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The SEC Enforcement Process: Practice and Procedure in Handling an SEC Investigation (No. 77-5th)

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This portfolio discusses practice and procedure in handling both informal and formal investigations by the Securities and Exchange Commission's Division of Enforcement, including responding to subpoenas, producing documents, and testimony; when and whether companies should conduct internal investigations; the Wells process and settlement discussions; remedies; and consent decrees. This portfolio also examines related issues, including disclosure of an SEC investigation and issues arising out of parallel civil and criminal inquiries.

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Portfolio 77-5th: The SEC Enforcement Process: Practice and Procedure in Handling an SEC Investigation

I.   Introduction  

  • Informal Investigations
  • Formal Investigations
  • Responding to Staff Requests for Documents and Testimony
  • Enforcement Actions
    1. Federal court actions
    2. Administrative proceedings
  • Settlement

II.   The SEC and Its Enforcement Program  

  • The Commission
  • The Division of Enforcement and Regional Offices
  • The Operating Divisions
    1. The Division of Corporation Finance
    2. The Division of Trading and Markets
    3. The Division of Investment Management
    4. The Division of Risk, Strategy, and Financial Innovation
    5. The Office of the Whistleblower
    6. The Office of Compliance Inspections and Examinations
    7. The Office of the General Counsel
  • The Office of Administrative Law Judges
  • Office of the Investor Advocate and Related Entities

III.   Informal Investigations  

  • Commencement of an Informal Investigation
    1. The Dodd-Frank whistle-blower bounty program
    2. Matter under inquiry process
  • Handling an Informal Investigation
  • Steps to Take When Faced with an Informal Investigation
    1. Retain experienced outside counsel
    2. Contact the SEC staff
    3. Preserve and gather relevant information
    4. Disclosure of the investigation
    5. Notifying certain third parties
    6. Cooperation with the staff
    7. Presentation to the staff
  • Conclusion of an Informal Investigation

IV.   The Formal Order of Investigation

  • The Commission's Authority to Issue a Formal Investigation Order
  • Issuance of a Formal Order of Investigation
    1. How the staff obtains a formal order
    2. Scope and format of a formal order
    3. Obtaining a copy of the formal investigation order

V.   Disclosure Issues in an SEC Investigation  

  • Introduction
  • Duty to Disclose an Existing Investigation
    1. Regulatory provisions bearing on disclosure
    2. No clear guidance provided by case law
    3. Voluntary disclosure
    4. Duty to disclose in special circumstances
      • Prior statements by issuer
      • Selective disclosure concerns
      • Disclosure when issuer is trading
  • Preparing the Disclosure Document
    1. The appropriate form
    2. What should be disclosed?
  • Preparing for the Consequences of Disclosing an SEC Investigation

VI.   The Internal Investigation  

  • Introduction
  • Purposes of an Internal Investigation
  • Advantages and Disadvantages of Conducting an Internal Investigation
  • Conducting an Internal Investigation
    1. When is an internal investigation warranted?
    2. Who should conduct the investigation?
    3. Role of the audit committee or other committee of the board of directors
    4. Plan of investigation
    5. Meet or speak with the government
    6. Consider retaining outside assistance
    7. Inform employees about the investigation and their rights and obligations
    8. Determine whether employees and former employees should be represented by outside counsel
    9. Gather internal company information
      • Documents
      • Interview witnesses
    10. Gather information outside the company
    11. Completing the investigation
  • The Investigation Report

VII.   Responding to Requests for Documents and Information  

  • Introduction
  • Responding to Informal Requests
    1. Discerning the scope of the inquiry from the request
    2. Initial steps in responding to a request
    3. Risks
    4. Voluntary cooperation
  • The SEC's Subpoena Power
  • Responding to a Document Demand
    1. Document preservation and retention
    2. Organize the search
    3. Investigate the facts in the course of the search
    4. Negotiate and clarify the scope of the subpoena
      • Narrowing the request for documents
      • Extending the time to comply
      • Documenting understandings
    5. Production of documents
      • Mechanics of production
      • Documents reflecting privileged communications or attorney work-product
      • Confidential treatment under the Freedom of Information Act
      • Special issues related to electronic documents
      • Alerting the SEC to the existence of certain documents
  • Providing Information Compilations to the Staff
  • Certification of Completeness of Document Production

