companies routinely turn over information voluntarily.

From 2008 to 2009, the issuance of formal orders more than doubled, to 496 from 223, according to the agency.

But some former SEC officials now representing companies and people facing agency probes warn that this may not be a positive development.

"Today's rule announcement seems to assume that this is necessarily a good thing for investors, but that's not obvious to me," said Russell G. Ryan, a 10-year SEC veteran now working at the law firm King & Spalding.

Said Ryan: "SEC investigations can be lengthy and expensive for companies and their shareholders, and formal investigations with subpoenas often tend to be lengthier and more expensive than informal ones in which companies voluntarily cooperate without subpoenas. And of course, in many cases the investigation -- whether formal or informal -- ultimately concludes with no proof that anybody did anything wrong."

The ability of the enforcement division to issue subpoenas has been emblematic of challenges facing the SEC in recent years as some commissioners questioned whether regulators were being too tough on corporate America.

For most of the agency's history, the enforcement division could swiftly obtain approval for a formal order from one of the agency's five commissioners serving as "duty officer." But in the years of SEC Chairman Christopher D. Coxthe process slowed down. Investigators sometimes would have to wait many weeks to get approval.

It was one of several barriers to swift enforcement of the securities law that investigators felt were getting in the way of their doing their jobs.

One of SEC Chairman Mary Schapiro's first acts, early last year, was to return to the duty officer model. Soon thereafter, subpoena power was given to the enforcement division directly.


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