The SEC and the Fifth Amendment: Reforming Tone At The Top

The Fifth Amendment to the U.S. Constitution embodies fundamental rights intended by the founding fathers to protect every citizen of this country. While it is frequently referred to as the protection against self-incrimination, the text of the amendment makes no mention of “incrimination.” Rather, the text states in pertinent part that “no person shall be compelled in any criminal case to be a witness against himself …”

The SEC as a law enforcement agency is charged by Congress with enforcing the law. Enforcing the law begins with respect for it and creating an environment of compliance. In the corporate context, the SEC might call this “tone at the top,” that is, creating the kind of environment that encourages respect for, and compliance with, the law.

Why is it then that the SEC seems to be hostile to the Fifth Amendment and the basic, fundamental rights it represents and protects? When a witness declines to testify in an SEC investigation, the staff routinely insists that the witness is refusing to testify to avoid incriminating him or herself. This dialogue typically continues with the staff contending that the witness is asserting his or her “right against self-incrimination.” Producing the text of the Amendment does noting to alter the position of the staff.

At the same time, the witness is told that an “adverse inference” will be drawn from the fact that he or she has chosen to exercise a fundamental constitutional guarantee. This position is typically enunciated with a citation to Baxter v. Palmigiano, 425 U.S. 308 (1976). Even when it is pointed out that the holding of Baxter is based on the theory that the witness is appearing in an adversary proceeding where the person could be expected to respond to allegations of misconduct, which is not the case in an SEC investigation, the staff persists in this view. Their position persists, even if it is point out that the Commission contends that its investigations are not adversary proceedings, do not have targets or subjects and are only fact finding proceedings – positions argued by the SEC and accepted by the Supreme Court in SEC v. O’Brien, 467 U.S. 735 (1984).

But it gets worse. The witness is then questioned in detail, and typically the staff will reiterate over and over their “self-incrimination” theme. This procedure seems more intended to embarrass the witness than ensure that the person intends to assert the privilege to all relevant subjects. Indeed, if the only purpose for the repeated questions is to ensure that the witness will decline to testify on the same basis to all relevant subjects then an affidavit would suffice. Yet, often times the staff refuses to take an affidavit.

Later, at the Wells stage, the burdening of fundamental rights continues. At this point, the staff typically declines to give all but the most cursory information about the proposed enforcement recommendation. Not only is this contrary to the very purpose of a Wells submission, since it can deprive the Commission of important views on the proposed enforcement action, but it seems intended to penalize the witness for exercising a fundamental constitutional right.

All of this seems directly contrary to Supreme Court’s admonition that “one of the Fifth Amendment’s ‘basic functions … is to protect innocent men …’ who otherwise might be ensnared by ambiguous circumstances.'” Ohio v. Reiner, 532 U.S. 17, 21 (2001), quoting Grunewald v. United States, 353 U.S. 391 (1957), which in turn was quoting Slochower v. Board of Higher Ed. Of New York City, 350 U.S. 551, 557-558 (1956) (emphasis original).

Reiner’s point about becoming ensnared in a web of circumstances seems more than appropriate in an SEC investigation. Many times those inquiries are based on a complex web of facts that occurred years ago. Circumstances can often point in several directions and it is all too easy to become ensnared in those circumstances, particularly for a witness who may not have had access to materials to properly prepare for testimony. No doubt the staff is aware of this. Yet their position on the Fifth Amendment persists.

All of this leaves one to ask: How can the SEC enforce the law by burdening fundamental legal rights? To be sure, an assertion of the Fifth Amendment may deprive the agency of facts it wants. Whether those facts are key to the inquiry or not relevant is not the question, however. The founding fathers, mindful of this possibility, chose to embed in our law the right of a person not to testify. An agency enforcing the law should respect and honor that privilege, not burden it. If there is to be proper “tone at the top,” it should begin with the SEC. It is time for the SEC to reform its policies regarding the Fifth Amendment.