As we have previously discussed, the Securities and Exchange Commission ("SEC") Director of Enforcement Robert Khuzami recently unveiled new tools designed to help the SEC Staff accelerate investigative proceedings. (See Davis Polk Client Newsflash, SEC Enforcement Director Introduces New Unit Chiefs and Cooperation Incentives.) For the first time, the SEC has now (1) announced guidelines for assessing individual cooperation in investigations and enforcement actions, and (2) authorized the Director to seek immunity for cooperating witnesses directly from the Department of Justice ("DOJ"). On February 5, at the annual SEC Speaks conference, SEC personnel further explained these changes and discussed the success of recent efforts to delegate additional responsibility to the SEC Staff.
Framework for Evaluating Cooperation
In 2001, in a release that has since become known as The Seaboard Report, the SEC outlined its criteria for analyzing whether to initiate enforcement actions against corporations. The report, which mirrored the DOJ's policy for deciding whether to prosecute corporations, included as a relevant factor the corporation's level of cooperation with the Staff in disclosing wrongdoing and providing evidence. While The Seaboard Report has been operative for nearly a decade, the SEC has only now articulated parallel criteria to consider relating to cooperation by individuals.
The SEC's new policy statement (17 C.F.R. § 202.12) details the factors that the Commission and Staff plan to weigh when deciding whether, and how extensively, to credit individual cooperation in investigations and enforcement actions. At the February 5 conference, Deputy Director of Enforcement Lorin Reisner stated that the SEC will be "looking to extend significant credits and benefits" to witnesses who assist the SEC in investigations and enforcement actions. Deputy Director Reisner indicated that the individual guidelines are intended to help the SEC and defense counsel use common criteria in weighing the value of potential cooperators.
The policy statement itself acknowledges the "tension" that exists between the objective of holding individuals fully accountable for misconduct and the objective of creating meaningful incentives for individuals who have knowledge of wrongdoing to cooperate with law enforcement. The statement indicates that the Commission and Staff will analyze cooperation by looking at four key issues:
- the value and nature of the individual's assistance—including whether the cooperation was substantial and complete, was offered in a timely fashion (e.g., the individual was the first to report misconduct, or cooperated before knowing that an investigation was pending), and resulted in a meaningful conservation of Commission resources;
- the public importance of the underlying matter—including whether the subject matter of the investigation is a Commission priority, the nature of the violation, the age and duration of the conduct, and the harm that it caused;
- the societal interest in holding the individual accountable—including the severity of the misconduct when measured against the individual's knowledge, education, and position, the individual's level of culpability (e.g., whether the individual acted with scienter), whether the individual tolerated illegal activity, and any efforts undertaken by the individual to remediate harm caused; and
- the individual's "profile"—including whether the individual has a history of lawfulness, has accepted responsibility for past misconduct, and the extent to which the individual plans to serve in a position that will create opportunities for future violations of the federal securities laws.
One important question with respect to these guidelines has been whether the SEC intended to credit an individual's cooperation with other regulatory agencies. At the February 5 conference, Regional Director George Canellos stated that the SEC will consider cooperation with other regulators. Moreover, the SEC has revised its proffer agreement to indicate that the SEC will not provide information to other regulators unless those regulators agree to abide by the same restrictions to which the SEC has agreed. Director Khuzami stated that the SEC will also expect defense counsel to demand that other regulators abide by these restrictions, creating parity for all involved.
Witness Immunity Order Requests
Under new Rule 30-4 (17 C.F.R. § 200.30-4(a)(14)), SEC requests to DOJ for immunity for individuals cooperating with SEC investigations and proceedings no longer require Commission approval. Rather, Director Khuzami is authorized to seek immunity directly from DOJ for witnesses who he believes provide "substantial assistance" to the Staff. (The "substantial assistance" formulation will be familiar to criminal law practitioners, since it is the same standard that appears in the United States Sentencing Guidelines and the Federal Rules of Criminal Procedure regarding a defendant's cooperation with federal prosecutors.) The SEC expects that this rule will streamline its process and conserve Commission resources, while improving the speed with which witnesses can receive immunity for assistance.
The delegation of authority to Director Khuzami to seek immunity directly from DOJ is the second recent delegation that the Commission has made to increase the speed of investigations. In August 2009, the SEC enacted a new rule (17 C.F.R. § 200.30-4(a)(13)) that permits Director Khuzami to issue formal orders of investigation, eliminating delays from the Staff seeking Commission approval before issuing subpoenas. Director Khuzami subsequently delegated such authority to senior Staff throughout the Division, thus permitting SEC field offices to issue subpoenas of their own accord. (See Davis Polk Client Newsflash, SEC Announces Significant Enforcement Initiatives.) At the February 5 conference, the Staff reported significantly more effective investigations as a result of the delegation, with stories throughout the field of the Staff obtaining evidence more quickly than before.
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It is not yet clear how significant the most recent developments will prove to be. Nonetheless, the new policies clearly are designed to encourage witness cooperation and to continue to allow the Staff to get access to sensitive information as quickly as possible.