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Chamber of Commerce Report Urges Review of SEC's Enforcement Program

The U.S. Chamber of Commerce has issued a report on the SEC's current enforcement program in which it recommends that the Commission appoint an advisory committee to study its enforcement processes and review the reasons for a number of its recent litigation losses. David Andrews, a former vice president, general counsel and secretary for PepsiCo. Inc., led the study and engaged Bruce Hiler of Cadwalader, Wickersham & Taft to review his findings. The report reflects interviews with over 35 securities practitioners, academics, general counsels and public company corporate secretaries. A number of former SEC commissioners and staff also provided input. The Chamber report includes over a dozen recommendations, one of which is that the SEC should cease to impose fines on corporations for a lack of cooperation in investigations. The purpose of the report is to encourage a dialogue given recent changes in the SEC's enforcement and regulatory authority.

The report notes that the SEC's enforcement program has taken on an increasingly punitive tone and appears to focus on securing large fines and seeking officer and director bars. Further, while the SEC's and the Department of Justice's statements relating to cooperation in investigations started out as means of avoiding prosecution or harsh sanctions, they now appear to be a prescription for corporate self-indictment and for the government to justify even harsher penalties for those who are deemed not to have fully cooperated, according to the report.

The Chamber report, referring to the SEC's recent statement on standards for seeking fines against public companies, suggested that it further clarify its policy as it gains experience in applying those standards. The SEC should periodically review its enforcement policies as recommended by the Wells Committee in its 1972 report. The report also urges the SEC to avoid the expansion of regulations and interpretations through enforcement actions.

Another recommendation is to use formal reprimands for situations that may not rise to the level of enforcement actions and to expand the use of reports of investigation under 1934 Act section 21(a) to provide guidance on complex disclosure and accounting issues, and to reflect the Commission's views on the appropriate standards of conduct. Criminal referrals for securities violations should be reserved for the most egregious cases, according to the report. The SEC should have a significant role in the decision-making process before the Department of Justice pursues an investigation of possible federal securities law violations.

The SEC should make clear that the waiver of attorney-client privilege or work product protection is not a required element in determining cooperation in an SEC investigation or to obtain more lenient treatment, according to the report. In addition, while corporations should attempt to make prompt determinations about employees who have engaged in improper conduct, the SEC should recognize the difficulties in making that determination. The SEC should not pressure corporations to reach hasty conclusions about employee conduct during investigations. The report also urges the SEC to consider the burdens associated with demands for document production, particularly with respect to electronic documents or older and off-site hard copy documents.

The Chamber report, in concluding that the SEC should not impose fines on corporations for lack of cooperation in investigations, pointed out that it has adequate tools through traditional means, such as subpoenas and the books and records rules to prevent unnecessary delays. To the extent the SEC believes that it has the authority to impose penalties for the lack of cooperation, the report recommends that the SEC provide clear standards and a disciplined process for the review of alleged uncooperative conduct, and that the review take place at the Commission level.

The report urges the SEC to make clear that it will not deem a corporation uncooperative for indemnifying or advancing legal expenses to employees in connection with SEC investigations or litigation. Further, the SEC should view good-faith reliance on attorneys and accountants in connection with transactions and disclosure issues as relevant to its enforcement decisions. The report urges the SEC to eliminate to the extent possible any overlap in enforcement efforts among state attorneys general, the self-regulatory organizations, the PCAOB and its own enforcement efforts.