Two seemingly unrelated events may have a significant impact on securities actions in the future. The first took place on Capitol Hill in the Senate. The second, a short way from that chamber at the SEC’s Washington headquarters building. The first is a new Senate bill. The second, a new SEC regulation. Neither got much attention from the public. Both may receive significant attention in the future.

First, Senator Specter introduced S. 1551 in the Senate, a short two page bill designed to amend Section 20 of the Securities Exchange Act of 1934. The bill would add a provision which provides in part: “Private Civil Actions — For purposes of any private civil action implied under this title, any person that knowingly or recklessly provides substantial assistance to another person in violation of this title . . .” shall be liable.

The purpose of this amendment is, according to Senator Specter, to “overturn two errant decisions of the Supreme Court,” Central Bank of Denver v. First Interstate, 511 U.S. 164 (1994) and Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 522 U.S. 148 (2008). The first concluded that there is no aiding and abetting liability under Section 10(b). The second held rejected a theory of “scheme liability,” discussed here, which potentially could have broadened liability under Section 10(b).

This is not the first time Congress had considered this question. In 1995, when the PSLRA restored aiding and abetting liability in SEC enforcement actions in the wake of Central Bank, the SEC urged Congress to extend liability on this basis to private actions. At that time, Congress was more focused on limiting liability in private damage actions. Now however, Congress is considering a host of provisions which would greatly expand liability under the federal securities laws. While those proposals focus on enhancing the power of the SEC, there is little doubt that the Commission will support Senator Specter’s bill which would greatly expand the reach of private damage actions based on Exchange Act Section 10(b). This would be consistent with the SEC’s frequently stated view that private damage actions are a necessary adjunct to its enforcement program.

Second, the SEC is “amending its rules to delegate authority to the Director of the Division of Enforcement to issue formal orders of investigation.” The change is being made for a one year trial period. According to the release (available at http://www.sec.gov/rules/final/2009/34-60448.pdf) the purpose is to facilitate the investigative process.

This represents a significant change in the investigative process. In the securities laws, Congress delegated to the Commission the power to conduct appropriate investigations in aid of its mandated duties. Until now the staff was not authorized to conduct a formal investigation without obtaining an order from the Commission. This meant that while the staff could conduct an informal inquiry and request the voluntary production of documents or that a witness appear on a voluntary basis for testimony, it could not compel those acts by issuing a subpoena. Perhaps more importantly, informal inquiries are typically relatively short in duration since they usually are conducted to determine whether the matter merited further inquiry.

The delegation of investigative authority to the staff can have significant consequences. Until now, to conduct a formal investigation the staff was required to seek Commission approval by demonstrating that there was a reason to conduct the inquiry. While that process is relatively routine, in many instances it does provide a buffer between the staff and those who may be subjected to the investigative process. Being required to seek an order meant that the staff had to evaluate the matter, prepare a memorandum justifying the use of the Commission’s congressionally delegated investigative power and then present its reasons to the Commissioners. The Commission then had to examine the situation and determine if it should delegate investigative power for a specific inquiry. This evaluative process is beneficial to the Commission and to those who may be subject to the investigation.

Now, the buffer is gone. The evaluative process is significantly diluted. Now, the staff has the authority to conduct whatever formal investigations it deems appropriate. While presumably the Director of Enforcement should act as the buffer, with the current pressure to revitalize enforcement there is at least a significant risk the any evaluative process will be significantly diminished in the race to get results and silence critics of the enforcement program.

The impact of this action is significant. Commission investigations can extend for a considerable period of time, frequently years. The process can impose significant costs on companies and individuals involved with them in resources and time as well as the sheer anxiety caused by the process. Before those burdens are imposed, there should be at an evaluative process. There should be some type of buffer between the investigating staff who will want to move forward and those about to be investigated. That evaluative process, that buffer, is the five Commissioners appointed by the president and confirmed by the Senate. It is their job to evaluate and determine whether an investigation should be conducted, not simply let the enforcement staff do whatever it deems appropriate.

There is no doubt that SEC enforcement needs to be revitalized and streamlined. Equally clear is the fact that the current Commission is making a concerted effort to give that tune-up the Division so it can once again be Wall Street’s top cop. The order today is not the way. Revitalizing the Division begins with tone at the top and proper leadership which directs the staff after a thoughtful process, not with the elimination of that process in a quest for speed.