The US Securities and Exchange Commission (“SEC”) has reportedly initiated an inquiry into possible Foreign Corrupt Practices Act (“FCPA”) violations in the US banking and private-equity industries.1 In recent weeks, the SEC has reportedly sent letters of inquiry to at least ten different financial firms focusing on the recipients’ involvement with sovereign-wealth funds. According to press reports, the letters do not contain allegations of bribery or misconduct, but ask about recipients’ connections to sovereign-wealth funds and request that the firms retain documents related to their dealings with such funds.2 Because sovereign-wealth funds are closely related to foreign governments, individuals at the funds could come within the FCPA’s broad definition of “foreign officials” to whom illicit payments are proscribed by the FCPA.
Reportedly, the letter recipients include several US financial institutions in which sovereign-wealth funds took investment positions just before or during the financial crisis of 2008. Among its investigative techniques, the SEC is authorized to serve letter requests on regulated institutions in a “sweep” as part of an industry-wide review, focusing on the areas of staff interest. This device, informally known as “SEC Interrogatories” or more formally as a “Section 21(a) letter,” enables the SEC to collect a broad spectrum of information from the industry. An SEC sweep under Section 21(a) (1) may be based on information the SEC already has obtained from ongoing investigations, news reports, whistleblower tips or other sources, not necessarily particularized complaints about firms or practices.
While Section 21(a) (1) letter may be substantive and detailed, the responses must be submitted in writing, under oath, and are time sensitive.3 Time limits imposed by the SEC for responses place a significant burden on an institution to identify documents and verify facts and sources of information to prepare sworn responses quickly. The “sweep” letters also may require recipients to identify individuals with potential knowledge of the circumstances under review, and to preserve paper and electronic documents for subsequent subpoenas and document requests.
The SEC will collect and review the sworn Section 21(a) (1) responses and information provided by the institutions, and if the staff determines that answers warrant further review, further requests and formal investigative proceedings may be initiated.
In FCPA and other significant investigations, it is customary for the SEC and DOJ to communicate and coordinate on such matters. Moreover, because of cross-border regulation and increased cooperation between the DOJ, SEC and national law enforcement and regulatory authorities, financial firms face increased risks of coordinated international enforcement actions.
Financial institutions that have had business dealings with sovereign wealth funds, whether or not they have received a letter of inquiry from the SEC, should be aware of this development and consider what proactive approach may be taken to evaluate and effectively deal with any FCPA issues that may require their attention..