VIII.   Testimony

  • Voluntary Sworn Testimony
  • Testimony Pursuant to a Subpoena
    1. Subpoena authority and logistics
    2. Reimbursement and fees
    3. No right to notice
  • Preparing the Witness
    1. The testimony process
    2. Anticipated lines of questioning
    3. Effectively answering questions
  • Defending Testimony
    1. Preliminary statements by counsel
    2. Representing witnesses during testimony
    3. Obtaining the transcript
  • Privileges
    1. The Fifth Amendment privilege
    2. The attorney-client privilege
    3. The work-product doctrine

IX.   Representing Multiple Witnesses: Conflicts of Interest and Sequestration

  • Introduction
  • Benefits of Joint Representation
  • Ethical Issues
  • The SEC's Sequestration Rule

X.   Parallel Proceedings

  • Introduction
  • Authority to Bring Parallel Proceedings
  • Stay or Dismissal of Civil Proceedings and Stay of Discovery
    1. Stay or dismissal sought by the defendants
      • Stay or dismissal of civil proceedings
      • Stay of discovery
    2. Stay sought by the government
  • The Fifth Amendment
  • Double Jeopardy Issues

XI.   Challenges to SEC Investigations and Subpoenas

  • Introduction
  • Challenging SEC Subpoenas
  • The Scope of the SEC's Subpoena Authority
  • Bases for Challenging SEC Subpoenas
    1. Relevance and burdensomeness
    2. Unreasonable or bad faith requests
    3. The subpoena seeks privileged information
      • Attorney-client privilege
      • Work-product doctrine
      • The Privacy Act
      • The Right to Financial Privacy Act

XII.   The Wells Process

  • Background
  • Issuing a Wells Notice
  • Preparing and Making a Wells Submission
    1. When to make a Wells submission
    2. An effective Wells submission
      • Timing
      • Addressing legal and policy issues
      • Addressing the facts
      • Addressing the relief sought
    3. After the Wells submission is made

XIII.   SEC Administrative Proceedings

  • Introduction
  • Procedural Framework for Administrative Proceedings
    1. Order instituting administrative proceedings
    2. Filing an answer
    3. Pre-hearing conferences
    4. Discovery
      • Documents in the possession of the SEC staff
      • Depositions
      • Subpoenas
    5. Motion for summary disposition
    6. Settlement offers
    7. The hearing
    8. Proposed findings, conclusions, and supporting briefs
    9. The initial decision
  • Appeals to the Commission
    1. Interlocutory review
    2. Appeal of an initial decision
    3. Issuance of a stay
  • Judicial Review
  • Factors to Consider When Deciding Whether to Settle or Contest SEC Administrative Charges
  • Gupta v. SEC': Constitutional Challenges to Administrative Proceedings

XIV.   Federal Court Injunctive Proceedings Brought by the SEC

  • Injunctive Relief Generally
    1. Securities statutes authorizing injunctions
    2. Standards for injunctive relief
      • Enjoining negligent behavior
      • Cessation of illegal activity
      • Promises of reform
      • Refusal to admit wrongdoing
      • Change of occupation
      • Change of corporate management
      • Prior requests for a preliminary injunction
  • Preliminary Injunctions
  • Permanent Injunctions
  • Barring Defendants From Serving as Corporate Officers or Directors
  • Other Equitable Relief Available to the Commission Under the Sarbanes-Oxley Act

