On January 13, the SEC announced a new policy to provide individuals with immunity from prosecution for providing information to the agency that furthers an investigation (press release available at http://www.sec.gov/news/press/2010/2010-6.htm). The agency’s approach is threefold. First, the SEC has now delegated its authority to the Enforcement Division to submit witness immunity requests directly to the DOJ for those witnesses who have provided, or will provide, substantial assistance in an investigation. Second, the Enforcement Division now has at its disposal various tools that were previously unavailable to it, including Cooperation Agreements, Deferred Prosecution Agreements, and Non-Prosecution Agreements in order to encourage both individuals and corporations to report wrongdoing and to cooperate in investigations and enforcement actions. Finally, the SEC has, for the first time, set forth how it will determine appropriate levels of credit for cooperating individuals. Its analysis will include four general considerations: the cooperating individual’s assistance; the importance of the underlying matter; the societal interest in holding the individual accountable for wrongdoing; and the appropriateness of granting cooperation credit based upon the individual’s risk profile.

This new policy is one of many recent measures designed to increase the efficiency and impact of the agency’s Enforcement Division, which has been criticized in the past for moving too slowly. Other measures recently adopted include:

  • Granting subpoena authority to Enforcement Division staff attorneys so that staff need only seek approval from a supervisor as opposed to obtaining SEC approval (August 2009);
  • Naming leaders of national specialized units to focus on five “priority” areas of securities law (Asset Management; Market Abuse; Structured and New Products; Foreign Corrupt Practices; and Municipal Securities and Public Pensions) (January 2010); and
  • The Creation of a new Office of Market Intelligence to more efficiently collect, analyze, and monitor tips and referrals (January 2010).

This new individual immunity policy, combined with the other tools now available to the restructured Enforcement Division, may entice disgruntled employees to bring the SEC to bear because of the lower likelihood of facing personal liability. The anticipated impact for companies from the SEC’s change in policy, however, remains unclear, as Cooperation Agreements, Deferred Prosecution Agreements, and Non-Prosecution Agreements almost exclusively benefit individuals. Further, the Enforcement Division can only make a recommendation based on their evaluation of the four general cooperation considerations above; it is ultimately the entire Commission’s decision whether to prosecute or settle with a witness.

The cooperation initiative raises an additional ethical consideration for those counsel who are asked to represent multiple officers and/or employees in an SEC investigation. While current U.S. criminal practices often reward both the first witness to the door and subsequent witnesses with cooperation agreements, SEC Enforcement Division Director Robert Khuzami has indicated that his division will not be as liberal. At a December 2009 AICPA National Conference (text available at http://www.sec.gov/news/speech/2009/spch120809rsk.htm), Khuzami noted that this cooperation initiative may present a “special challenge” for counsel and witnesses in SEC investigations because reduced sanctions are possible only in “appropriate circumstances, such as where an individual is ‘first in the door’” to provide evidence of wrongdoing, and that “obviously, only one client can be first.” Law firms often represent more than one individual witness (and perhaps the corporation as well); thus, lawyers and their clients must carefully weigh the ethical obligations and conflicts of interest that may result from choosing to be “first in the door” and obtaining the only opportunity for favorable treatment.