The Securities and Exchange Commission’s (“SEC”) compliance examination and enforcement investigation can be an excruciating experience for firms. Prior to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), examination and enforcement investigations could often go on for over a year. SEC enforcement investigations are private and often have two steps: a) an informal investigation, otherwise known as a nonpublic informal Matter Under Inquiry (or “MUI”), that can be launched by any SEC staff attorney by simply filing a one-page SEC form, b) a formal investigation, usually following the MUI, that requires the SEC staff attorney request a Formal Order of Investigation, based on believed facts of securities violations, be issued by a Commissioner. A Formal Order of Investigation gives the SEC examiner more authority to compel the production of books, records, documents and testimony via subpoenas. If the examiner finds there are securities violations, an administrative, civil or criminal action may be brought against the firm and any wrongdoers. In light of the burden examination and enforcement investigations place on firms, Section 4E of the Dodd-Frank Act places a deadline on the SEC for completing these investigations.
The Dodd-Frank Act specifies that SEC staff has 180 days to complete any compliance investigation or examination, sometimes known as a routine examination. After the 180 days have passed, the SEC shall provide the firm with a written statement that the investigation or examination has concluded, or request the firm undertake corrective action. In certain complex cases, the deadline may be extended for one additional 180-day period after providing notice to the Chairman of the Commission (“Chair”).
Enforcement investigations are also limited to 180 days, upon which the SEC staff must either provide a written Wells notification and file an action or provide the Director of the Division of Enforcement (“Director of Enforcement”) notice of its intent not to file. This process also has an exception for certain complex actions. The Director of Enforcement may provide notice to the Chair and extend the investigation period for one additional 180-day period. If the investigation is not completed after that first extension, the Director of Enforcement may, upon approval of the SEC, extend the investigation for one or more additional successive 180-day periods.
For most firms, this statute reads like a light at the end of the investigative or examination tunnel, at least so it would seem. The SEC often interprets rules to bend them in its favor. However, Montford & Co. (“Montford”), an investment advisory firm, challenged a SEC action claiming that the investigators had exceeded the 180-day limit. Under Section 4E of the Dodd-Frank Act, Montford should have been notified of an extension of the investigation, the SEC’s intention to file an action, or the completion of the investigation with no findings. The appellate court in Washington, D.C. hearing the case decided against Montford. The court found that because Section 4E “failed to specify consequences to the SEC for exceeding the 180-day period, the time limit was no limit at all.”
Uncertain timeframes for concluding investigations or examinations is problematic. Among other things, the disruption to a firm’s business, issues relating to client or investor diligence and disclosures, insurance coverage and legal expenses will only add to the pressure of being investigated. The Dodd-Frank Act seemed to provide a fair compromise, providing both a reasonable window of time to complete an investigation and options to extend the time in appropriate cases. It is unfortunate that the Montford court made the logical leap that no consequences for the SEC means no time limit.