The Securities and Exchange Commission (SEC) has updated rules for enforcement actions. According to a document posted on the SEC’s website, the Director of Enforcement will no longer be able to issue formal orders of investigation and must seek Commission approval before pursuing the investigation.
The Rule has been marked as Final and will become effective following its publication in the Federal Register.
It was reported last month that the Commission was considering this action. SEC attorneys would need permission from the Commission before they “formerly launch probes,” a move designed to “slow down investigations.”
The SEC has been criticized for being overly aggressive with certain enforcement actions. As defendants are battling an entity with unlimited resources only the exceptionally wealthy have the ability to fight back when they deem the SEC is in error. The result of punitive lawsuits can destroy individuals or firms as the SEC typically announces investigations but rarely acknowledges a lost case. If a settlement is agreed upon without any acknowledgment of guilt, the penalties may also be devastating.
As the Commission is currently controlled by Republicans, a more principle-based approach may be anticipated to be applied rather than a monolithic zero-tolerance policy.
The SEC delegated authority to the Director of Enforcement in 2009 as a test of its efficacy. Following the trial, authority was delegated to the Director of Enforcement. The Final Rule states that it will now “more closely align the Commission’s use of its investigative resources with Commission priorities.”