On the same day the Securities and Exchange Commission Enforcement Division introduced the leaders of its five new specialized units, the Commission formally announced a series of new measures aimed at fostering greater cooperation from individuals and companies in the agency’s investigations and enforcement actions. One of the new measures gives Enforcement staff the ability to employ certain “cooperation tools” in its investigations and related enforcement actions—tools similar to those regularly used by the Department of Justice (“DOJ” or ”Justice Department”) in a criminal context. The new initiative also includes a policy statement setting forth the analytical framework the SEC will use to evaluate cooperation by individuals, as well as a streamlined process for submitting witness-immunity requests to the DOJ for witnesses who might assist the staff in those investigations and actions.

New Cooperation Tools

Unlike the Justice Department, which has made the use of cooperation tools routine and even standardized (to some degree) a form of cooperation agreement specifying the benefits of cooperation and the consequences for violation of the agreement, the SEC’s Enforcement Division traditionally has had no formal practice with respect to cooperating individuals and companies. The cooperation tools just announced1 borrow from the DOJ’s tool box, now permitting the staff to garner cooperation through the use of formal written agreements, including:

Cooperation Agreements, in which the Enforcement Division agrees to recommend to the Commission that a cooperator receive credit for providing substantial assistance, such as full and truthful information and testimony, in investigations or related enforcement actions;

Deferred Prosecution Agreements, in which the Commission agrees to forego an enforcement action against a cooperator if the cooperator agrees, among other things, to cooperate fully and truthfully and to comply with express prohibitions and undertakings during a period of deferred prosecution;

Non-Prosecution Agreements, entered into under limited and appropriate circumstances, in which the Commission agrees not to pursue an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and to comply with express undertakings; and

Proffer Agreements, in which the Commission agrees that any statements made by an individual on a specific date may not be used against him or her in subsequent proceedings, except that the Commission may use the statements as a source of additional leads and to impeach or rebut inconsistent testimony by that individual at a subsequent trial, and may share the information with criminal authorities in a prosecution for perjury, false statements or obstruction of justice. The new cooperation initiative also codifies the Enforcement Division’s ability, in appropriate cases, to provide oral assurances to individuals or companies that the Division does not anticipate recommending an enforcement proceeding against the individual or company.

Under the SEC’s new rules, the agency has delegated authority to the director of the Enforcement Division to submit witness immunity-order requests to the Justice Department for witnesses who have provided, or have the potential to provide, “substantial assistance” in the SEC’s investigations and related actions.2 The rule, which in the past required the Commission to seek a letter of immunity from the Justice Department, streamlines the immunity request process.

Cooperation Credit

According to the SEC’s new policy statement,3 the Commission will evaluate, on a case-by-case basis, the specific circumstances surrounding an individual’s cooperation in determining the extent to which the individual will receive cooperation credit. In general, the Commission will evaluate the following four considerations.

The assistance provided by the cooperating individual in connection with the SEC’s investigation or related enforcement actions. This includes, among other things, whether the individual’s cooperation “resulted in substantial assistance,” its nature and timeliness, whether it was voluntary, and whether the individual provided non-privileged information that was not requested by the staff or that otherwise might not have been discovered.

The importance of the underlying matter in which the individual cooperated. In this regard, the Commission will consider, among other things, the nature of the investigation, including whether the subject matter of the investigation is a priority, the types of securities violations, the age and duration of the misconduct, the number of violations and whether they were isolated or repetitive, and the dangers and harm or potential harm to investors or others resulting from the underlying violations involved in the investigation or action.

The societal interest in ensuring that the cooperating individual is held accountable for his or her misconduct. The Commission will consider, among other things, the severity of the misconduct, the culpability of the individual in relation to others, the degree to which the individual tolerated illegal activity and his or her efforts to remediate the harm, and whether and to what extent sanctions for the violations were imposed on the individual by other federal, state or industry organizations.

The appropriateness of cooperation credit based upon the profile of the cooperating individual. Here, the Commission will assess the individual’s history of compliance with securities laws and regulations, acceptance of responsibility for past misconduct, and the degree to which the individual will have an opportunity to commit future securities law violations in light of his or her occupation.  

Seaboard for Individuals

The new individual cooperation policy, broadly speaking, emphasizes many of the same types of considerations articulated in the SEC’s 2001 report explaining why it was declining to file charges against Seaboard Corporation after an investigation of accounting irregularities at that company.4 For the SEC, this presumably means a greater flow of information from whistleblowers and others seeking to avail themselves of cooperation credit.

For companies that have uncovered potential wrongdoing, the new policy impacts the evaluation of how they might best position themselves in order to benefit from cooperation credit. With cooperating individuals seeking to be the “first to report the misconduct,” companies may perceive that there is a race to self-report, and may consider doing so earlier than they might have in the past.  

Privilege issues also will be important to consider. Among the Seaboard factors to have generated vigorous debate and requiring careful analysis is the extent to which a company shares the results of its internal investigation of the underlying violations, including whether the company refrains from asserting the attorney-client privilege or work product protection. While the announced individual cooperation policy does not raise the same concerns, it may raise other questions in practice (e.g., to what extent, if any, will an individual’s ability to receive cooperation credit be affected by his inability to share information protected from disclosure by the company’s privilege?).

The Prosecutor’s Toolbox

Perhaps most evident from the SEC’s announcement is its embrace, yet again, of tactics traditionally used by criminal prosecutors in investigations and related actions. This is not altogether surprising given the professional pedigree of the newly constituted division. Director of Enforcement Robert Khuzami is an 11-year veteran of the U.S. Attorney’s Office for the Southern District of New York. Both his deputy and the New York regional director also served as former prosecutors in the same office.

Whether DOJ cooperation tactics will translate to a civil enforcement context remains to be seen. As the program is implemented, individuals and their counsel will need to grapple, early and often, with any number of practical questions in determining whether a cooperation agreement is advisable, including:

  • What level(s) of cooperation (or “substantial assistance”) will allow an individual to avail himself or herself of a formal agreement, and will that level vary depending on the type of agreement?
  • Given the potential collateral consequences of admitting to wrongdoing (e.g., proceedings by self-regulatory organizations against registered persons or civil litigation), is the individual better served entering into a settlement in which he or she neither admits nor denies liability rather than cooperating?
  • Is early cooperation with the SEC possible where criminal authorities may be investigating the same misconduct on a slower timeline and are, therefore, not prepared to grant immunity from prosecution?  
  • What are the risks that the Commission will not authorize credit for an individual who has cooperated?  
  • Will the SEC provide sufficient information regarding the nature and benefits cooperation given the overall lack of transparency in confidential SEC settlements?  

As in the criminal context, counsel also will need to carefully consider whether they may represent more than one client in the case at hand. The SEC’s new policy suggests tangible benefits to whistleblowers—benefits that were only theoretical prior to this policy. In circumstances where counsel will need to advise clients on whether they can avail themselves of the policy, this potentially creates a conflict with clients who cannot.