XV.   Remedies Available to the SEC

  • Introduction
  • Judicial Remedies
    1. Injunctive relief
    2. Monetary penalties in civil actions
      • Control person liability and civil penalties
      • Anti-bribery sanctions
    3. Disgorgement
    4. Barring securities violators from serving as officers or directors of public corporations
    5. Other ancillary relief in injunctive proceedings
  • Administrative Remedies
    1. Permanent cease-and-desist orders
    2. Section 15(c)(4) orders
    3. Temporary cease-and-desist orders
    4. Administrative fines
    5. Officer and director bars
    6. Accounting and disgorgement
    7. Nonmonetary administrative remedies against securities professionals
    8. Practice before the Commission
    9. Section 21(a) report
  • Clawbacks of Executive Compensation
  • Miscellaneous Issues Related to Remedies
    1. Statute of limitations
    2. Criminal and other referrals

XVI.   Discovery of Information From the SEC

  • Introduction
  • Exemptions From Disclosure Under FOIA
    1. Trade secrets and confidential commercial and financial information
    2. Agency work product
    3. Personnel, medical, and similar files
    4. Law enforcement records
    5. Documents relating to the regulation or supervision of financial institutions
    6. Information sharing with foreign regulators
  • Preventing Disclosure: Procedures for Requesting Confidential Treatment of Records Submitted to the SEC
  • Discovery of Information From the SEC Pursuant to Subpoena
    1. Attorney-client privilege and attorney work product
    2. Deliberative process privilege
    3. Law enforcement investigatory privilege

XVII.   Settlement Discussions  

  • Why and When to Commence Settlement Discussions With the Staff
    1. Advantages and disadvantages of a settlement
    2. When to commence settlement discussions
  • Establishing Clear Goals for Negotiation
    1. The forum
    2. The charges
    3. Who is charged
    4. Negotiating the language in the settlement papers
    5. Negotiating disgorgement
    6. Negotiating penalties
    7. Negotiating undertakings
    8. Deferred prosecution and non-prosecution agreements
  • Public Statements in Connection With Settlement

XVIII.   Collateral Consequences of an SEC Action
Introductory Material

  • Collateral Consequences of a Federal Court Injunction or Administrative Cease-and-Desist Order
    1. Injunctions and cease-and-desist orders against issuers and their employees
      • Disclosure obligations
      • Disqualification from certain private placements
      • Loss of safe harbor for forward-looking statements
      • Loss of eligibility for streamlined offering process
    2. Collateral consequences relating to investment companies and investment advisers
    3. Collateral consequences relating to broker-dealers
      • Exchange Act disqualifications and bars
      • Effect on ability to underwrite private placements
      • Forms BD and U4
    4. Collateral consequences under state securities laws
    5. Other collateral consequences
      • Schedule 13D
      • Debarment or suspension from government contracting
      • Professional considerations
      • Ability to obtain cooperation credit
  • Admissibility of Civil Complaints, Consent Decrees, Administrative Findings and Statements During Settlement Negotiations
    1. Rules 408 and 404(b)
    2. Rules 802 and 803(8)
    3. Rule 403

XIX.   Avoiding an Enforcement Action: Implementing and Maintaining Effective Compliance

  • The Compliance Requirements Imposed on Public Companies by the Sarbanes-Oxley Act
    1. Background to Sarbanes-Oxley: the internal controls and books and records provisions of the Foreign Corrupt Practices Act
    2. Certification of financial reports
      • Section 302 certification
      • Section 906 certification
    3. Internal control and disclosure requirements
      • Internal control over financial reporting
      • Disclosure controls and procedures
    4. Management report on internal controls
      • Management assessment and annual report
      • Quarterly evaluations and disclosure
    5. Code of ethics
  • Revised SRO Corporate Governance Listing Standards
    1. SRO code of conduct requirements
    2. Executive sessions
    3. Corporate governance guidelines
  • Avoiding Enforcement Through Effective Compliance
    1. The Seaboard case
    2. Self-policing, self-reporting, remediation and cooperation
      • Self-policing
      • Self-reporting
      • Remediation
      • Cooperation
    3. The SEC's Cooperation Initiative and Policy Statement
    4. Effective compliance and the Dodd-Frank Act
    5. The SEC's ‘Statement on Penalties'
  • Significance of the Federal Sentencing Guidelines
  • Compliance with Financial Disclosure and Reporting Requirements: The Role of the Audit Committee
    1. Audit committee membership and qualifications
      • Independence of audit committee members

