Forging ahead with the revamp of its Enforcement Division, the Securities and Exchange Commission unveiled new tools to incentivize individuals and companies to cooperate with the enforcement staff during investigations, including deferred- and non-prosecution agreements and a so-called Seaboard Memo for individuals.

For the first time, the SEC set out in a new policy statement how it will evaluate whether, how much, and in what manner to credit cooperation by individuals, to serve as an incentive for people to report violations and cooperate fully and promptly in enforcement cases. The guidance is similar to the so-called "Seaboard Report" issued in 2001 detailing the factors the SEC considers when evaluating cooperation by companies, and identifies four general considerations:

The assistance provided by the cooperating individual;

The importance of the underlying matter in which the individual cooperated;

The societal interest in ensuring the individual is held accountable for his or her misconduct; and

The appropriateness of cooperation credit based upon the risk profile of the cooperating individual.

The moves are part of an overhaul announced last summer that marks the most significant reorganization of the Enforcement Division in more than 30 years.

The Enforcement staff will also have new tools at its disposal, including: formal, written cooperation agreements, in which the staff agrees to recommend to the Commission that a cooperator get credit for cooperating in an investigation or enforcement action, if they provide substantial assistance, such as "full and truthful information and testimony"; Deferred Prosecution Agreements, by which the Commission agrees to forego enforcement action against a cooperator who agrees to cooperate and comply with certain reforms for the duration of the agreement; and rarer Non-prosecution Agreements, under which the Commission agrees not to pursue an enforcement action against a cooperator who agrees to cooperate and comply with express undertakings.

While such tools have long been used by prosecutors in criminal prosecutions and investigations, they were previously unavailable in civil proceedings.

Enforcement Division Director Robert Khuzami, who described the measures as "a potential game-changer for the Division," noted in remarks at Wednesday's press conference, that cases aided by cooperator testimony can be made quickly, since cooperators are most often insiders who've seen and heard what happened first-hand and charges supported by cooperator testimony can be resolved or litigated from a "position of strength." Cooperating witnesses can also help investigators break cases involving complex transactions that might otherwise escape detection, or help apprehend "higher-ups" whose culpability can be hard to establish, Khuzami noted.

Russ Ryan, a partner with King & Spalding and a former assistant director in the Enforcement Division, says the move "represents a sea change in enforcement practice with respect to individuals."

"Previously only companies ever got any tangible rewards for extraordinary cooperation, so individuals rarely had any incentive to come forward with information unless and until asked for it, especially if they knew they had potential liability," says Ryan. "This could really change the dynamic in many investigations."

The SEC also streamlined the process for submitting witness immunity requests to the Justice Department for witnesses who help in its investigations and related enforcement actions.

At the same time, Khuzami announced the heads of the five new national specialized units and the head of its newly created Office of Market Intelligence.

The new Office of Market Intelligence, led by Thomas Sporkin, who most recently served as deputy chief in the Office of Internet Enforcement, will be responsible for the collection, analysis, risk-weighing, triage, referral, and monitoring of the tips, complaints, and referrals that the SEC receives each year.

The Asset Management Unit, led by co-chiefs Bruce Karpati, head of the SEC's Hedge Fund Working Group, and Enforcement Division Assistant Director Robert Kaplan, will focus on investment companies, investment advisers, mutual funds, hedge funds, and private equity funds.

The Market Abuse Unit, headed by Daniel Hawke, director of the SEC's Philadelphia Regional Office, will focus on large-scale and organized insider-trading and market manipulation schemes, and will utilize some unique technology to aid in the investigations.

The Structured and New Products Unit, led by Kenneth Lench, an Assistant Director in the Enforcement Division, will cover all structured products, including collateralized debt obligations, both cash and synthetic Credit Default Swaps, securitized instruments, and other structured products, and will focus on developing products.

The Foreign Corrupt Practices Act unit, led by Cheryl Scarboro, an associate director in the Enforcement Division, will focus on enforcing the law and regulations that prohibit corporate bribery of foreign officials.

The Municipal Securities and Public Pension Unit, led by Elaine Greenberg, associate regional director of the Philadelphia Regional Office and Co-Chair of the Division's national Municipal Securities Working Group, will focus on misconduct in the $2.8 trillion municipal securities market and at public pension funds.

Compliance Week will provide readers with full details in an upcoming edition.

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