SEC Enforcement Manual Offers a Window Into Division of Enforcement’s Processes
The SEC posted on its website the Division of Enforcement’s “Enforcement Manual” (the “Manual”) on October 6, 2008. The Manual provides guidelines for the SEC’s enforcement Staff that should result in greater procedural uniformity across the SEC’s offices (and within offices), which sometimes has been lacking1.
The procedures set forth in the Manual require senior Division officials to play a larger role in decisions to open and to continue investigations. New procedures are described for certain situations, such as those involving communications between senior Division officials and private parties. However, beyond these discrete items, and especially as concerns the day-to-day conduct of investigations, there is little that experienced practitioners would find unfamiliar. Nonetheless, the Manual does provide a window into the Division’s sometimes opaque internal processes. Financial services firms, public companies, and individuals who, fortunately, have not had to become familiar with such processes may find it helpful to review the Manual if and when they become entangled in an SEC investigation.
The effectiveness of the Manual in fostering procedural uniformity and other improvements in the Division’s practices will depend on the extent to which senior enforcement Staff require adherence by line investigators. Importantly, the Manual specifies that persons or entities subject to an SEC investigation cannot rely upon the Manual as “creat[ing] any rights, substantive or procedural.” Thus, private parties may have limited success in referring to the Manual in order to affect Staff conduct.
The Enforcement Manual apparently has been under development for some time. Commentators had criticized the Division for failing to develop and maintain a procedures manual2. (The Department of Justice, in contrast, has long maintained a procedures manual for U.S. Attorneys Offices.3) A spokesperson for the SEC has acknowledged that the Division published the Manual, at least in part, in response to these criticisms4. Further, both courts and commentators have recently rebuked the SEC and the Division for their handling of some high-profile matters5, and certain sections of the Manual appear intended to address procedural defects that may have contributed to these problems. Regardless of the impetus, it is helpful to have the Division’s procedures articulated publicly and collected in one place.
The Manual, identified as the product of the Division’s Office of Chief Counsel, in consultation with the SEC’s Office of the General Counsel, Office of the Inspector General, and Office of the Chairman, is divided into five main topics:
- The Introduction sets forth general principles under which the Division operates, including a description of the Division’s mission (“[T]o protect investors and the markets by investigating potential violations of the federal securities laws and litigating the SEC’s enforcement actions”) and a statement of the Division’s commitment to “a culture of integrity and professionalism.”
- The Guide to Matters Under Inquiry and the Stages of Informal and Formal Investigations describes procedures for initiating investigations and deciding what resources should be applied (including the office that should be responsible for the investigation) in order to conduct the investigation efficiently. Among other things, the Manual describes a process whereby senior enforcement Staff will review periodically all pending matters and encourages them to close investigations of conduct that do not involve potentially serious malfeasance. The criteria to be applied, including the programmatic importance of the investigation and the magnitude of the potential violation, allow significant discretion, and this procedure can be effective only if the review is rigorous.
This section of the Manual also describes the Wells and Action Memorandum processes, the presentation of recommendations to the Commission, and procedures for closing an investigation, including the sending of termination letters (discussed in greater detail below).
- The Guide to Investigative Practices provides guidance for communications between senior officials of the Division of Enforcement and counsel for those who may be subject to an investigation. (This provision is intended to address criticisms that senior officials have provided access to certain prominent counsel or have inappropriately disclosed details of investigations.) This section also describes document control procedures, the maintenance of investigative files, and the appropriate conduct of investigative testimony. The section on Privileges and Protections discusses the considerations involved when a witness or counsel asserts attorney-client or other privileges (discussed in greater detail below), and the section on Cooperation with Other Agencies and Organizations describes procedures to be followed when sharing information with other agencies, including the Food and Drug Administration and the Public Company Accounting Oversight Board (PCAOB). Finally, the section on Informal Referrals from Enforcement describes processes for referring matters to the Department of Justice, self-regulatory organizations (such as the Financial Industry Regulatory Authority (FINRA)), or the PCAOB.
Although, as noted, many of the procedures described in the Manual are familiar, we highlight the following:
- Although the Manual does not mandate an "open jacket" policy (i.e., a requirement to provide access to non-privileged materials in the investigative file during the early stages of the Wells process) or even establish a preference for such a practice, it does clarify that it is within the enforcement Staff's discretion to provide such information. The practice previously has been localized to certain SEC offices, and we hope that other offices will adopt it, which would be a very helpful development.
- The Manual states that it is the Division's policy to notify individuals and entities "at the earliest opportunity" when the Staff has determined not to recommend an enforcement action. This has been policy for some time, yet it has been followed inconsistently. The Manual says that termination letters "must be sent" to, among others, "anyone who asks for one" (and who is not under consideration for an enforcement action). If the request is denied, the relevant Associate Director or senior regional enforcement official must be informed. Collectively, these statements should prompt more uniform application of the policy.
- As to privilege waivers and cooperation, the Manual articulates the Division's established policy (which, until recently, contrasted with the policy of the DOJ). The Manual instructs the Staff not to ask for waivers and specifies that credit for cooperation is not contingent on the provision of a waiver. Rather, the Staff is instructed to work with companies so that the Staff receives information helpful to the investigation other than through waiver.
Although the Manual does not represent a wholesale revision of the SEC Enforcement Division’s investigative practices, it is potentially significant that the Division has articulated these policies in a publicly-available document. The impact, however, will be clarified only with the benefit of experience.
1) The SEC did not herald the public dissemination of the Manual with a press release or other commentary, and the link to the Manual is posted on the Division of Enforcement’s specific web-page, rather than on the Commission’s general web-site. The low-key approach may reflect the fact that, as discussed below, at least part of the impetus behind the Manual is criticisms of the enforcement process that have been leveled at the Division and the Commission itself.
2) See, e.g., Arlen Spector Speaks on the Senate Floor Regarding the SEC (September 3, 2007) (“The SEC should draft and maintain a comprehensive manual of procedures for conducting enforcement actions, along the lines of the U.S. Attorney’s Manual. The Manual should address situations and issues likely to recur, including a section outlining all SEC policies related to the issuance of subpoenas. It should set a consistent SEC policy and provide general guidance for complex issues that require individual assessment on a case-by-case basis”); see also, GAO Report, Securities and Exchange Commission, Additional Actions Needed to Ensure Planned Improvements Address Limitations in Enforcement Division Operations (August 2007).
3) See Justice Manual.
4) See, Securities Regulation & Law Report, Volume 40, Number 40 (October 13, 2008).
5) See, e.g., United States Securities and Exchange Commission, Office of Inspector General, Report of Investigation: Reinvestigation of Claims by Gary Aguirre of Improper Preferential Treatment and Retaliatory Termination (Sept. 2008); Christopher Cox, Chairman, Securities and Exchange Commission, Statement Concerning Subpoenas of Journalists (2006); Christopher Cox, Chairman, Securities and Exchange Commission, Remarks at the Annual Meeting of the Society of American Business Editors and Writers (May 1, 2006), available at http://www.sec.gov/news/speech/2006/spch050106cc.htm; Christopher Cox, Chairman, Securities and Exchange Commission, Address to the New York Financial Writers Association (June 8, 2006), available at http://www.sec.gov/news/speech/2006/spch060806cc.htm; United States v. Stringer, 408 F. Supp. 2d 1038 (D. Or. 2006), overruled by United States v. Stringer, 535 F.3d 929 (9th Cir. 2007).