The SEC Division of Enforcement published its Enforcement Manual on October 6, 2008. The manual is a guide to the staff of the Enforcement Division and, for the first time, it will serve as a resource for the public to obtain information regarding Enforcement Division processes, policy and procedure. In the past, the Enforcement Division's investigative process has been somewhat unclear, and the publishing of this manual provides to the public procedural rules and policies that are certain to assist practitioners with strategy decisions when practicing before the Enforcement Division.
The Enforcement Manual is a useful guide to those practicing before the Enforcement Division; this alert provides a brief overview.
The manual deals with, among other issues, the following key aspects of the Enforcement Division's work:
- The process for opening an investigation
- The Wells process
- Closing procedure and termination notices
- Communication with senior enforcement officials
- Document production in response to SEC subpoenas
- Informal referrals to other agencies
The full text of the manual can be found at http://www.sec.gov/divisions/enforce/enforcementmanual.pdf.
Opening Investigations and Ongoing Review
The Enforcement Manual addresses the opening of Matters Under Investigation (MUI), a preliminary investigation of conduct with the potential to violate federal securities laws. The purpose of this process is to ensure the best allocation of resources as well as to ensure the most appropriate office is assigned to each investigation. The enforcement staff considers the egregiousness of the conduct in question, the Enforcement Division's ability to address the conduct, and whether the conduct is continuing. Additionally, once it is determined that the case will be opened, the Enforcement Manual provides guidelines for deciding which office will handle the matter. Such guidelines include location of individuals involved, location of the conduct at issue and the expertise and resources of each office.
The Enforcement Manual provides a process by which senior officials may periodically review open investigations. Every six months after the commencement of an investigation, each investigation is evaluated to determine whether the investigation should continue and whether the allocation of resources at that time remains appropriate. Additionally, the Enforcement Manual states that the associate director of enforcement and the regional director of enforcement must make quarterly reports to the division director identifying the priorities of investigations in each region.
The Wells Process
The Enforcement Manual provides that a recipient of a Wells notice may request access to the investigative file at issue. The enforcement staff then has the discretion to release non-privileged portions of the file. This process may allow counsel to better craft Wells submissions so as to provide the enforcement staff with information and/or argument that no action is justified.
The Enforcement Manual also provides that the staff must obtain approval of a deputy director before issuing a Wells notice. This will likely have the practical effect of forcing the staff to be more selective in seeking to commence a proceeding.
Closing Procedure and Termination Notices
The Enforcement Manual provides that the enforcement staff is encouraged to close an investigation as soon as it becomes clear that no action will be brought. Additionally, the manual states that the Enforcement Division's policy is to notify individuals and entities when the staff has decided not to move forward. The Enforcement Manual allows the staff to send termination notices even before the investigation is formally closed. In the past, some targets of investigations have received no notice of an investigation closing; rather, the enforcement staff simply stops communicating with them.
Communication Between Senior Enforcement Officials and Those Involved in Investigations
The Enforcement Manual sets forth a policy that allows those being investigated to contact senior enforcement officials. While the policy addresses the general question of whether outside parties may contact senior personnel — and they may — the Enforcement Manual also encourages senior personnel to remain sensitive to the fact that the staff should serve as the Enforcement Division's main point of contact with outside parties.
Document Production in Response to SEC Subpoenas
The Enforcement Manual provides standards for producing documents pursuant to an SEC subpoena. While the provisions outlined in the Enforcement Manual are not binding law, they provide insight into the Enforcement Division's perspective on document production and may serve as a useful tool for practitioners. The Enforcement Manual states that when persons being investigated withhold requested documents based on privilege, a privilege log should be provided. For documents being produced, the manual suggests electronic production is preferred and an accompanying list of documents being produced should be provided. Finally, when responsive document are unavailable or have been destroyed, an explanation of such circumstances should be provided.
Enforcement staff may informally refer inquiries or investigations, when appropriate, to criminal authorities, self-regulatory organizations, the Public Accounting Oversight Board, state agencies and/or professional licensing boards. In determining whether to make an informal referral to criminal law enforcement, the staff will consider the egregiousness of the conduct, likelihood of recidivism and whether criminal agency involvement could help investors. In all cases, enforcement staff must obtain authority from senior personnel prior to making such a referral. Additionally, when the staff has decided to refer the matter to a self-regulatory agency, the Public Accounting Oversight Board or state agencies, the staff is encouraged to maintain periodic communication regarding the status of the other agency's investigation. The Enforcement Manual expressly provides that parallel investigations are allowed, and in some cases, information gained from an outside agency may be used to take additional measures in the SEC investigation.
About Buchanan's Securities Litigation Practice Group
The attorneys in our group have wide experience in representing corporations, their officers and directors in SEC enforcement proceedings, hostile takeover litigation, shareholder class and derivative actions, and SEC and FINRA investigations. We have represented professional service firms, including commercial banks, underwriters, accounting firms and brokerages, in actions related to the federal securities acts, broker/dealer consumer actions, insider trading allegations, and all manner of securities arbitrations overseen by FINRA and other SROs. For more information, contact any of our SEC attorneys.