What Will Paul Atkins Do with the SEC’s Formal Order Authority?
John Stark has written a fairly comprehensive outline on X of what the SEC might look like under incoming Chair Paul Atkins. If you want some ideas about how it’s going to go, you should read it. He uses an article Atkins and his former counsel Brad Bondi wrote in the Fordham Journal of Corporate and Financial Law in 2008 as a guide to what’s coming next. One thing it doesn’t address is the Commission’s delegation of its authority to grant formal orders to the SEC’s Enforcement Director.
Official Curiosity
If you’re reading you probably know this, but here’s some background anyway: The SEC staff cannot send subpoenas to anybody it wants to for any purpose. Their authority is quite broad but not unlimited. If the staff has “official curiosity” about a particular action or practice, it can send a subpoena to investigate it.
Here’s how Justice Jackson put it in United States v. Morton Salt Co. almost 75 years ago:
Even if one were to regard the request for information in this case as caused by nothing more than official curiosity, nevertheless law enforcing agencies have a legitimate right to satisfy themselves that corporate behavior is consistent with the law and the public interest.
Of course, a governmental investigation into corporate matters may be of such a sweeping nature and so unrelated to the matter properly under inquiry as to exceed the investigatory power. Federal Trade Comm'n v. American Tobacco Co., supra. But it is sufficient if the inquiry is within the authority of the agency, the demand is not too indefinite, and the information sought is reasonably relevant.
Formal Orders
But at least as to the SEC, that’s not the whole story. If a frontline staff attorney sees something sketchy and wants to start sending subpoenas to bad guys, there’s another step. The staff first has to get ticket called a formal order of investigation. Once granted, the formal order authorizes subpoenas for the duration of that investigation. The staff can send voluntary requests for documents and testimony before that point, but subpoenas have to follow the formal order.
For decades, the Commission itself issued formal orders after staff memos and presentations. That is, the staff would write a memo explaining the need for subpoena authority and get on the calendar for a brief hearing. At that hearing the Commissioners got a chance to ask questions about how the investigation’s progress and how voluntary requests for documents were working or not working. Some Commissioners were pretty active with these questions!
2009 Delegation and 2017 Retrenchment
Then the Bernie Madoff debacle hit. The SEC’s failures as to Madoff were so bad there were rumblings about moving the SEC under the Treasury Department or DOJ or merging it with the CFTC. In the end, none of that happened, but after Mary Schapiro started as chair and hired Rob Khuzami as the Enforcement Director in 2009, discussion turned to how the SEC could be more nimble in responding to future Madoffs.
One of the things the new Commission did was streamline the formal order process. In 2009, it delegated its authority to issue formal orders to Khuzami, who in turn delegated it to Associate Directors. The staff liked this. It lifted a somewhat cumbersome step that took a significant amount of time and let them get straight to sending subpoenas. Instead of memos and hearings, a staff attorney would draft a formal order, have a conversation with an Associate Director explaining the need for it, and boom, done.
Not everyone loved it. Certainly the securities defense bar thought the delegated authority short-circuited a process that maybe should have remained as the prerogative of presidentially appointed Commissioners. One former Enforcement Director told me at the time that the Commission only had two chances to weigh in on a proposed enforcement matters: once at the formal order stage, and once when approving or rejecting the matter for public filing. From his perspective, the delegation had cut their chances to comment on enforcement cases in half, which seemed bad.
After Donald Trump’s first election, in early 2017 the Commission under Acting Chair Michael Piwowar cut the delegation back, but not all the way. For the next four years formal order authority was limited to the Enforcement Director and not the 20 or so Associate Directors. In 2021, Acting Chair Allison Herren Lee restored it to the Associate Directors.
What Now?
I’ll tell you somebody else who almost certainly hates this delegation: Paul Atkins. He left the SEC in 2008, so he didn’t get a chance to vote on that policy. I can’t find examples of his comments on it online, but look at that Fordham article. Does it suggest someone who wouldn’t take advantage of opportunities to question the staff’s need for a formal order? Everything about it cuts toward paring back the staff’s power, not expanding it. Also, Atkins’s former counsel Marc Uyeda is a current Commissioner and made a speech last year partly addressing the staff’s subpoena authority. In it, he noted that the Morton Salt standard “is a low threshold and, thus, the protection against potential abuse is largely left to the discretion and judgment of the investigating agency.” Who do you think Atkins trusts to protect against that potential abuse?
I would bet $10 that Chair Atkins will want to take that discretion and judgment all the way back from Enforcement’s senior staff and hold it for the Commissioners themselves. I’d be pretty surprised if he doesn’t.
It won’t be a disaster. Writing a memo arguing for subpoena power in a case and defending it doesn’t take that much time and is not the worst thing. If the “Department of Government Efficiency” gets its hooks into the SEC, the staff could have much bigger things to worry about.
United States v. Morton Salt Co., 338 U.S. 632 (1950)
Scott Kimpel, How Low Can You Go?: DOGE and the SEC, CLS Blue Sky Blog (Nov. 27, 2024)