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SEC Investigations: The Enforcement Cooperation Initiative

The US Securities and Exchange Commission went public with a new initiative they have created in hopes of encouraging individuals and companies to cooperate with investigations.

Posted by Joe Gerard on March 22nd, 2010

On January 13, 2010, the US Securities and Exchange Commission went public with a new initiative they have created in hopes of encouraging individuals and companies to cooperate with investigations. The plans from the SEC outline changes that could affect (for the better) the speed and efficiency of handling investigations and enforcement actions. This Corporate Securities and Law Blog  article states that “the SEC has been stung with allegations of investigative failures in the wake of revelations regarding the Madoff Ponzi scheme, the SEC is centralizing its intake of tips, complaints and referrals.”

As a response to these allegations, the SEC has created policies for both the cooperation of individuals and companies in order to better their investigation process. Some of these changes include the addition of new units to its Division of Enforcement, as well as the Enforcement Cooperation Initiative, in order to become more receptive to making deals with insiders/ witnesses to better understand potential violations.

The Cooperation Initiative

In the press release from the SEC, they explain the Cooperation Initiative:

“The Cooperation Initiative is a series of measures designed to encourage greater cooperation by individuals and companies in SEC investigations and related enforcement actions. The SEC has set forth, for the first time, the analytical framework it will use to evaluate whether, how much, and in what manner to credit cooperation by individuals in its investigations and enforcement actions. In addition, the Commission has streamlined the process for submitting witness immunity requests to the Department of Justice for witnesses who have the capacity to assist in its investigations and related enforcement actions.”

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The SEC’s goal for the Cooperation Initiative is to help with the early detection of fraud, in order to shut it down before it’s too late- this should be a goal for any organization when it comes to the early detection and handling of observed misconduct. The Cooperation Initiative has established incentives for individuals and companies that fully cooperate with investigations in a truthful manner. The Cooperation Initiative has made changes to the Division of Enforcement, in order to improve upon the current state of their investigations process. Many of the principles outlined in the SEC initiative can be applied internally in your own workplace when conducting your own investigations, as the cooperation from those involved makes the investigation process less painful.

Changes to the Division of Enforcement

The SEC states that “the Division of Enforcement authorized its staff to use new tools and to expand the use of existing tools to encourage individuals and companies to reports securities law violations and provide assistance in connection with investigations and related enforcement actions.” The SEC has posted the new tools for cooperation, which are:

  • “Cooperation Agreements— Formal written agreements in which the Enforcement Division agrees to recommend to the Commission that a cooperator receive credit for cooperating in investigations or related enforcement actions if the cooperator provides substantial assistance such as full and truthful information and testimony.
  • Non-prosecution Agreements— Formal written agreements, entered into under limited and appropriate circumstances, in which the Commission agrees not to pursue an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and comply with express undertakings.”
  • Deferred Prosecution Agreements— Formal written agreements in which the Commission agrees to forego an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and to comply with express prohibitions and undertakings during a period of deferred prosecution.”

Benefits of Cooperation

When making his address to the public about the policy overhaul, Robert Khuzami, Director of the Division of Enforcement said

“This is a potential game-changer for the Division of Enforcement. There is no substitute for the value of the insiders’ view into fraud and misconduct that only cooperating witnesses can provide. That type of evidence can expand our ability to conduct our investigations more swiftly, and to act quickly to file charges, freeze assets, and protect investors.”

Khuzami recognizes the key role that witnesses play in an investigation and is willing to reward those who cooperate. Since majority of the observed misconduct reported comes from employees within the organization, chances are, there are many employees out there right now that probably know more about what some of the other employees are up to than you do.

The evidence that is brought forward by internal witnesses is invaluable. This is a lesson that the SEC has learned, and it’s also one that can be applied to your own investigations that are conducted internally. Here are some other benefits that your company can experience for cooperating during an SEC investigation:

  • Rewards will be administered for cooperation by individuals, ranging from taking no enforcement action to the ability to seek reduced charges in connection with enforcement actions.
  • Contribute to the success of the investigation by providing information that used to be much harder for the SEC to gather.
  • Improve the effectiveness and efficiency of SEC investigations through the reduction of investigation time and increased quality in case evidence.

Joe Gerard
Joe Gerard

CEO, i-Sight

Spend my days showing off the i-Sight investigative case management software and finding ways to help clients improve their investigations. Usually working with corporate security, HR & employee relations, compliance and legal teams.

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