The SEC recently announced various initiatives to encourage individuals and companies to fully and truthfully cooperate with SEC investigations and enforcement actions. The Director of the Division of Enforcement, Robert 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 into fraud and misconduct that only cooperating witnesses can provide. 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.”
First, the Division of Enforcement authorized its staff to use new tools and to expand the use of existing tools to encourage individuals and companies to report securities law violations and provide assistance in connection with investigations and related enforcement actions. The new tools – long available to the Justice Department in its criminal investigations and prosecutions – are described in a revised version of the Division’s Enforcement Manual in a new section entitled “Fostering Cooperation” and include:
- Cooperation Agreements. Formal written agreements between the Enforcement Division and an individual or corporation (cooperator) in which the Enforcement Division agrees to recommend to the SEC that a cooperator receive credit for cooperating in investigations or related enforcement actions if the cooperator provides substantial assistance such as full and truthful information and testimony.
- Deferred Prosecution Agreements. Formal written agreements between the SEC and a cooperator in which the SEC agrees to forego an enforcement action against a cooperator during the period of deferred prosecution if the cooperator agrees, among other things, to cooperate truthfully and fully with the SEC’s investigation and related enforcement actions and to comply with certain prohibitions and undertakings.
- Non-Prosecution Agreements. Formal written agreements, which the SEC has indicated it will enter into “under limited and appropriate circumstances,” in which the SEC agrees not to pursue an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate truthfully and fully with the SEC’s investigation and related enforcement actions and comply, under certain circumstances, with express undertakings.
The SEC addressed “cooperation arrangements” in its long-awaited policy statement setting out, for the first time, the way in which it will determine “whether, how much, and in what manner to credit cooperation by individuals to ensure that potential cooperation arrangements maximize the SEC’s law enforcement interests.” According to the press release, this pronouncement “is similar to the so-called ‘Seaboard Report’ that was issued in 2001 and detailed the factors the SEC considers when evaluating cooperation by companies.”
In the policy statement the SEC identifies four general considerations:
- The assistance provided by the cooperating individual;
- The importance of the underlying matter in which the individual cooperated;
- The societal interest in ensuring the individual is held accountable for his or her
- The appropriateness of cooperation credit based upon the profile of the
The SEC also announced that it has delegated to the Director of the Division of Enforcement
the authority to make requests for witness immunity directly to the Department of
Justice without first seeking an order from the SEC, thereby streamlining the process for
submitting witness immunity requests.
The potential impact of the new initiative will depend upon how the SEC resolves the fact,
acknowledged in its policy statement, that “there exists some tension between the objectives
of holding individuals fully accountable for their misconduct and providing incentives
for individuals to cooperate with law enforcement authorities.”
On Jan. 13, 2010, Khuzami named unit chiefs for five specialized units within the Enforcement
Division, as well as the head of the new Office of Market Intelligence. Khuzami
explained that each of the five national specialized units – Asset Management, Market
Abuse, Structured and New Products, Foreign Corrupt Practices Act, and Municipal Securities
and Public Pensions – will “benefit greatly” from the cooperation initiative. For more
on the specialized units, please see our September 2009 Investment Management Developments
A copy of the Division of Enforcement’s Enforcement Manual is available at http://www.