It’s great to see the SEC move toward more transparency about its enforcement program, and it also deserves praise for its efforts to improve the Wells submission process. However, another issue that anyone who’s been involved with an SEC investigation knows needs some attention is the often interminable delays in the investigative process. This excerpt from a recent post on The CLS Blue Sky Blog explains the issue:

Regulation by delay occurs when an investigation remains open long after the Wells process has concluded, allowing the practical consequences of an SEC investigation to continue indefinitely without either a formal enforcement action or a formal decision to close the matter.

The issue is not merely administrative. SEC investigations frequently carry substantial consequences, even when no enforcement action is ultimately filed. Financing transactions become more difficult. Banking relationships become strained. Directors’ and officers’ insurance may become unavailable or prohibitively expensive. Strategic transactions are delayed or abandoned. Hiring and retention suffer. Key personnel depart. Investors discount uncertainty. Potential business partners walk away rather than assume regulatory risk.

In theory, investigations are designed to determine whether an enforcement action should be brought. In practice, however, excessively prolonged investigations can themselves become a source of significant economic and reputational harm. The result is a system in which the practical burdens associated with enforcement may persist even where no enforcement action is ever authorized.

In some circumstances, the investigation itself begins to function as the punishment.

The above excerpt focuses on the impact of investigative delays on the companies involved, but the SEC almost always also target individuals in its investigations, and the personal toll that sitting under the sword of Damocles takes on them can be even more devastating. People’s careers and reputations hang in the balance, and delays that require them to wait years for a resolution to the investigation aren’t just punishment, they’re torture.

During his speech to the Economic Club of New York last week, SEC Chairman Paul Atkins said that the SEC would conduct a “thorough review of enforcement processes.” I’d submit that what the CLS blog refers to as “regulation by delay” should be near the top of the agenda for that review.

– John Jenkins