On January 13, 2010, the Securities and Exchange Commission announced a potentially significant policy change intended to foster greater cooperation from individuals in enforcement investigations. The new measures are intended to give credit to offending individuals who self-report wrongdoing and cooperate with investigations and other enforcement actions. Robert Khuzami, Director of the Division of Enforcement, described the new policy as a “potential game-changer for the Division of Enforcement . . . There is no substitute for the insiders’ view into fraud and misconduct that only cooperating witnesses can provide.” Insider knowledge and live testimony will undoubtedly aid enforcement efforts and further the Commission’s goal of protecting investors. In turn, the Commission advises that prospective defendants who choose to cooperate, and provide timely and effective cooperation, could be given leniency in various ways. These benefits may range from having no enforcement action brought to reduced charges and sanctions in connection with enforcement actions.

The SEC has approved three main measures to improve the “quality, quantity, and timeliness of information and assistance” it receives. First, the Division of Enforcement has authorized its Staff to use various cooperation “tools” to facilitate and reward cooperation. The new tools are laid out in a revised version of the Divison’s enforcement manual in a new section entitled “Fostering Cooperation,” which can be viewed directly on the SEC’s website at http://www.sec.gov/spotlight/enfcoopinitiative.shtml. The tools include agreements similar to those regularly used by the Department of Justice in the criminal context—cooperation, deferred prosecution, and non-prosecution. These agreements provide cooperators with a range of inducements from reduced charges and sanctions to promises to forego an enforcement action entirely.

Second, the SEC has streamlined the process for submitting witness immunity requests to the Justice Department, thus making more available to the Staff another tool in the prosecutor’s toolbox.  

Third, and perhaps most important, the Commission issued guidelines as to the way it will evaluate an individual’s cooperation. Before delineating the specific criteria, the Commission acknowledged the tension between holding individuals accountable for their misconduct and providing incentives for individuals to cooperate. It also underscored the ultimate goal of the analysis—to protect the investing public. The regulation then goes on to list 26 different factors grouped in four categories:

  • the nature and value of the assistance provided by the cooperating individual;
  • the relative importance of the underlying matter in which the individual cooperated;
  • the societal interest in ensuring the individual is held accountable for his or her misconduct; and 
  • the appropriateness of cooperation credit based upon the risk profile of the cooperating individual.  

The Commission cautioned that the factors are not listed in order of importance and are not intended to be all-inclusive or to require a specific determination in any particular case.  

Practitioners have long anticipated the establishment of this type of framework for individuals. See Gary P. Naftalis and Alan R. Friedman, Encouraging Individual Cooperation in SEC Enforcement Investigations, 30 Sec. Reg. L.J. 118 (Summer 2002). In 2001, the Commission articulated an analogous policy for corporate cooperators, commonly referred to as the “Seaboard Report.” And while the Commission has always contended that it rewards cooperation from individuals, it had never promulgated a report or policy statement. Moreover, given the discretion exercised by the Staff, practitioners had questioned the actual degree of leniency afforded to individual cooperators and the disparity of the leniency exercised from case to case. Anticipation for the SEC’s recent announcement grew in August 2009 after Mr. Khuzami indicated that a policy statement encouraging cooperation by individuals would be one of five new initiatives undertaken to reorganize the Enforcement Division and enhance its investigatory processes. Now that the policy has been announced, it remains to be seen how the policy will be applied over time.The Enforcement Staff has put special emphasis on the value that would be afforded timely, that is early, and voluntary cooperation. Some practitioners remain skeptical about the Commission’s ability to motivate cooperators in light of the Commission’s historic lack of flexibility in the imposition of sanctions and other limitations. Individuals should also be concerned that their willingness to self-report and cooperate with the SEC might increase the likelihood of being charged in a parallel criminal prosecution. Taken at face value, however, this initiative signals a desire to work with individuals to achieve the Commission’s law enforcement goals while at the same time rewarding those that assist in this endeavor.