On February 16, 2017, the U.S. Securities and Exchange Commission (SEC) announced an important policy change that reduces the number of SEC enforcement officials who can issue subpoenas and authorize SEC investigations.  Under the new policy, only the Director of the SEC’s Enforcement Division has the power to approve subpoena requests and/or initiate an SEC investigation.  This marks a departure from the policy that had been in place since 2009, where Assistant Directors in the SEC Enforcement Division possessed these subpoena approval and investigatory powers.

The SEC’s 2009 policy was intended to prevent future failures to detect and stop fraud on investors.  Those failures arguably plagued the SEC during the build up to the global financial crisis, and were most publicly evidenced by Bernie Madoff’s massive and undetected fraud on investors.  While the impact of this policy change is unclear, there are troubling signs that it could create a bottleneck for whistleblower claims.

Should Whistleblowers Anticipate Further Changes?

Given our experience representing whistleblowers, we know that SEC investigations can be incredibly complex endeavors that many take years to resolve.  And in recent years, the SEC Enforcement Division’s aggressive pursuit of corporate fraudsters has been encouraging to whistleblowers.

But the new policy change could portend a less aggressive and more pro-business SEC, and it might constitute a step towards further deregulation of companies and the imposition of additional limits on the SEC’s enforcement power.

James Kidney, a former trial attorney with the SEC Enforcement Division, noted in a recent post discussing the policy change that the SEC appears to be “considering eliminating [subpoena] authority altogether.”  Kidney and other commentators have suggested that corporate interests pushed for the February 2017 policy change because of mounting frustration in recent years with the SEC’s more vigorous exercise of investigatory powers.  If the commentators’ speculation is accurate, whistleblowers and their counsel should remain vigilant about additional changes to SEC enforcement policies and rules in the coming months.

Will the SEC’s Investigatory Powers Weaken?

As my colleague Alexis Ronickher wrote in January, the future of financial regulation is still very much uncertain under the new administration, and that uncertainty particularly clouds the future of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.  As counsel to whistleblowers, we have reason to believe that statutory whistleblower retaliation protections will survive any changes to SEC-related laws and regulations, in part because those statutory protections have the support of certain influential Republicans in Congress.  But the SEC’s decision to strip enforcement authority from Assistant Directors may foreshadow a future in which the SEC’s investigatory powers degrade even further.  Although whistleblowers who report corporate fraudsters to the SEC should remain protected from retaliation, they may also now need to contend with a bureaucratic bottleneck that could be created by the SEC’s February 2017 policy change.