Part II: SEC Enforcement Trends, 2009: Significant Policy Initiatives
There were two key policy initiatives in 2008 which will continue to impact SEC enforcement in the future. The first is the publication of the SEC’s Enforcement Manual. The second concerns cooperation guidelines which, in part are in the Manual, and should be considered in conjunction with the recently recast DOJ guidelines.
The publication of the SEC Enforcement Manual is a significant step toward improving the transparency of the enforcement division processes. While the Department of Justice has long had a manual which details its policies, the SEC has not.
The Manual details the internal policies and procedures of the division. Many of these policies are written as internal directives to division investigators, memorializing procedures that experienced practitioners will recognize. These include standard procedures for producing documents and taking testimony.
Other sections, such as those discussing the Wells process, parallel proceedings and cooperation, contain significant policy statements which should be carefully assessed. In discussing the Wells process, the Manual notes that in certain instances the division may make the factual material from the underlying investigation available. Some offices have experimented with this type of process in the past. While the Manual is careful to carve out situations such as those where the investigation is on-going or where a witness invoked the Fifth Amendment, it is clear that at lease in some instances this process may be available.
Use of an open jacket process in the Wells process would represent a significant step forward, which not only improves transparency but should also enhance the enforcement decision making process. If the staff has a solid case, the process should encourage settlement on terms favorable to the SEC. If however, there are flaws in the proposed case, this process can afford the staff an opportunity to avoid recommending an action that may not be warranted.
The Section of the Manual regarding parallel proceedings is also significant. It directs division investigators to ensure that SEC investigations are independent of any conducted by the Department of Justice, as well as other regulators. On the critical question of how the staff should respond to inquiries from counsel for a witness about the prospect of parallel proceedings, the Manual directs SEC investigators to rely on Form 1662. That standard form notes that the SEC may make its files available to other agencies including DOJ. The Manual goes on to note however, that if authorized by the U.S. Attorney’s Office conducting a parallel inquiry, the staff may disclose that fact. This directive suggests that at least in some instances counsel may obtain more of a response to inquiries about parallel proceedings than the standard “assume the worst.”
A third key section of the Manual concerns cooperation and cooperation credit. Prior to the publication of the Manual cooperation was governed by the standards in the SEC’s 2001 Seaboard Release, discussed here. While that Release still governs, the Manual makes two statements not found in Seaboard. In one statement, the Manual flatly directs SEC attorney’s not to ask for waivers of the attorney client privilege or the work product doctrine. This is in line with new Department of Justice guidelines.
Another pronouncement makes it clear that cooperation is a function of producing all the facts about a particular matter, as does Seaboard. The Manual takes the additional step however, of noting that if a company declines to waive privilege, the entity still must produce the facts to earn cooperation credit. This view appears to conflict with the SEC’s frequently stated position that cooperation credit can be earned even absent a waiver of privilege. Those positions can be reconciled however, since the Manual states in another section that the facts from an internal investigation are not privileged. Under that position privilege can still be asserted and the facts produced to obtain cooperation credit.
Portions of the cooperation standards in the Manual seem to echo at least in part, the revision DOJ issued to its cooperation standards in 2008. These standards, issued in response to the decision in U.S. v. Stein, discussed here, which held portions of the earlier standards unconstitutional, and in view of threats by Congress to pass The Attorney Client Protection Act, discussed here, contain two significant provisions. First, like the SEC Enforcement Manual, the new standards flatly prohibit Department attorney’s from requesting what is called “core” attorney client privilege material. While this term is not defined, it apparently does not cover material from, or communications about, internal corporate investigations. It is unclear whether the directive in the Enforcement Manual is limited to these types of communications.
Second, like the Enforcement Manual, cooperation is defined in terms of producing all the relevant facts. To avoid the question of privilege waivers which is typically presented by a company considering producing all of the relevant facts from an internal investigation, the new Department policy suggests that non-lawyers be used to collect the facts during the investigation. This of course eliminates the question of privilege waivers, although it seems to contrast with the SEC’s position and perhaps highlights the difficulty as to whether information from the internal investigation can be produced without privilege waivers. DOJ’s new policies should be carefully considered with those in the Enforcement Manual when assessing the question of earning cooperation credit. Both the new Enforcement Manual and the revised DOJ cooperation standards will continue to have a significant impact on SEC enforcement.
Next: Areas of focus for the Enforcement Division