02/11/2010

Corporate Finance Alert: SEC Announces Initiatives to Encourage Individuals and Companies to Cooperate With Investigations

To reward and encourage cooperation by individuals and entities in Securities and Exchange Commission (SEC) investigations and related enforcement actions, the SEC utilizes many tools, ranging from taking no enforcement action to pursuing reduced charges and sanctions in its enforcement actions. The SEC recently released its analytical framework regarding the assessment of an individual’s cooperation with the SEC, authorized the use of three new cooperation tools and granted its Enforcement Division the authority to seek prosecutory immunity for cooperating witnesses.

The SEC’s analytical framework concerning cooperation with the SEC outlines the factors the SEC will consider in evaluating whether, how much, and in what manner to credit cooperation by individuals in SEC investigations and related actions. The release of this analytical framework is intended to encourage individuals to report violations and to cooperate in investigations.

While the SEC evaluates an individual’s cooperation on a case-by-case basis and in accordance with the specific circumstances presented, the SEC primarily focuses on four considerations:

The assistance provided by the cooperating individual. The SEC considers, among other things:

• whether the individual’s cooperation resulted in substantial assistance to the investigation;
  
  
• the timeliness of the individual’s cooperation;
  
  
• whether the individual was the first to report the violation;
  
  
• whether the individual was aware of a pending investigation or related action at the time the individual first cooperated;
  
  
• the quality of the cooperation;
  
  
• whether the cooperation was voluntary or required by the terms of an agreement;
  
  
• the extent of the information provided; and
  
  
• whether the individual encouraged others to cooperate as well.
  
  

The importance of the underlying matter. Cooperation in investigations that involve priority matters or serious, ongoing or widespread violations will be viewed most favorably. In making these determinations, the SEC considers, among other things:

• whether the subject matter of the investigation is an SEC priority;
  
  
• the type of securities violation; and
  
  
• the extent, duration, and number of violations.
  
  

Interest in holding the individual accountable. The SEC assesses the societal interest in holding the cooperating individual fully accountable for any misconduct by considering, among other things:

• the severity of the misconduct based on the nature of the violations and the individual’s knowledge, education, training, experience, and position at the time of the violation;
  
  
• the culpability of the individual;
  
  
• the degree the individual tolerated the illegal activity;
  
  
• remedial efforts by the individual; and
  
  
• the sanctions imposed on the individual by other governmental bodies.
  
  

Profile of the individual. The SEC assesses the cooperating individual’s personal and professional profile by considering, among other things:

• the individual’s past compliance with securities laws and regulations;
  
  
• whether the individual has taken responsibility for past misconduct;
  
  
• and the likelihood of future violations.
  
  

In addition to the release of its analytical framework, the Enforcement Division of the SEC also announced the adoption of several new tools to encourage individuals and companies to report violations and provide assistance to the agency. These tools are set forth in a revised version of the Enforcement Division’s manual under the title “Fostering Cooperation” and include the following agreements:

• Cooperation Agreements. Formal written agreements in which the Enforcement Division agrees to recommend to the SEC that the cooperator receive credit for providing substantial assistance.
  
  
• Deferred Prosecution Agreements. Formal written agreements in which the SEC agrees to forego an enforcement action against a cooperator if the cooperator agrees to certain concessions, including complying with express prohibitions and undertakings during the period of deferred prosecution.
  
  
• Non-prosecution Agreements. Formal written agreements in which the SEC agrees not to pursue an enforcement action if the cooperator agrees, among others things, to comply fully and truthfully with express undertakings.
  
  

The use of these new tools is potentially a win for individuals and companies that choose to cooperate with the SEC. In certain situations, however, these tools may not bind the SEC. The policy statement authorizing the use of these tools states that a cooperation agreement is between the cooperating party and the Enforcement Division only. Thus, the SEC retains the discretion to reject and disregard any such agreement. There is no such risk with deferred prosecution agreements and non-prosecution agreements because these agreements will require an SEC decision to forego an enforcement action.

The SEC also granted the Enforcement Director authority to submit witness immunity requests directly to the Department of Justice.

All in all, these announcements and releases offer guidance and definiteness to individuals and companies who fear reprisal but wish to cooperate with an SEC investigation.

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If you have any questions regarding the new analytical framework, or any of the new tools and resources available to the Enforcement Division and the SEC, please contact John Granda at 816.691.3188,  Jim Allen  at 816.691.3211,  Jack Bowling  at 816.691.2314 or  Jim Swenson  at 816.691.2768.