SEC Investigative Process: An Overview of Procedural Considerations

An Overview of Various Procedural Considerations Associated With the Securities and Exchange Commission's Investigative Process Author(s): William
R. McLucas, Thomas D. Hamill, Catherine Shea and Jay Dubow Source: The Business Lawyer, Vol. 45, No. 2 (February 1990), pp. 625-694 Published by: American Bar Association Stable URL: http://www.jstor.org/stable/40687062 . Accessed: 30/12/2013 14:05
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An Overviewof Various Procedural ConsiderationsAssociatedWiththe Securities and Exchange Commission'sInvestigative Process

TABLE OF CONTENTS
I. COMMISSION INVESTIGATIONS A. Sources ofInvestigations B. Informal Investigations C. FormalInvestigations D. Investigative Technique CHALLENGES TO AND PROCEDURAL ISSUES IN INVESTIGATIONS A. FirstAmendment Amendment B. Fourth Amendment C. Fifth D. Perjury E. False Statements F. Obtaining CopiesofFormalOrders G. Transcript Availability H. GoingOfftheRecord I. Attorneys and Clients Other Privileges J. K. The Freedom ofInformation Act Actof 1974 L. The Privacy forCustomer Records M. Subpoenas to FinancialInstitutions The Rightto FinancialPrivacy Actof 1978 Actof 1986 N. The Electronic Communications Privacy Act O. The Fair CreditReporting P. Section 6103 oftheInternal RevenueCode Tax Return Testimony by Preparers Q. R. NoticeofThirdPartySubpoenasto "Targets"of Commission Investigations - Subpoena withCommission S. Failureto Comply Subpoena Enforcement withOtherGovernmental Authorities and T. Discussions Accessto theCommission's Files Investigative Page 627 627 628 629 632 636 636 637 638 640 640 641 641 641 642 645 647 649 652 659 660 660 662 662 662 668 625
II.
Vol.45,February 626 The Business 1990 Lawyer; U. Referrals and Settlements of Enforcement Actions V. ParallelProceedings W. Disclosure ofGrandJury MaterialsPursuant to Rule 6(e) oftheFederalRules ofCriminal Procedure III. COLLATERAL DISCLOSURE EFFECTS RELATING TO AN SEC ENFORCEMENT ACTION A. Disclosure B. Processing of Disclosure Documents DuringPendency or Inquiry Enforcement Investigation COMPLETION OF INVESTIGATION A. Staff Recommendation B. Wells Submissions G. Document Retention 670 671 673 679 679 683 689 689 689 694
IV.
Process 627 The SEC's Investigative
An Overviewof Various Procedural ConsiderationsAssociatedWiththe Securities and Exchange Commission'sInvestigative Process

By William R. McLucas, Thomas D. Hamill, CatherineShea, and Jay Dubow*
I. COMMISSIONINVESTIGATIONS** A. SOURCES OF INVESTIGATIONS

Securities and Exchange Commission ("Commission") investigationsare triggeredfroma number of sources, including: examinations of filingsmade with the Commission; broker-dealer,investmentcompany, and investmentadviser inspections which are conducted by Commission staff and by selforganizations;marketsurveillanceby Commission staffand by selfregulatory regulatoryorganizations; complaints from members of the public, including of issuers and their currentor formeremployees,and anonymous competitors sources; news media; referrals from other governmentagencies; and other investigations. Pursuant to an amendmentto the Securities Exchange Act of 1934 ("Exchange Act") in November 1988, 15 U.S.C. 77-78 (1934), under section 21A(e) of the Exchange Act the Commission may now award a "bounty" to a of a civil penaltyfrom person who providesinformation leading to the recovery an insidertrader,a tipper,or a controlling person of a trader(i.e., the person's employer). See U.S. Securities and Exchange Commission, Informationon Bounties, SEC Form 2222 (June 1989). While the Commission has not developed significant experiencewith its bountyprogramas of the preparationof this therehave been personswho have providedinformation presentation, pursantto which certaininvestigations of possible insidertradinghave been commenced.
