Effective March 14, 2025, the Securities and Exchange Commission ("SEC") issued a Final Rule to revoke the SEC Enforcement Director's "authority to issue formal orders of investigation" that had been in place for over fifteen years. Since 2009, in the wake of the financial crisis, the SEC has permitted the head of its Division of Enforcement, on their own authority and without need of specific Commission approval, to issue orders of investigation, pursuant to which lower-level enumerated Enforcement staff could issue subpoenas for documents and testimony in pursuit of that investigation. By removing this authority, and returning to the requirement of a majority vote of the sitting Commissioners to authorize formal investigatory powers, the Final Rule is the latest and clearest example of the new administration's effort to reign in the SEC's enforcement activities.
Although this represents an important development for entities and individuals subject to SEC oversight, market participants should continue to be mindful of the other means that the SEC and other regulators have at their disposal to conduct investigations, and the likelihood that as federal investigators retreat, other actors will step in to fill the gap.
Key Takeaways:
- A Final Rule, effective March 14, 2025, returns control over authority to issue subpoenas for documents and testimony to a majority vote of the Commission itself, revoking authority previously vested with the Director of Enforcement and other Enforcement staff. There will be a majority of Republic Commissioner votes in the Commission for the foreseeable future. Accordingly, the move is widely seen as an effort to restrain the SEC's ability to commence new investigations and to direct investigations in line with the new administration's enforcement priorities.
- Regulated persons and entities should nonetheless remain mindful of other enforcement and investigation tools available to the SEC, including the continued authority to issue "voluntary" and mandatory records demands that although not subpoenas, still have significant compliance implications.
- Other authorities—including state securities regulators, FINRA, and exchanges such as NYSE and Nasdaq—also have enforcement tools at their disposal and may be more engaged in the near term as federal authorities step back.
- Regardless of the source, when you are contacted by any government agency or regulatory body conducting any form of examination, inquiry or investigation, you should promptly consult counsel with experience handling responses to such inquiries in order to ensure appropriate compliance and careful consideration of all potential issues the inquiry may entail.
History of SEC Investigation Authority Delegation
Prior Rule 200.30-4(a)(13) (17 C.F.R. § 200.30(4)(a)(13)), permitted the Enforcement Director to "order the making of private investigations pursuant to section 19(c) of the Securities Act of 1933 (15 U.S.C. § 77s(c)), section 21(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78u(b)), section 42(b) of the Investment Company Act of 1940 (15 U.S.C. § 80a-41(b) and section 209(b) of the Investment Advisers Act of 1940 (15 U.S.C. § 80b-9(b))." Under the newly issued Final Rule, "[a]s a result of [the Commission's] experience with its nonpublic investigations" and "to more closely align the Commission's use of its investigative resources with Commission priorities," this provision has now been deleted and reserved.
This revocation of authority returns the SEC to the situation that existed prior to 2009, when "Formal Orders of Investigation could be issued only upon Commission approval," and thus required a majority of the Commissioners to vote in favor of authorizing investigative powers, including the power to issue subpoenas. The Commission has, at most, five Commissioners who are appointed to five year terms by the President and confirmed by the Senate, no more than three of whom may be members of the same political party. To act, the Commission requires a quorum of at least three members—which is satisfied by the current membership of the Commission, comprised of two Republican Commissioners and one Democrat—though two or even one Commissioner is sufficient when seats are vacant or a Commissioner is disqualified from the vote. In a three-seat Commission, like the one currently in place, the two Republican Commissioners hold the majority to approve or disapprove investigations—which will only strengthen assuming the President's nominee for Commission Chair, Republican Paul Atkins, is confirmed by the Senate.
In 2009 the SEC was reeling in the wake of the 2008 Financial Crisis and the Bernie Madoff Ponzi Scheme scandal, among other perceived regulatory failings. In August 2009, in an effort to "expedite the investigative process by reducing the time and paperwork" needed for Commission approval of an investigation, the SEC "delegate[d] authority to the Director of the Division of Enforcement to issue formal orders of investigation," which would "designate the enforcement staff authorized to issue subpoenas in connection with investigations under the federal securities laws." While this authority was initially approved for only a one year trial run, on August 11, 2010, the Commission extended this authority indefinitely. In the first year after the new rule took hold, the number of formal orders of investigation more than doubled—from 233 to 496, and was accompanied by a further sub-delegation of investigative authority to approximately twenty senior Enforcement Division personnel, including Associate Directors and Associate Regional Directors. In effect, nearly two dozen senior Enforcement Division staff members had authority to commence investigations and to authorize more junior members of the Division to issue subpoenas for testimony and documents.
The new Final Rule is not the first time this authority has been modified by a new administration. During the first Trump administration, in February 2017, then Acting Chair of the Commission, Michael Piwowar—in a move not announced by the SEC but publicly reported—revoked the sub-delegation of investigative authority to senior Enforcement personnel and permitted that authority to remain solely with the Director of Enforcement. Then, when President Biden took office, Acting Chair Allison Herren Lee reversed course and announced in February 2021 that she had "restored a vital tool to [the SEC's] enforcement program . . . by authorizing senior officers in the [Enforcement] [D]ivision to approve the issuance of a Formal Order of Investigation," allowing "investigative staff to act more swiftly to detect and stop ongoing frauds, preserve assets, and protect vulnerable investors." Now the second Trump administration has retracted this authority again, going even further than the first time around.
