The New Enforcement Manual And the Wells Process

The publication of the SEC Enforcement Division’s Enforcement Manual, which details its internal procedures, is a milestone. Many, including former SEC Commissioner Atkins, have repeatedly called for the Division to publish such a manual in the interest of fairness and transparency. In contrast, the Department of Justice has long had such a manual.

One significant section of the Manual deals with the Wells Process. That process, which is largely governed by Release No. 5310, issued in 1972, Rule 5(c) of he SEC’s Rules on Informal and Other Procedures, and to some extent custom and practice, is critical to the enforcement process. In the narrow sense, the Wells Process refers to the Wells notice, which is an opportunity of those against whom the Enforcement staff may make a recommendation to the Commission that an action be instituted to submit a presentation advancing their point of view on the question. In a broader and more fundamental sense, the Wells Process is more than the notice. Rather, it refers to the entire process by which enforcement recommendations are formulated, discussed with potential defendants and through which cases are frequently resolved.

The procedures outlined in the Manual begin by citing back to the origins of the process, which is the recommendations made by an advisory committee chaired by then Commissioner John Wells in June 1972. That Report significantly altered the existing process. At the time, according to the Wells report, the staff was not permitted to initiate settlement discussions or negotiate the terms of an offer of settlement before the action had been authorized by the Commission. The staff at that point was also “precluded from indicating to the prospective defendant or respondent the particular recommendations that the staff intends to make to the Commission.” The Committee recommended that the process be revised, concluding that “We think that frank discussions between the staff and opposing counsel concerning the staff’s conclusions and probable recommendation to the Commission would encourage settlements.”

The policy adopted under Release 5310 and Rule 5(c) implemented the spirit of the Wells Committee report. Much of what is in the Manual reiterates standard practice regarding the staff’s discretion to give a notice and its content. The initial subsection on the process encourages a written notice which identifies the specific charges, gives the recipient an opportunity to provide a statement and sets reasonable limits on the length of the submission. The section concludes by noting that the staff may reject a submission if the person making it limits its admissibility under Federal Rule of Evidence 408 regarding settlements or in some other manner.

Perhaps the most significant subsection in this portion of the Manual is the one titled “The Post-Notice Wells Process.” Here, the staff is afforded “discretion to allow the recipient of the notice [the opportunity] to review non-privileged portions of the investigative file, including documents that the recipient likely would receive during discovery if the Commission were to file a recommended action or proceeding.” In considering this request the staff is to “keep in mind” three factors: 1) whether access would be “a productive way” for the staff and the notice recipient to assess the strength of the evidence on which the staff recommendation is based; 2) whether the notice recipient invoked the Fifth Amendment or otherwise refused to testify during the investigation; and 3) the stage of the proceeding and whether others have yet to testify.

This policy represents a significant advancement in Enforcement Division procedures. Prior to the issuance of the Manual, the Division typically did not give a potential defendant or respondent access to the factual material on which the enforcement recommendation would be based, although some offices and sections of the Division experimented with the concept.

Full use of the discretion by the staff to grant access should only serve to further implement the goals of the Wells Committee to foster settlement. If the staff has developed a sound factual record, permitting defense counsel to review it should only encourage settlement. If however, the staff has not fully or accurately assessed the evidence, it should welcome an opportunity to discover this before bringing an enforcement action which could only serve to unjustly injure the name and reputation of the defendant and embarrass the Commission with a loss in court. Not only is this consistent with the ethical obligations of a good prosecutor, but, in a pragmatic sense, it simply recognizes the inevitable – after an action is filed the evidence will have to be produced in discovery. Thus, if the staff utilizes the discretion discussed in this portion of the Manual – even if the Fifth Amendment has been invoked as discussed here – it is a win-win for everyone: The practice for the Commission will encourage a good dialogue and settlement in appropriate cases and avoid losses in court. For the defendant, it should also encourage settlement where the Commission has the facts and avoid litigating a case where it would be inappropriate.

In the future we will periodically explore other sections of the Enforcement Manual.