*Mr. McLucas, Mr. Hamill,and Ms. Shea are attorneys in theSecurities and Exchange Commission's Divisionof Enforcement. of the Pennsylvania, New York, Respectively, theyare members and District ofColumbiabars. Mr. Dubow is a member oftheDistrict ofColumbiaand Pennsylvania bars.He was formerly an in theSecurities and Exchange Commission's Divisionof Enforcement. attorney The Securities and Exchange as a matter ofpolicy, disclaims forany Commission, responsibility The viewsexpressed herein are those oftheauthors and private publication byanyofitsemployees. do not necessarily reflect the viewsof the Commission or its staff. See 17 C.F.R. 200.735-4(e) (1980). **With theauthors' ofthematerials setforth in thispresentation weredrawn permission, portions froman outlineentitled "An Overviewof Various Considerations in SEC Investigations and Enforcement Actions" (1980), by EdwardHerlihy (WachtellLiptonRosen & Katz) and Thomas A. Ferrigno (Debevoise& Plimpton).
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The Business 1990 Lawyer;Vol. 45, February
B. INFORMALINVESTIGATIONS
or "preliminary" Commission begin as informal investigations generally not have subpoena the staff does In an informal investigation investigations. fromwhom of and entities on individuals and relies the cooperation power is sought. and testimony information in section 5 of the are contained The guidelines forinformal investigations 17 C.F.R. 202.5 (1960). InforAndOtherProcedures. Commission's Informal - an unlessordered mal investigations are non-public publicbytheCommission can instiThe Commission 17 occurrence. C.F.R. rare 202.5(a). exceptionally 17 C.F.R. actionas a resultof an informal tuteenforcement investigation. also to formal that 202.5(b). Procedural investigations applyto safeguards apply and U.S. Securities informal See, e.g., ExchangeCommission, investigations. VolFor Persons Information RequestedTo SupplyInformation Supplemental A Commission To Pursuant To Or Directed Supply Information untarily SEC Form1662 (June1989). Subpoena, thevolunwill frequently thestaff request investigation Duringan informal creation of the also The documents. staff of request may tary production will also the staff of documents request (e.g., chronologies events).Often, witnesses. The interviews from or transcribed interviews may,detestimony to ofthewitness thewillingness ofthematter and/or upontheurgency pending on the or be face-to-face telephone. cooperate, voluntarily oathsor affirmations, cannot administer thestaff In an informal investigation are often interviews whichit can do in formal Nevertheless, investigations. is and a verbatim witha court conducted transcript produced. reporter present the in an informal on the record is goingto testify If a witness investigation, the court if consent tobeingplacedunder willask thewitness' staff oath,and so, is placed under theoath. If the witness will administer (if a notary) reporter and state underfederal to punishment oath,thenfalsetestimony maybe subject to falsestatements 18 U.S.C. 1001,whichprohibits laws. In addition, perjury an oath. has taken or nota witness officials, applieswhether government actionor by a enforcement without can conclude An informal investigation an enforcement authorize thattheCommission recommendation staff proceeda formal first by a cooperation Although investigation. conducting ing,without will sometimes is fromwhichinformation sought keep an personor entity needto the witnesses or third informal, party non-cooperation by investigation telebanks and a thatrequire subpoena(e.g., entities from obtaindocuments the Commission that staff that the often necessitates request phonecompanies) order thestaff a formal authorize mayseeka formal Additionally, investigation. as views the staff if the is "cooperating," evenifa requested "cooperation" party the as or if the staff that, insufficient, subpoena inquiryproceeds, recognizes to be requiredto obtainthe information necessary powerwill mostcertainly the complete inquiry.
