On October 6th, the Securities Exchange Commission (SEC) released its Enforcement Division manual to the general public for the first time. The manual contains guidelines for SEC investigations, including evaluating investigations, investigative practices, and inter-agency cooperation.
Although the manual states that it does not create any rights, it will serve as a valuable resource for individuals and entities in dealing with the SEC’s enforcement efforts. By understanding the SEC’s processes, parties can more easily cooperate with investigations and more quickly achieve resolutions of contested matters.
The manual, colloquially known as the “Red Book,” had previously been available solely to SEC attorneys. It can be found online at:
Among the most significant provisions are:
Guidelines for Responding to Subpoenas for Documents
The manual outlines explicitly what is expected of those responding to the SEC’s subpoenas for documents, including that respondents: produce documents in OCR text, provide indexed itemized lists and claim privileges with specificity. Having clear and uniform production requirements should save time and costs normally spent on the back-and-forth with SEC staff and ensure that respondents are fully complying with the SEC’s requests.
Wells Respondents Can Access SEC’s Investigative Files
“Wells notices” communicate the Enforcement Division's preliminary findings and give parties under investigation an important opportunity to respond to the staff’s proposed allegations and argue against charges before they are filed.
The manual provides helpful guidance on preparing these Wells submissions, including the process by which respondents may review the SEC’s investigative files before drafting a submission. It also shares the factors the SEC staff should weigh before granting such a review, including:
- the respondents’ ability to gauge the strength of the evidence against them;
- whether the prospective defendant refused to testify during the investigation; and
- the stage of the investigation, including whether certain witnesses have yet to testify.
These guidelines should help counsel develop a strategy that maximizes the likelihood of gaining access to the staff’s investigative files prior to making a Wells submission.
SEC Staff May Not Request Waiver of Privilege
The manual also addresses the attorney-client privilege, including the contentious issue of waiver of privilege. It expressly directs enforcement staff not to ask parties to waive privilege: “staff should not ask a party to waive the attorney-client or work product privileges and is directed not to do so.” Additionally, the manual notes that assertion of privilege is not a bar to obtaining credit for cooperation. Thus, parties can cooperate with an investigation by sharing all relevant facts within their knowledge, without waiving the attorney-client privilege.
In addition to prohibiting SEC staff from requesting privilege waivers, the manual outlines a process for handling inadvertent disclosure of privileged documents under the new Federal Rule of Evidence 502, including review by the department Ethics Liaison. The manual encourages staff to follow-up on and share with other governmental agencies the contents of nonprivileged documents that were inadvertently shared. This demonstrates the continued importance of crafting a thorough and tailored response to document requests.
The manual also details other guidelines that will be relevant to individuals and entities in dealing with the Enforcement Division:
- Communications With Senior Enforcement Officials: The manual creates “best practices” for communications between senior officials and parties outside the SEC who are involved with investigations. The emphasis is placed on the inclusion of investigative team members in such discussions where possible.
- Offering Protection to Witnesses: The manual allows the SEC to present “Witness Assurance Letters” to witnesses, assuring them that the SEC does not intend to bring an enforcement action against the witness or an associated entity. While the manual describes the circumstances allowing for such a letter as “narrow,” these letters will still provide necessary reassurance to certain witnesses.
- Immunity Orders: In addition to “Witness Assurance Letters,” the manual outlines the process for the SEC granting immunity from criminal prosecution to witnesses. This immunity, however, does not shield witnesses from civil prosecutions.
- No-Action Letters: The manual cements the SEC‘s longstanding policy to inform those that were the focus of its investigations when it has determined not to recommend an enforcement action.
- Parallel Investigations: The manual provides processes for the SEC to work independently during a parallel criminal investigation. Thus, while the SEC can share the results of its investigations with criminal prosecutors, the manual asserts that the Enforcement Division's primary responsibility is to pursue a civil investigation.
The publication of this “Red Book” will allow parties to interact with the SEC in a more informed and thoughtful manner. This may create less costly administrative disagreements and allow for speedier resolution of conflicts.