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The SEC’s Division of Enforcement (the Division) has for the first time adopted and made publicly available a manual (the Manual) governing its enforcement of potential violations of the federal securities laws.

The Manual addresses Division practice and procedure related to, among other things, charging practices, grants of civil immunity, requests for waivers of privileges, the “Wells letter” process and contacts with senior SEC officials. Its disclosure of these enforcement policies, many of them previously only the subject of internal SEC guidance or case-specific practice, makes the Manual a critical reference.

In some respects, the Manual is similar to the United States Attorneys Manual (USAM), which has long been publicly available. Like the USAM, the SEC’s Manual states that it is not meant to create enforceable rights. Nevertheless, the Manual provides a window into SEC enforcement operations and should be helpful in dealing with SEC enforcement counsel, particularly during the investigative phase of a matter. Key provisions of the Manual are discussed below. You may read the entire Manual here.

Contact with Senior SEC Staff Regarding Pending Investigations

One important change from prior practice is found in the Manual’s section on contacts with senior SEC officials. Recently, the SEC has been heavily criticized for its handling of high-profile matters in which there was at least an appearance that senior officials interceded to override recommendations of frontline SEC enforcement attorneys who were closer to the evidence. For example, the SEC’s Inspector General released a report in early October 2008 recommending discipline against the SEC’s Director of Enforcement and two supervisors for their handling of a case involving the chief executive of Morgan Stanley. More broadly, the Inspector General focused on the “common practice” of private attorney access to high-level SEC officials to complain about lower-level enforcement staff decisions. Similar criticism was leveled by the Inspector General with regard to the SEC’s Miami office’s decision to drop a potential enforcement action against Bear Sterns.

Perhaps as a result, the Manual makes clear that “although outside persons involved in investigations [should] feel that they may contact the staff in the Division without hesitation, including senior officials,” such contacts are to be circumscribed according to certain “best practices.” Principal among these is the recommendation that senior staff should include line investigative team members in material external communications, including in preparing for and memorializing the external contact. If line investigative team members are unavailable, senior officials are counseled to weigh their knowledge of the investigation’s subject matter against whether the communication involves an urgent or routine matter and whether the outside person is seeking a concession or representation regarding a material aspect of the investigation.

Finally, if a senior official entertains an outside contact without the involvement of other staff, such official should not only document all material aspects of the contact but also advise the outside party that consultation with the investigative team is required.

Ongoing Review and Closing Investigations

The Manual provides that each investigation must be evaluated by Division staff every six months. Senior Division staff (Associate Director and above) are to evaluate whether the investigation merits continued pursuit and how to effectively allocate resources. The Manual encourages Division staff “to close an investigation as soon as it becomes apparent that no enforcement recommendation will be made.”

Factors to be considered include the seriousness of the potential violation, the sufficiency of the evidence, the resources necessary to continue the investigation and the relevant conduct. If the staff has decided to close an investigation, applicable policy is to forward a termination letter at the “earliest opportunity.” This should be helpful going forward, as past practice did not always include a written termination notice.

The Wells Process

A “Wells” notice advises persons involved in a preliminary investigation “of the general nature of the investigation, including the indicated violations.” The recipient may then prepare and submit a statement to Division staff prior to the staff’s recommendation of an administrative or injunctive proceeding.

A Wells submission permits an investigative subject to present a legal and factual argument as to why an enforcement action is unwarranted. Recipients of Wells notices commonly seek review of the staff’s investigative file.

The Manual accords Division staff discretion to resolve such requests on a case-by-case basis and to allow the recipient an opportunity to review the non-privileged portions of the investigative file, including documents the recipient likely would receive in discovery, if such access would “be a productive way for both the staff and the recipient . . . to gauge the strength of the evidence” in the investigation. Importantly, the Manual also suggests that Division staff should consider “whether the prospective defendant or respondent invoked his Fifth Amendment rights or otherwise refused to testify during the investigation,” and asserts that staff may reject a Wells submission “if the person making the submission limits its admissibility under Federal Rule of Evidence 408” or otherwise seeks to limit the SEC from disseminating the submission pursuant to SEC Form 1662. The Manual’s discussion of the Wells process is not a departure from prior practice.