The SEC's Current Enforcement Priorities
In recent public comments, SEC personnel have taken pains to dispel the popular perception that the SEC would retreat from enforcement during the second Trump administration. The current Acting Chair, Mark T. Uyeda, recently told the Florida State Bar Association's Federal Securities Institute and M&A Conference: "the Commission's enforcement work has not stopped. The agency continues to bring charges for insider trading, inflating financial performance, and breaches of fiduciary duty by investment advisers, among other topics." Similarly, recent remarks by Antonia M. Apps, Regional Director of the New York Office and Acting Deputy Director of Enforcement, during the American Bar Association White Collar Crime Institute highlighted continued emphasis on core enforcement targets: offering-related Ponzi schemes, disclosure cases, accounting fraud, insider trading, deceptive market practices such as price manipulations, and breaches of fiduciary duty. Executive Orders and additional SEC rulemaking further suggest that the SEC will be included in the administration's efforts to target DEI and ESG investing.
Nevertheless, the Final Rule issued last week represents a dramatic reduction in key investigative powers available to Enforcement Division staff. Whether this results in simply fewer investigations across the board, or rather revised and more centralized priorities for allocating investigative resources, remains to be seen.
Where Enforcement Authority Remains
Despite the current deregulatory currents at the SEC, however, no market participant should be lulled into thinking securities enforcement is simply going to go away. There are other tools, and other players, that remain on the board.
The SEC's Other Investigation Tools
Although the Final Rule curbed some of the Enforcement Division's authority to act without advance Commission approval, regulated entities and persons remain subject to various rules requiring their cooperation with SEC inquiries, including the mandatory maintenance and production of requested documents, even in the absence of a formally designated investigation or binding subpoena. For example:
- Section 204 of the Investment Adviser's Act provides that "[a]ll records . . . are subject at any time, or from time to time, to such reasonable periodic, special, or other examinations by representatives of the Commission as the Commission deems necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C.A. § 80b-4(a). In September 2022, the SEC issued a "Risk Alert—Investment Advisers: Assessing Risks, Scoping Examinations, and Requesting Documents" specifically listing typical information that must be produced in response to either "announced or unannounced" examinations.
- Section 17(a) of the Securities Exchange Act provides examination rights for the records of, among others, "[e]very national securities exchange, member thereof, ... registered securities association, [or] registered broker or dealer." 15 U.S.C. § 78q.
- The SEC's Form 1661, "Information for Entities Directed to Supply Information to the Commission Other Than Pursuant to Commission Subpoena," lists numerous other statutes providing for "Mandatory Information" to be produced in response to information requests short of a formal subpoena, along with the potential penalties for failing to comply with such requests.
Information and document requests may be made during the course of an Examination, the comment letter process, or in a "Matter Under Inquiry" or other preliminary Enforcement Division investigation that has not received formal authorization and does not require Commission approval. Although the absence of a subpoena for such records means the SEC cannot apply directly to a court to compel production of the documents, the SEC nonetheless has options—ranging from a disfavorable finding of cooperation, to the threat of potential criminal penalties, 15 U.S.C. § 78ff—to strongly encourage compliance. Certainly sufficiently egregious conduct, or conduct specifically targeted by the new administration's enforcement priorities, will continue to be subject to formal orders authorized by vote of the Commission
State Regulators and Non-Governmental Oversight
While the SEC has long been the nation's primary securities regulator, as in other areas of law enforcement the coming years may usher in an era of increased state enforcement of state "blue sky" securities laws. Indeed, the federal rules still permit SEC "staff at the Assistant Director level or higher [to] discuss nonpublic information, including whether the staff has or will commence an investigation, with state regulatory agencies, and [SEC staff] can show (but not release) documents" to state regulators, SEC Enforcement Manual, Section 2.2.2.3, suggesting the possibility of federal-state cooperation even where federal investigations are restricted. For example, the Martin Act, N.Y. Gen. Bus. Law Art. 23-A, §§ 352, et seq., one of the nation's oldest "blue sky" laws, gives state agencies, including the New York Attorney General's Office, broad criminal and civil authority to investigate "any device, scheme or artifice to defraud" in connection with securities which, according to one former New York Attorney General, is useful especially "when federal authorities have fallen down on the job."
In addition to oversight by the SEC, securities market participants are subject to regulation and enforcement actions by non-governmental self-regulatory organizations ("SROs"). For example, FINRA, of which most U.S. "securities traders must be members . . . to conduct their business," retains independent enforcement authority, otherwise appealable to the SEC after a disciplinary sanction is imposed. Alpine Sec. Corp. v. Financial Indus. Regul. Auth., 121 F.4th 1314, 1323, 1326 (D.C. Cir. 2024). Exchanges such as the New York Stock Exchange and Nasdaq also have enforcement authority over their members and regularly institute disciplinary measures, including for violations of the securities laws. For example, in March 2025, Nasdaq settled claims against Wells Fargo Securities, LLC, alleging that it violated Securities Exchange Act Section 17(a) "by failing to maintain accurate order memoranda for manually handled options orders," and resulting in a censure and $250,000 fine. State regulators and SRO enforcement staff, with ranks potentially bolstered by departing federal workers, are likely to play a substantial enforcement role in the coming years.
Conclusion
The Final Rule appears intended to restrain the formal investigative mechanisms of the SEC, and especially to stem service of compulsory subpoenas for documents and testimony, but participants in the securities market are well-advised to remain vigilant and maintain all existing safeguards to prevent regulator scrutiny, whatever the source. Although the SEC may be exhibiting signs of stepping back, to some extent, from its role as the nation's primary securities enforcer, there are numerous other agencies and organizations that still can and likely will wield enforcement authority.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
