January.13.2010
On January 13, 2010, the Securities and Exchange Commission published its long-awaited Policy Statement Concerning Cooperation By Individuals In Its Investigations And Related Enforcement Actions. The new Policy Statement is set forth at 17 C.F.R. § 202.12, and is also included in Section 6 (titled "Fostering Cooperation") of the revised version of the SEC Division of Enforcement’s Enforcement Manual, which was also released on January 13. Though the Policy Statement on its face applies only to individuals, the Enforcement Staff will surely apply its principles to companies as well, under the overall framework of the Commission’s October 2001 "Seaboard Report."
Under the Policy Statement, the Commission’s determination whether, how much, and in what manner to credit cooperation by individuals will involve four considerations:
The "assistance" prong of the inquiry involves a consideration of the nature and value of the individual’s cooperation, e.g., the timeliness and quality of the assistance, whether the assistance resulted in the initiation of an investigation, whether the assistance conserved Staff time and resources, whether the cooperation was voluntary, whether the individual provided "non-privileged" information that was not requested or that otherwise might not have been discovered, and whether the individual encouraged others to cooperate.
Notably, the Policy Statement does not include disclosure of privileged information as a criterion for assessing the nature or value of cooperation. An earlier section of the revised Enforcement Manual states that "[t]he staff must respect legitimate assertions of the attorney-client privilege and attorney work product protection" and that the Staff should not ask for a party to waive privilege without the prior approval of the Enforcement Director or Deputy Director. As to information from corporate internal investigations, the revised Manual states as follows:
To receive cooperation credit for providing factual information obtained from the interviews, the corporation need not necessarily produce, and the staff may not request without approval, protected notes or memoranda generated by the attorneys’ interviews. To earn such credit, however, the corporation does need to produce, and the staff always may request, relevant factual information—including relevant factual information acquired through those interviews.
It is also noteworthy that the Policy Statement does not limit cooperation credit to an individual in any particular matter who is the "first one in" to proffer cooperation, though that will be one factor that the Commission will consider.
The "importance" prong of the analysis focuses on the character of the investigation (whether the subject matter is a Commission priority, the age, duration and type of conduct, the number of alleged violations, and whether the conduct is isolated or recurring), as well as the dangers to investors, both in nature and amount, presented by the alleged misconduct. As the Commission put it, cooperation "that involve[s] priority matters or serious, ongoing, or widespread violations will be viewed most favorably."
The "societal interest" prong assesses the severity of the individual’s alleged misconduct, whether the individual acted with the intent to deceive, whether the individual took steps to prevent the conduct from occurring or notified the SEC, other law enforcement authorities or members of management or the board of directors, whether the individual took other remedial steps, and whether the individual has been subjected to sanctions by other authorities.
Finally, the "appropriateness" prong of the inquiry looks into the "profile of the individual" – his or her history of lawfulness, acceptance of responsibility, and opportunity to commit future violations. These considerations are similar to the so-called Steadman factors that courts consider in deciding whether an injunction is appropriate in federal court actions.
The Commission acknowledged that the Policy Statement involves a case-by-case inquiry and that, accordingly, there are no hard and fast rules. Yet, this Statement is perhaps the most detailed, specific delineation of the factors that the Commission and its Enforcement Staff will consider in deciding whether and to what extent to reward cooperation, and accordingly will provide a highly useful tool for counsel with clients who are the subject of a Staff inquiry or investigation.
In the same release, the Commission also outlined five tools for facilitating and rewarding cooperation: proffer agreements; written cooperation agreements pursuant to which the Staff will, among other things, agree to recommend that an individual or company receive credit for cooperation; deferred proffer agreements ("DPAs"); Non-Prosecution Agreements ("NPAs"); and immunity requests. While the SEC has used proffer agreements for some time, the other tools are new to the SEC. Tools such as DPAs, NPAs and immunity requests are more commonly used by the Department of Justice in criminal matters, and their use in SEC matters appears to be another example of change in the SEC Enforcement Division resulting from Director Robert Khuzami’s former tenure as head of the securities fraud unit of the Southern District of New York U.S. Attorney’s Office.
Cooperation agreements are formal written agreements in which the Enforcement Division will agree to recommend to the Commission that a cooperator receive credit for cooperating if (s)he provides substantial assistance such as full and truthful information and testimony. DPAs are formal written agreements in which the Commission will forego an enforcement action if the individual or company agrees, among other things, to cooperate fully and truthfully and to comply with express prohibitions and undertakings during a period of deferred prosecution. And, NPAs are formal written agreements in which the Commission will agree not to pursue an enforcement action against a cooperator under specified conditions, which may include payment of disgorgement or penalties and additional undertakings. Finally, the Commission has sought to streamline the process for submitting witness immunity requests to the Justice Department so as to encourage witnesses to testify substantively and not to invoke their Fifth Amendment rights.
In the press release announcing the Policy Statement, Mr. Khuzami referred to the new cooperation initiative as "a potential game-changer for the Division of Enforcement," adding that "[t]here is no substitute for the insiders’ view. … That type of evidence can expand our ability to conduct our investigations more swiftly, and to act quickly to file charges, freeze assets, and protect investors." Of course, it remains to be seen whether the new initiative will in fact be a "game-changer." For the Commission and Enforcement Division to achieve this goal, it will have to apply the Policy Statement in a manner that in deeds as well as in words meaningfully rewards cooperation by individuals and companies.
The Commission’s new Policy Statement regarding cooperation can be found here at pp. 119-136.