The Securities and Exchange Commission is authorized to conduct investigations of possible violations of the federal securities laws, which provide that “any member of the Commission or any officer designated by it is empowered to administer oaths and affirmations, subpoena witnesses, compel their attendance, take evidence, and require the production of any books, papers, correspondence, memoranda, or other records which the Commission deems relevant or material to the inquiry.” Section 21(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78u(b).
On August 5, 2009, in a speech before the New York City Bar, Robert Khuzami, the Director of the Division of Enforcement for the SEC, announced that the Commission has approved an order that delegates to him the authority to issue formal orders of investigation, with their accompanying subpoena power. He also announced that he, in turn, will delegate that authority to senior officers throughout the Division (i.e.; to the regional offices).
Mr. Khuzami stated, “[t]hus, staff will no longer have to obtain advance Commission approval in most cases to issue subpoenas; instead, they will simply need approval from their senior supervisor. 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.”
The amendment will go into effect on August 11, 2009, according to Release No. 34-60448, and will be in effect for a one-year period. At the end of this period, the Commission will evaluate whether to extend the delegation (though any formal orders issued during this period will remain in effect).
What does this mean to issuers? It means that if the SEC conducts an informal investigation, and you don’t cooperate to their satisfaction, they can very quickly now issue a subpoena to force you to disclose the requested information. This has two important implications.
The first is cost. Often, an informal investigation can be responded to by the company directly and fairly informally. But a subpoena likely means you have to “lawyer-up” and have counsel prepare a formal response. This is obviously more time-consuming and costly than the company preparing an informal response to the inquiry.
The second is disclosure under the ’34 Act. For shareholders, news of an SEC investigation is highly unsettling and is often reason enough to sell stock in the company under investigation. For issuers, Item 103 of Regulation S-K requires disclosure of legal proceedings “known to be contemplated by governmental authorities.” Item 401(f), which covers disclosure of legal proceedings involving officers and directors of the issuer, has no similar “contemplated” language. Practices vary as to when companies disclose SEC proceedings against them or their officers and directors, and there is no bright-line test.
If your policy on disclosure of pending SEC investigations turns on the issuance of a subpoena versus an informal investigation letter, you can expect the SEC to have an itchy trigger finger with respect to issuing subpoenas. Consequently, to avoid receiving a subpoena from the Commission and having to make unfavorable disclosure under Item 103 of Regulation S-K, issuers should plan to promptly and thoroughly respond to any informal investigation letters from the Commission.
