Ideas Whose Time Has Come: An Enforcement Manual and Open Jacket Policy
In discussing the SEC’s enforcement program last week, Commissioner Atkins advocated that the Enforcement Division have a Manual similar to that of the U.S. Attorney’s Office and that it include an open jacket policy. Neither idea is new, but both have sound merit. Speech by SEC Commissioner Paul S. Atkins: Remarks to the “SEC Speaks in 2008” Program of the Practising Law Institute.
First, as Commissioner Atkins noted, a manual would help the Enforcement Division “achieve greater predictability.” A Manual would help create an aura of fairness regarding the Division’s policies by bring transparency. That, of course, should be a key goal for a disclosure agency. It would also implement one of the findings of the Senate Report from the ill-fated Pequot Capital Management investigation last year which recommended that the division have established procedures (discussed here).
Second, Commissioner Atkins is also clearly right about an open jacket policy. Under such a policy those about to be accused would have an opportunity to review the evidence on which that accusation is based. This would be a refreshing process for all. This procedure, long used by criminal prosecutors, would facilitate settlement discussions when appropriate by placing all the parties on a level playing field. Where settlement is not possible, it would also improve the Wells process. It is standard now that in a Wells submission the arguments should focus on legal issues and policy, if for no other reason than the person making the submission is typically only aware of a small portion of the evidence the staff has accumulated. If, however, there is an open jacket policy, a person facing a possible accusation of wrong doing would be able to argue the facts where appropriate. As Commissioner Atkins noted, having the government show the accused its evidence “is called due process.”
An open jacket policy might also save the Commission from costly errors – and some from a wrongful accusation by a law enforcement agency which will leave a lasting stigma even if the person is vindicated. This was precisely the situation last year in SEC v. Todd, Civil Action No. 03 CV 2230 (S.D. Cal). There, the Commission, in part, accused former Gateway computer executive John Todd of violating Section 17(a) in connection with a prospectus supplement filed with the SEC which was later incorporated into a Form 10Q. Although the SEC represented in its brief that there was “no dispute that [Mr.] Todd signed a prospectus offering,” the Court found that “the prospectus supplement was unsigned. The SEC presented no other evidence connecting Mr. Todd to the supplement.” (discussed here). An open jacket policy might have avoided an embarrassing loss for the Commission and the angst undoubtedly suffered by Mr. Todd from the wrongful allegation.
Many criminal prosecutors have used an open jacket policy for years. And, some SEC offices have experimented with it. Like the adoption of a Manual, there is no good reason not to have an open jacket policy. Commissioner Atkins is right: the time has come for both of these ideas.