The SEC's Investigative Process 629
a FORMAL INVESTIGATIONS
Statutory Authority
The statutesunder which the Commission exercisesjurisdictionprovide for Commission investigations of past, on-going,or prospectiveviolations of their provisions. Section 20(a) of the SecuritiesAct of 1933 ("Securities Act") provides: Whenever it shall appear to the Commission,eitherupon complaintor otherwise,that the provisions of this title, or of any rule or regulation have been or are about to be violated,it thereof, prescribedunder authority eitherrequire or permitsuch person to filewith it a may, in its discretion, statementin writing,under oath, or otherwise, as to all the facts and circumstances concerningthe subject matterwhich it believes to be in the to investigate, and may investigate such facts. public interest 15 U.S.C. 78(1933). Section 8(e) of the SecuritiesAct provides: The Commission is herebyempowered to make an examination in any case in order to determine whether a stop order should issue under subsection(d). In making such examination the Commission or any officer or officersdesignated by it shall have access to and may demand the productionof any books and papers of, and may administer oaths and affirmations to and examine, the issuer, underwriter, or any other person, in respect of any matter relevant to the examination, and may, in its discretion,require the productionof a balance sheet exhibitingthe assets and liabilitiesof the issuer, or its income statement, or both,to be certified to by a public or certified accountantapproved by the Commission. If the issuer or underwriter shall fail to cooperate,or shall obstructor refuseto the of an examination,such conductshall be properground permit making forthe issuance of a stop order. 15 U.S.C. 78(1933). Section 21(a)(l) of the Exchange Act provides: The Commission may, in its discretion,make such investigations as it deems necessaryto determine whetherany person has violated,is violating, or is about to violate any provision of this title, the rules or regulations the rules of a national securitiesexchange or registered securithereunder, ties association of which such person is a member or a person associated with a member,the rules of a registeredclearing agency in which such or the rules of the Municipal Securities Rulemakperson is a participant, and Board, ing may require or permitany person to filewith it a statement in writing, under oath or otherwiseas the Commission shall determine, as to all the factsand circumstances the matter to be concerning investigated. The Commission is authorized, in its discretion,to publish information concerningany such violations, and to investigateany facts, conditions,
630
1990 The Business Lawyer;Vol. 45, February practices,or matterswhich it may deem necessaryor proper to aid in the of rules and regulations of such provisions,in the prescribing enforcement to serve as a basis for recomunder this title,or in securing information mending furtherlegislation concerning the matters to which this title relates.
15 U.S.G. 78(1934). Note that pursuant to section21(a)(l) of the Exchange Act, the Commission can conduct investigationseven if it does not believe that any violation has or will occur. occurred,is occurring, Section 21(a)(2) of the Exchange Act provides: On request from a foreignsecurities authority,the Commission may provide assistance in accordance with this paragraph if the requesting is conductingan investigation statesthatthe requestingauthority authority which it deems necessaryto determinewhetherany person has violated,is violating,or is about violate any laws or rules relatingto securitiesmatters that the requesting authorityadministersor enforces.The Commission as the Commission deems conductsuch investigation may, in its discretion, and evidence information to collect pertinentto the request for necessary assistance. Such assistance may be providedwithoutregard to whetherthe a violation of the laws of factsstated in the request would also constitute the United States. In deciding whether to provide such assistance, the Commission shall consider whether (A) the requesting authority has agreed to providereciprocalassistance in securitiesmattersto the Commission; and (B) compliance with the request would prejudice the public of the United States. interest 15U.S.C.78(1934). Note that section 21(a)(2) of the Exchange Act allows the Commission to conduct investigationson behalf of foreign securities authorities even if no violationof'United States laws are involved. Pursuant to section 17(a) of the Exchange Act the Commission may, upon demand and withoutobtaininga formalorder,examine and obtain copies of the recordsof,among others,any broker-dealer, any securitiesexchange, registered or transfer securities dealer, clearing agency. Rules 17a-3 and agent, municipal 4 [17 C.F.R. 240.17a-3 and 17a-4 (1948)] set forththe recordsrequired to be securitiesexchange members,brokers,and dealers. maintainedby registered Section 209(a) of the InvestmentAdvisers Act of 1940 ("Advisers Act") provides: Whenever it shall appear to the Commission,either upon complaint or otherwise,that the provisions of this title or of any rule or regulation prescribed under the authoritythereof,have been or are about to be violated by any person, it may in its discretionrequire, and in any event in writing,under oath shall permit,such person to filewith it a statement
Process 631 The SEC's Investigative or otherwise, relevantto such violation, as to all the factsand circumstances all such factsand circumstances. and may otherwiseinvestigate 15 U.S.C. 80b-13 (1940). Section 42(a) of the InvestmentCompany Act of 1940 ("Investment Company Act") provides: The Commission may make such investigations as it deems necessaryto determine whether any person has violated or is about to violate any provisionof this title or of any rule, regulationor order hereunder,or to determinewhether any action in any court or any proceeding before the Commission shall be instituted under this title against a particular person to a or persons,or with respect particular transactionor transactions.The in writing, Commission shall permitany person to filewith it a statement under oath or otherwiseas the Commission shall determine,as to all the factsand circumstances concerningthe matterto be investigated. 15 U.S.C. 80a-42( 1940). See also section18(a) of the Public UtilityHolding Company Act of 1935 and section321(a) of the Trust IndentureAct of 1939.
