New SEC Enforcement Manual Directs Staff Not to Seek Waivers of Attorney-Client Privilege
On October 6, the Securities and Exchange Commission (“SEC”) posted on its web site the first-ever SEC Enforcement Manual. (See http://www.sec.gov/divisions/enforce/enforcementmanual.pdf.) The publication of the manual reflects the first time that the SEC has committed to writing, in a single document, the various policies and procedures that govern investigations conducted by its Division of Enforcement. According to press accounts, the manual was prepared in response to a report issued in August 2007 by the Senate Judiciary and Finance Committees that criticized the SEC for its handling of an insider trading investigation involving hedge fund Pequot Capital Management (see separate article in this newsletter), and recommended that the SEC adopt a consistent set of procedures similar to the U.S. Attorneys Manual.
In large measure the Enforcement Manual does not break new ground, but instead describes practices that have been commonly understood for years. Notably, however, the Enforcement Manual does include the first comprehensive, written statement by the SEC on its view of the relationship between “cooperation” in an investigation and the assertion of attorney-client or attorney work product privileges. After years of controversy over this issue in the post-Enron era, during which parties often felt pressured by government investigators to waive privilege in order to receive full credit for cooperation, the Enforcement Manual makes clear that waiver is neither necessary nor expected. The manual’s key statements on this topic include:
- “As a matter of public policy, the SEC wants to encourage individuals, corporate officers, and employees to consult counsel about potential violations of the securities laws.”
- “The staff should not ask a party to waive the attorney-client or work product privileges, and is directed not to do so.” (Emphasis in original.) (This express direction is significant given that, as recently as last year, Enforcement Director Linda Thomsen acknowledged in a speech that waivers were still sometimes being requested – albeit “judiciously.”)
- “The voluntary disclosure of information need not include a waiver of privilege to be an effective form of cooperation, as long as all relevant facts are disclosed.”
- “Waiver of a privilege is not a pre-requisite to obtaining credit for cooperation. A party’s assertion of a legitimate privilege will not negatively affect their claim to credit for cooperation. The appropriate inquiry in this regard is whether, notwithstanding a legitimate claim of privilege, the party has disclosed all relevant underlying facts within its knowledge.”
With its emphasis on obtaining underlying facts, rather than on waivers of privilege, and in its direction that the SEC Staff should not seek waivers, the Enforcement Manual follows the path of the Department of Justice’s recent “Filip Memorandum,” which prohibits federal prosecutors from requesting privilege waivers (see “DOJ Issues New Guidance That Retreats From Aggressive Policies Followed in White Collar Cases,” K&L Gates White Collar Crime/Criminal Defense Alert (Sept. 24, 2008)).
Although senior Enforcement Division officials stated in the past that waiver of privilege was not required in order to obtain credit for cooperation, they had also indicated that the voluntary decision to waive privilege would receive enhanced credit, and some SEC enforcement orders reflected this approach. Among others, former SEC Commissioner Paul Atkins had been a vocal critic of the practice of holding out privilege waiver as a “plus factor” in determining credit for cooperation.
Although it remains to be seen how the Enforcement Manual is applied in practice, the manual does not suggest that any “plus factor” calculus will be used in future cases. Instead, the manual emphasizes that waiver of privileges is not necessary to “effective cooperation.”
As the SEC expands and increases the pace of its investigations into possible wrongdoing in relation to the crisis in the financial sector, these provisions of the Enforcement Manual will hopefully bring clarity and consistency to Enforcement Division practices when parties seek to cooperate while still preserving attorney-client and work product privileges. This should provide important protections to companies (in particular those that conduct internal investigations), as well as to their officers and employees, as compared with the environment of a few years ago, when waivers of privilege were often viewed as necessary to receiving full credit for cooperation.
