On October 31, 2016, the Securities and Exchange Commission (SEC) updated its Enforcement Manual1  guiding SEC enforcement staff on the use of the submission of white papers and other advocacy-type documents submitted to the SEC prior to a Wells notice. The new guidance on the submission of White Papers raises the risks for anybody who makes such a submission. Under the new Section 3.2.3.2 of the Enforcement Manual, the SEC will accept “white papers, PowerPoint decks, legal memos, or letter briefs (collectively ‘White Papers’)” that are prepared on a voluntary basis by persons who are under investigation. The SEC was careful to warn that any information provided in a White Paper may be used by the SEC for the following purposes:

as an admission, or in any other manner permitted by the Federal Rules of Evidence, or for any of the Routine Uses of Information described in Form 1662, “Supplemental Information for Persons Requested to Supply Information Voluntarily or Directed to Supply Information Pursuant to a Commission Subpoena.” (Form 1662 can be found at http://www.sec.gov/about/forms/sec1662.pdf.) White Papers also may be discoverable by third parties in accordance with applicable law.
Similarly, the SEC included specific criteria upon which it would reject a White Paper. This criteria addressed the dearth of and conflicting case law under Federal Rule of Evidence 408 (Rule 408). The staff will reject a White Paper in which:

§ 3.2.3.2, p. 37
 
Similarly, the SEC included specific criteria upon which it would reject a White Paper. This criteria addressed the dearth of and conflicting case law under Federal Rule of Evidence 408 (Rule 408). The staff will reject a White Paper in which:

  • the person producing the White Paper seeks to limit its admissibility under Federal Rule of Evidence 408 or the Commission’s ability to use the White Paper for the purposes described in Form 1662.
  • the White Paper contains or discusses a settlement offer. Offers of settlement should not be included in White Papers that also address other topics, and instead, may be made in a separate document.

§ 3.2.3.2, p. 37

With regard to the first rejection criterion, the SEC distinguished itself from other government agencies, such as the Department of Justice (DOJ), which allow parties under investigation to submit white papers and other advocacy presentation under the auspices and the protection of Rules 408 and 410. Under Rule 408, evidence of settlement negotiations or offers to settle is not admissible at trial “to prove or disprove the validity or amount of a disputed claim or to impeach by a prior inconsistent statement or a contradiction.” Rule 410 contains the same stricture for statements made in plea negotiations. The purpose of these rules is to encourage settlement by ensuring such discussions cannot be used against a party at trial. See Bankcard Am., Inc. v. Universal Bancard Sys., Inc., 203 F.3d 477, 483 (7th Cir. 2000). The case law — however sparse — in this area of law suggests a fact-intensive inquiry to determine whether the purpose of the submission was for settlement or merely to avoid liability during the investigation phase2. As a result, the second criterion adds another level of protection for the SEC against Rule 408 evidentiary exclusion challenges because the SEC will reject a White Paper that contains any discussion of settlement or assertion of Rule 408 protection. Note, in the context of a parallel investigation in which both the DOJ and the SEC are participating, this policy could allow a submission to the SEC to be used as evidence even where the DOJ has agreed to treat a submission to it under Rules 408 and 410.

Wells Notices

While the SEC has allowed responses to a Wells Notice, the formal concept of White Papers is new to the SEC. Since 1972, the SEC has had policy that requires SEC enforcement attorneys to provide notice to potential defendants that they intend to pursue an enforcement action for alleged securities violations (Wells Notice). See § 2.4 of the SEC Enforcement Manual. Potential defendants are offered the opportunity to respond to the Wells Notice by explaining why an enforcement action is not warranted under the circumstances. However, a White Paper is different than a Wells submission in that a White Paper offers the potential defendant an earlier chance to lay out their position while a Wells submission generally occurs after enforcement staff has already made a preliminary determination to recommend to the Commission the filing of an enforcement action. White Papers generally occur during the investigation where no enforcement action decision has yet been made, and enforcement staff looks to the potential defendant for assistance in developing its investigation.

In addition to including a section on White Papers in the Enforcement Manual, the SEC also revised the Wells Notice section to protect against coverage under Rule 408:

  • The staff may reject a Wells submission if the person making the submission seeks to limit its admissibility under Federal Rule of Evidence 408 or the Commission’s ability to use the submission for the purposes described in Form 1662.
  • The staff may reject a Wells submission if the submission contains or discusses a settlement offer. Offers of settlement should not be combined with, or included in, Wells submissions, and instead may be made in a separate document.

§ 2.4, p. 22

Although there is some good case law for the SEC to support their position that Wells submissions are not covered under Rule 408,3 the SEC further protected itself by allowing the enforcement staff to reject a Wells submission that “contains or discusses a settlement offer.”

Key Takeaways

Although these changes do not signify any major changes from the current status quo in how the SEC conducts its investigations, they do show that the SEC’s endorsement of the submission of White Papers prior to the Wells Notice and raises the risks for a defendant who makes such a submission during the investigation process. Since the enactment of the Dodd-Frank Act, the SEC had begun to deviate from the strict Wells process by incorporating White Papers earlier into the investigation in part due to Section 929U(a) of the Dodd-Frank Act, which requires that the enforcement staff make a decision regarding pursuing an action 180 days after a Wells notice is sent to a potential defendant. The SEC’s incorporation of a White Paper submission prior to a Wells notice provide both the SEC and the potential defendants with more flexibility with regard to timing, content, and potential publicity and a greater opportunity to share facts and knowledge prior to the Wells submission.

The SEC, however, was careful to preserve its ability to use these submissions — either in the form of a White Paper or Wells submission — in later proceedings or trials by allowing enforcement staff to reject any submissions that assert Rule 408 protection or contain a discussion of settlement. Therefore, potential defendants must be cautious with regard to the information they put forth in any submission because the SEC will be on the lookout for ways to use it against them. This caution, in turn, could chill the advocacy that potential defendants are able to pursue in White Papers and deprive the SEC of valuable input into its decisionmaking.