FormalOrders
Various statutesprovide for designation of officers of the Commission who can administeroaths, subpoena witnesses,take evidence, and require the production of documents. See, e.g., Securities Act, section 19(b); Exchange Act, section 21(b); InvestmentAdvisers Act, section 209(b); and InvestmentCompany Act, section42(b). These statutory provisionsdo not limit the designation of Commission "officers"to attorneys.Staffaccountants,analysts, and investiand sign gatorsmay also be so designatedand are empowered to take testimony subpoenas. Thus, forinstance,in an investigation dealing with the application of generallyaccepted accountingprinciplesor auditing standards,it is commonplace foraccountantsto examine witnesses.
Function ofFormal Orders

The formal order of investigationsserves two important functions:(a) it generally outlines the boundaries or scope of the investigation which the Commission is authorizing,and (b) it grantsthe staffpower to issue subpoenas fortestimony and fordocumentsand to administeroaths.
ProvisionsofFormal Orders
In addition to a caption (which provides the name and file number of an formalordersof investigation investigation) normallycontain: a "Public Official Files" section;a "StaffReport" section;and a "Purpose and Order" section.
1990 Vol.45,February 632 The Business Lawyer; The PublicOfficial and provides Files section identifies, describes, pertinent in theCommission's facts aboutthenamedsubjects, as disclosed publicofficial files. and The Staff contains whichgenerally Reportsection separateparagraphs and to showthestatutory in conclusory fashion recite theinformation tending in Such violations are usuallydescribed ruleviolations thatmayhaveoccurred. called forby SEC subpoenasneed not be broad terms. However,documents - otherwise the in the formalorder limitedto only those areas mentioned as to whatcoursean investigation wouldhaveno discretion Commission might offact as a broaddelegation take.The formal order has beeninterpreted finding Arthur v. SEC to the staff. from the Commission See, Young& e.g., authority has the power to the Commission Co., 465 U.S. 805 (1984). Additionally, and to whether thelaw has beenviolated conduct an investigation to determine to determine it in Thus determine has, effect, "jurisdiction coverage. statutory SEC v. Wall StreetTranscript Corp.,422 F.2d 1371 (2d Cir.), jurisdiction." cert, 398 U.S. 958 (1970). See also SEC v. Savage,513 F.2d 188 (7th denied, Distribution Scotch Cir. 1975); SEC v. Brigadoon Co., 480 F.2d 1047 (2d Cir. v. SEC 415 U.S. 915 cert, Meek, denied, (1974); [1979-1980Transfer 1973), Okla. L. Fed. Sec. f 1979). The mere 97,105 (W.D. Binder] Rep. (CCH) in or the broker-dealer the issuer with ofthewords"and others" inclusion along the activities of all orderwill adequatelyencompass the bodyof the formal etc. salesmen, officers, employees, agents, principals, a recital of contains section of the and Order The first Purpose paragraph tendsto show may have violations thatthe StaffReportsection the specific ofa thecommencement forordering or be occurring, as a justification occurred formal investigative proceeding. The remaining paragraphsof the Purpose and Order sectioncontaina who are members be made,and namesthestaff thatan investigation direction oathsand issuing forthepurpose of administrating "officers" Only subpoenas. are named ofwitnesses in theinterrogation whomayparticipate members staff as officers.
