SEC ENFORCEMENT TRENDS 2011: REOGRANIZATION
This is the third in a series of articles that will be published periodically analyzing the direction of SEC enforcement.
While the Commission has been proposing new rules, the Division of Enforcement has undergone perhaps its most significant reorganization since creation. The reorganization is complete and the Division is moving forward, rebuilding its reputation as an effective enforcer.
The reorganization was designed to streamline and speed the investigative process. It had two main features. First, the initial layer of management in the division was eliminated. This was the branch chief position. The eliminating this tier was designed to put “more boots” on the ground, not just to eliminate a management layer in a division which many have thought for years was top heavy. Now the initial management layer starts at the Assistant Director level.
The second key facet of the reorganization was the creation of specialty groups. Those units focus on asset management, market abuse, structure and new products, the FCPA and municipal securities and public pensions. These units are designed to marshal and focus the expertise of the Division. There is also a new Office of Market Intelligence which will sift tips and other sources of information in an effort to cull key information about possible new matters from the many sources of information available to the division.
Whether eliminating the branch chief position really puts more boots on the ground is questionable. Some of the former branch chiefs assumed new Assistant Directors positions. On the other hand creating specialty units should facilitate the work of the Division. As initially created the Division had specialty units which were abolished in the early 1980s. In addition, the OECD made positive comments about the creation of the FCPA unit in a recent report.
Statistics from fiscal 2010 suggest that the Division is in fact becoming more efficient. According to NERA, Enforcement settled 694 cases during the most recently ended fiscal year. That is the highest number since before the market crisis. There was a significant increase in settlements with individuals although corporate settlements declined.
A key part of the reorganization in the future may be the new initiatives to encourage cooperation. In new Sections to the Enforcement Manual the Division, added provisions to incentivize individuals and corporations to cooperate with on-going investigations. Modeled after techniques long used by the Justice Department in criminal cases, the new initiatives offer a potential defendant the prospect of avoiding prosecution through either a non-prosecution or a deferred prosecution agreement. Again, the point is to speed the work of the Enforcement Division, a goal that is fully consistent with the newly created time limitations on investigations incorporated into Dodd-Frank.
At this juncture it is difficult to determine the precise impact of these new cooperation initiatives. The recently announced non-prosecution agreement with Carter’s Inc. does however provide some insight. There the Commission entered into a non-prosecution agreement with the company in a financial fraud case. The agreement was based on the cooperation of the company and the isolated nature of the fraudulent conduct.
The result in Carter’s Inc. is similar to the one in Seaboard where, based on cooperation and isolated wrongful conduct, the SEC chose not to prosecute the company. If the new cooperation initiatives are limited to circumstances where previously the Commission would have elected not to prosecute then it would appear that they will do little to facilitate the work of the Enforcement Division. On the other hand, if the initiatives are used to encourage cooperation by offering an alternative to prosecution while giving the SEC the ability to obtain sanctions and institute remedial measures, they may well achieve the intended result. Under those circumstances the Commission could broaden their application beyond the limited circumstances of Seaboard and Carter’s Inc. That would encourage companies to cooperate while permitting the Commission to ensure future compliance.
Next: Close cooperation between the SEC and DOJ.