Since Dodd-Frank was signed into law five years ago, many have criticized it for going too far while others have said it hasn’t gone far enough. However, one thing is certain: the Securities and Exchange Commission has taken every opportunity to interpret Dodd-Frank in its favor—particularly the provision within the law placing a 180-day limit on SEC investigations to bring an enforcement action or terminate the investigation after a so-called “Wells” notice.
On July 20, an appellate court in Washington, D.C., agreed with the SEC’s self-serving interpretation that the 180-day limit was not an enforceable limit at all, reducing a Dodd-Frank requirement to a mere suggestion.
In March 2011, when Ernest Montford received a so-called “Wells” notice from the SEC, he was no doubt disappointed. (The SEC sends people or firms a Wells notice when it is planning to bring an enforcement action against them.)
The SEC’s Wells notice informed Montford that the SEC staff intended to recommend a lawsuit against him and his investment advisory firm, Montford and Company, Inc., for failing to disclose having received payments for promoting investments managed by a third-party investment manager specializing in hedge funds who was later found liable for misappropriating investor funds.
However disappointed Montford was upon learning that the SEC might sue him, he might have taken some measure of comfort that at least the Wells notice marked the beginning of the end of the SEC’s lengthy investigative process.
Dodd-Frank contains the following explicit limitation on SEC investigations:
Not later than 180 days after the date on which Commission staff provide a written Wells notification to any person, the Commission staff shall either file an action against such person or provide notice to the director of the Division of Enforcement of its intent to not file an action.
This provision appeared in Dodd-Frank following years of reports describing the burdens imposed by open-ended SEC investigations that drag on for months or years.
As Montford’s attorneys would later point out in his appeal, numerous reports and observations noted the need for some restrictions to minimize the burden of SEC investigation:
“The investigative process can be devastating to business entities or individuals under scrutiny,” Comm. on Fed. Regulations of Sec., Report of the Task Force on SEC Rules Relating to Investigations, 42 Bus. Law. 789, 790 (1987)
“[The SEC Enforcement Division’s staff] may leave open for years many investigations that are not being actively pursued.”U.S. Government Accountability Office, GAO-07-830,SEC: Additional Actions Needed to Ensure Planned Improvements Address Limitations in Enforcement Division Operations 3, 21 (2007)
“[The staff’s inability to close investigations should be remedied in order to ensure that [the SEC’s Enforcement Division] conducts adequate Enforcement investigations and uncovers violations of securities laws and fraud.” U.S. SEC, 2009 Performance & Accountability Report 113–14 (2009)
“[Lengthy investigations may] wre[a]k havoc on people and their families,” Troy A. Paredes, SEC Commissioner, Remarks at the 2009 Southern Securities Conference (Mar. 19, 2009)
The perils of lingering SEC investigations—both to the targets of those investigations and to the resources of the SEC itself—did not go unnoticed during the congressional deliberations around Dodd-Frank.
The author of the 180-day restriction provision, the now retired Rep. Paul Kanjorski of Pennsylvania, said that Dodd-Frank would include “deadlines generally forcing the SEC to complete enforcement [. . .] within 180 days, with some limited exceptions for complex cases.”
For good measure, Rep. Kanjorski included an equivalent 180-day limitation on the amount of time the SEC’s examination staff, OCIE, could take when it’s conducting on-site compliance exams.
With such bold statutory language and Congressional support restricting the SEC, Montford might be forgiven for breathing a sigh of relief when 180 days passed after he received his Wells notice with no action being filed against him.
According to the appellate court’s ruling earlier this month, any such relief was misplaced. The court found that because Dodd-Frank failed to specify the consequences to the SEC for exceeding the 180-day period, the time limit was no limit at all.
Essentially, the court agreed with the SEC that Dodd-Frank’s use of the word “shall” really means “should.”
Almost exactly five years after Dodd-Frank attempted to put some mild restrictions on the duration of SEC investigations and examinations, we are right back where we started.