October 29, 2001

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SEC Sets New Enforcement Guidelines;
Firms Will Benefit from Cooperation

Firms that cooperate with SEC investigators when trouble is brewing could get a break, according to new guidelines issued last week by the Commission. The degree to which a firm charged or suspected of securities law violations cooperates with regulators will be a key test in determining the severity and extent of penalties levied, the SEC said October 23.

The SEC used the occasion of an enforcement action against Gisela de Leon-Meredith, the former comptroller of a public company, to make its point. Meredith was accused of overstating earnings and understating income of the company, a subsidiary of the Seaboard Corporation. Seaboard's response to the violations -- it fired Meredith, conducted its own investigation, and assisted SEC investigators -- was a key element in the Commission decision not to take action against the firm.

In a "report of investigation and statement" -- a so-called "21(a) report" -- that accompanied the enforcement action, the Commission identified four areas of cooperation it would take into account when considering sanctions:

• Self-policing prior to the discovery of the misconduct, including establishing effective compliance procedures and an "appropriate tone at the top";
  
  
• Self-reporting of misconduct when it is discovered, including conducting a thorough review of the nature, extent, origins and consequences of the misconduct, and promptly, completely, and effectively disclosing the misconduct to the public, to regulators, and to self-regulators;
  
  
• Remediation, including dismissing or appropriately disciplining wrongdoers, modifying and improving internal controls and procedures to prevent recurrence of the misconduct, and appropriately compensating those adversely affected; and
  
  
• Cooperation with law enforcement authorities, including providing the Commission staff with all information relevant to the underlying violations and the company's remedial efforts.
  

Credit for cooperative behavior may range from taking no enforcement action at all to bringing reduced charges, seeking lighter sanctions, or including mitigating language in documents the Commission uses to announce and resolve enforcement actions, according to the SEC. The new criteria, said acting director of enforcement Stephen Cutler, "will encourage companies to address unlawful conduct swiftly and meaningfully and to cooperate with law enforcement authorities." The result, said Cutler, "will be more efficient and effective enforcement of the federal securities laws."

While the October 23 statement represents the first definitive signal that the SEC has a new approach to enforcement under Pitt's chairmanship, Commission tea leaf readers have been seeing the signs of change over the past two months. Among them:

• A September 28 case in which the SEC cited the cooperation of investment adviser David Bellet when it issued a relatively lenient cease-and-desist order barring him from future violations of the Advisers Act (IA Week, October 8, 2001). Bellet filed "fictitious" personal trading reports and concealed "several hundred" actual transactions from his firm's compliance officer, according to the SEC. Bellet provided "significant" cooperation to SEC staff investigating the matter and "expedited" resolution of the matter, Karen Pennington, assistant regional director in the SEC Northeast Regional Office, told IA Week. His cooperation was taken into account when the Commission staff recommended its mild course of action, said Pennington.
  
  
• A September 27 Commission Order resulted in a cease and desist finding against Illinoisbased consulting firm Performance Analytics and one of its principals, Robert P. Moseson. The charge: presenting inaccurate performance history of an advisory firm managed by a former Performance Analytics affiliated broker to the . firm's clients. Moseson, who neither admitted nor denied the findings within the Order, was suspended from the advisory business for three months and fined $25,000. The penalty represented a "significant departure" from penalties levied in previous such cases, according to Richard A. Levan, of Levan Freidman, LLP, a former SEC enforcement attorney.

The October 18 announcement by Office of Compliance Inspections and Examination (OCIE) director Lori Richards that firms facing possible enforcement actions will receive a "deficiency letter" prior to any action being taken. In some cases, said Richards, the corrective measures a firm takes after receiving such a letter could stave off enforcement action.

In his confirmation hearings this summer, Pitt indicated a desire to make the SEe's enforcement process more efficient. The new guidelines are a logical extension of those sentiments, according to securities attorneys. "The SEC can do a much better job for all investors if it has the ability to reward those who come forward with vital information in SEC investigations," according to Levan.

Most recently, in an October 22 speech to the American Institute of Certified Public Accountants (AICPA) SEC Chairman Pitt said he is "committed to the principle that government is and must be a service industry. " Speaking of the antagonism that had emerged between the accounting industry and the SEC over recent years Pitt declared that "those days are ended."

The change in approach comes as no surprise to those who have read what Pitt wrote prior to becoming SEC chairman. Writing in August 1997, Pitt lamented an "enforcement process...used to craft rules for public companies and market participants" where "good people trying to do the right thing nonetheless...get enmeshed in the litany of subpoenas and testimony under oath." Those days, it appears, are ended.

Copyright 2006. Richard A. Levan. All rights reserved