IMPORTANT GUIDANCE ON SEC COOPERATION STANDARDS
When the SEC announced an initiative to encourage cooperation with its enforcement investigations by individuals a key focus was speed and efficiency for the Division. The idea was that a cooperating witness could speed investigators through the mountain of information that is often involved in the complex transactions the SEC investigates. This would conserve resources while aiding efficiency. At the same time it offered individuals potentially caught up in an enforcement investigation the prospect of earning credit to minimize or eliminate potential liability. It it was clear that the proposal was limited in scope and would only be employed in select circumstances.
The announcement by the Commission that it declined to prosecute a former AXA Rosenberg executive based on his assistance under the program gives important guidance and definition to the promise of the January 2010 proposal. AXA Rosenberg is an investment advisor which specialized in quantitative investment strategies tied to complex computer models. Because of a computer coding error over 600 clients lost about $217 million. Although the firm at first concealed the error once it was discovered the Commission investigated and brought two enforcement actions which recovered all of the investor losses (here).
The SEC credited a senior executive at the firm with facilitating its investigation as envisioned by the proposal. Key elements of the cooperation included:
Â· The executive was the first to offer assistance under the cooperation initiative;
Â· He participated in the absence of any promise regarding the impact on him;
Â· The staff was provided with candid and accurate information which facilitated the investigation;
Â· The position of the executive, coupled with his relationship with the parties involved and detailed knowledge of the model, allowed him to provide credible, important information to the staff; and
Â· The investigation was in a priority area for the Division and a favorable result was achieved for investors.
There were two key factors which influenced the non-prosecution decision that limit the application of this program. First, the executive had a limited role in the wrongful conduct. While he learned of the coding error he advocated that it be disclosed to the CEO. Ultimately he was instructed to conceal it.
Perhaps equally important is the second factor â€“ the executive is no longer in the securities business. Rather, he is retired and, previously had no disciplinary history. Accordingly, there is no likelihood of reoccurrence.
Overall the release provides important guidance on the cooperation standards for individuals. It gives definition to the 2010 proposals in terms of what is expected under the program while illustrating its limitations. The decision not to prosecute the individual here is also fully consistent with the Commissionâ€™s Seaboard release which focuses on corporations. The Commission should be commended for providing guidance of the type offered here. It can only serve to assist its enforcement program by encouraging those in similar positions to the AXA executive to step forward and cooperate in the hope of mitigating or eliminating their liability.