        (1) Restrictions on compensatory fees

        (2) Restrictions on company affiliation

        (3) Exemptions from independence requirement
      • Audit committee financial expert
      • SRO rules regarding membership and qualifications of audit committees
    2. Audit committee authority and responsibilities
      • Appointment, retention, and oversight of independent auditor
      • Handling complaints
      • Authority to engage advisers
      • Funding
      • Pre-approval of audit and permitted non-audit services
    3. Audit committee disclosure rules
      • Audit committee charters
      • Public filing of audit committee reports
      • Required disclosure concerning audit committee charters
      • Required disclosure concerning ‘independence' of audit committee members
      • Safe harbors
    4. Applying the audit committee's disclosure rules
  • Insider Trading
  • Regulation Fair Disclosure
    1. Applicability
    2. The disclosure obligation
    3. Materiality judgments
    4. Making required disclosures
    5. Additional considerations
    6. Regulation FD enforcement actions
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Portfolio 77-5th: The SEC Enforcement Process: Practice and Procedure in Handling an SEC Investigation

  Practice Tool 1: Standard Form Letter From the SEC Staff Accompanying a Subpoena
to a Company in a Formal Nonpublic Investigation
  Practice Tool 2: SEC Subpoena Requiring the Production of Documents and Appearance for Testimony
  Practice Tool 3: SEC Form 1661—Supplemental Information for Entities Directed to Supply
Information to the Commission Other Than Pursuant to Commission Subpoena
  Practice Tool 4: SEC Form 1662—Supplemental Information for Persons Supplying Information
Voluntarily or Directed to Supply Information
  Practice Tool 5: Form Letter to the SEC Staff Requesting a Copy of the Formal Order
of Investigation
  Practice Tool 6: Form Letter to the SEC FOIA Officer Requesting Confidential treatment of Letter
Requesting a Copy of the Formal Order of Investigation
  Practice Tool 7: SEC Order Directing a Private Investigation and Designating Officers to
Take Testimony
  Practice Tool 8: Form Letter to the SEC Staff Producing Documents and Requesting Confidential
treatment of Documents Produced Pursuant to a Subpoena Duces Tecum
  Practice Tool 9: Form Letter to the SEC FOIA Officer Requesting Confidential treatment of
  Practice Tool 10: Form Letter to the SEC Staff Requesting Confidential treatment of Testimony
Before the Staff
  Practice Tool 11: Form Letter to the SEC FOIA Officer Requesting Confidential treatment of Testimony
Before the Staff
  Practice Tool 12: SEC Form 1712—Claim for Fees and Expenses of Witness
  Practice Tool 13: SEC Background Questionnaire
  Practice Tool 14: Commencement of Enforcement Proceedings and Termination of Staff Investigations,
Securities Act Release No. 5310 (Feb. 28, 1973)
  Practice Tool 15: Report of the Commission's Advisory Committee on Enforcement Polices
and Practices (The Wells Committee Report) (June 29, 1972)
  Practice Tool 16: Report of Investigation Pursuant to Section 21(a) of the Securities Exchange
Act of 1934 and Commission Statement on the Relationship of Cooperation
to Agency Enforcement Decisions, Exchange Act Release No. 44,969
  Practice Tool 17: Statement of the Securities and Exchange Commission Concerning Financial
Penalties, Press Release 2006-4
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Colleen P. Mahoney
Skadden, Arps, Slate, Meagher & Flom LLP
Washington, D.C.

Charles F. Walker
Skadden, Arps, Slate, Meagher & Flom LLP
Washington, D.C.

Erich T. Schwartz
Skadden, Arps, Slate, Meagher & Flom LLP
Washington, D.C.

Andrew M. Lawrence 
Skadden, Arps, Slate, Meagher & Flom LLP
Washington, D.C.

Joshua A. Ellis 
Skadden, Arps, Slate, Meagher & Flom LLP
Washington, D.C.

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