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.