Witness Testimony and Immunities

The Manual formalizes the SEC’s process of granting civil immunity to investigative subjects, noting that witness assurance letters should issue only in “very limited circumstances.” Only the Commission may authorize issuance of a witness assurance letter and only then after considering: (1) the witness’s relative degree of culpability for the violation(s) in issue; (2) the importance of the evidence to be secured; and (3) whether the same evidence can be obtained collaterally.

Critically, however, testimony obtained pursuant to a grant of civil immunity may still be used not only in connection with a collateral prosecution for perjury, obstruction of justice or false statements, but also, assuming authorized access, as the basis of a substantive criminal securities fraud prosecution. Witnesses must therefore continue to mindful of their potential criminal exposure notwithstanding issuance of a civil witness assurance letter.

The Manual also expressly authorizes the staff to enter, with Assistant Director approval, into a proffer agreement – or “Queen for a Day” letter – with a witness. The key term of such a proffer agreement is that statements made pursuant to it will not be used directly against the witness in any subsequent enforcement action.
Prior statements are excluded, and the staff is authorized to make derivative use of the statements and to use them as impeachment material should the witness later testify inconsistently. In the event the witness’s proffer is to be taken jointly with an Assistant United States Attorney and/or the FBI, the staff is encouraged to coordinate the SEC’s proffer protection with that of the DOJ. This is not a break from prior Division practice.

Contact with Employees

The Manual makes clear that enforcement staff are to conduct their investigations in accordance with Model Rule of Professional Conduct 4.2, which provides that a lawyer is prohibited from contacting a person the lawyer knows to be represented by another lawyer.

In the corporate employment context, this means that, in the absence of a compelling reason to contact an individual directly, staff should go through corporate counsel to communicate with corporate employees with managerial responsibilities (e.g., senior officers); employees who supervise, direct or regularly consult with corporate counsel concerning the subject matter of the investigation; or employees whose acts or omissions may be imputed to the corporation for purposes of establishing civil or criminal liability.

The staff is also directed to inquire, when contacting employees directly, whether the employee is represented by counsel, including corporate counsel.

Privilege Waivers

The Manual also clarifies the SEC’s approach regarding requests for waiver of the attorney-client privilege. The practice of SEC and DOJ requests for privilege waivers from companies has come under harsh criticism in recent years, and the DOJ recently revised its practices to quell such criticism and calls for legislation. See Jeffrey B. Coopersmith and Kevin D. Galbraith, "New DOJ Guidelines: Fig Leaf to Avoid Legislation?" DLA Piper White Collar Alert, September 17, 2008. The Manual brings the SEC in line with the new DOJ policy, as it provides that the staff is directed not to ask a party to waive its privilege, and waiver of a privilege is not a prerequisite to obtaining cooperation credit.

As with the new DOJ policy, it is not at all clear whether the new SEC ruling will, as a practical matter, really leave companies with the realistic choice of not disclosing the results of internal corporate investigations in order to obtain cooperation credit and therefore lenient treatment from the Division.

Cooperation with Other Agencies

As stated in the Manual, “[i]n furtherance of the SEC’s mission and as a matter of public policy, the staff is encouraged to work cooperatively with criminal authorities, to share information, and to coordinate their investigations with parallel criminal investigations when appropriate.” Principal among the factors governing “appropriate” coordination are: (1) that the civil investigation have its own independent purpose and not be initiated simply to obtain evidence for a criminal prosecution; and (2) that the staff independently determine what documents to request and what investigative testimony to take.

If asked whether there is a parallel criminal investigation, staff should direct the inquiring party to the “Routine Uses of Information” section of Form 1662, which provides that Commission files may be made available to criminal law enforcement authorities for use in their investigations. While subject to supervisory approval, it is also generally permissible for staff, on the request of criminal authorities, to refrain from taking certain actions that might jeopardize the criminal investigation.

This Manual provision underscores the importance of retaining experienced counsel who are sensitive to matters that could lead to criminal as well as civil enforcement. By remaining aware and advised of pitfalls. companies and individuals can fully consider how actions taken in defense of an SEC investigation or proceeding may affect a potential criminal investigation or case.