Z). INVESTIGATIVE TECHNIQUE In General

members staff of mostinvestigations, At theoutset Divisionof Enforcement will takethefollowing steps: who may be about all companiesand individuals Obtain information sources internal Commission from and involved including: public Forms3 and 4, etc.) statements, (1) Publicfilings (registration (2) SEC computer (3) News stories (4) Who'sWho (5) Standard& Poor'sinformation
The SEC's Investigative Process 633 (6) Price/Volume history Gather and analyze relevantfacts. Analyze applicable legal theories. Develop a plan of investigation. In addition to the above, investigations into different areas of possible securities law violationsrequire unique investigative approaches. It is difficult to generalize as to the typeof information that will be soughtor the specific investigativesteps that will be employed in a particular case. Nonetheless, set forthbelow is a descriptionof investigative techniques commonly employed in: insider trading and other market related investigations; to and broker-dealer/failure financialfraud/financial statementinvestigations; of the While this is no means a listing investigations. by complete supervise types of investigationsthat the Commission conducts, the investigativetechof those used in most investigations. niques describedare illustrative
InsiderTradingand Other Market-Related Investigations

Market investigations such as insidertradingor marketmanipulation investithe staff to examine market-related gations require evidentiarymatters.When insider cases it is to determine what the relevant investigating trading important event is and the time material (e.g., tenderoffer, earnings decline) period when event first or known. This is the was being considered became usually accomplished by requestingchronologiesfromthe entitiesand persons involved(e.g., issuers, investmentbankers, lawyers) or by conducting informal telephone with knowledgeablepersons. interviews After determiningthe relevant event and time period, and examining the will determinethe timingof public announcementsduring that period, the staff timeperiod forwhich it wants to request tradinginformation frombrokers.The staffuses clearing sheets to determinewhich brokershad accounts that traded securitiesinvolvedduringthe relevantperiod. The staff then will commencethe "Blue Sheet" process by sending trading questionnaires* to the identified brokersrequesting,foreach account that traded,such information as the name, address, account executive,and size of transaction.** At the same timethat the staff is requestingBlue Sheet information, the staff will usually request or subpoena fromthe issuer or other entitiesthe names of all individualswho knew about the event prior to its announcement. The staffmay question persons knowledgeable about the event as to the timingof meetingsand other key steps leading up to the public announcement of the event.
*Due to thecolorofthepaperon whichthesequestionnaires are printed, are known as "Blue they Sheets." **The Blue Sheetprocess is being thatpermit electronic Blue Sheetrequests computerized. Systems under theauspicesoftheSecurities and responses are being theselfAssociation, developed Industry ofSecurities and theCommission. See, e.g.,NationalAssociation Dealers, organizations, regulatory ReviewTask Force(March 1988),at 8. Inc.,Final Report oftheRegulatory
634 The Business Vol.45,February 1990 Lawyer; The staff to determine if any relationships analyzesBlue Sheetinformation existamongidentified customers and thoseknown to havebeenin possession of information. Factors thatare lookedat include: customer namesand nonpublic the size of transaction; the number of transactions; the date of the addresses; and theaccount If accounts executive. are identified thatwarrant transactions; further thenthestaff will request from thebrokerage firm new account review, and otherdocumentary information accountstatements). The (e.g., monthly staffuses the new accountinformation and monthly statements to further to discover between or amongtraders and people who attempt relationships werein possession ofnonpublic information. Other investigative accountexecutives and obsteps includeinterviewing additional documents either or witha subpoena, taining voluntarily including: bankstatements and checks; and rolodexes. calendars; phonerecords; personal will requestor subpoenathe testimony of the persons who Finally,the staff traded. If theBlue Sheetresponses indicate then thestaff willhaveto foreign trading, determine the mostpractical to the trader if possible, and, approach identify consider in the the assets account identification. The may freezing pending Commission uses negotiated and Memorandaof Understanding treaties with certain countries to obtainevidence from abroad.In otherinstances theCommissionmust considerwhat steps to take to obtain evidencefromforeign countries on an ad hocbasis. Marketmanipulation also requirean examination of trading investigations time over a time The could be one period activity given period. day (see, e.g., 87 Civ. 1809 (S.D.N.Y. March 19, 1987), Lit. Rei. SEC v. BoydL. Jefferies, or a number ofdays,weeks, or longer No. 11370),or a particular partthereof, (see,e.g.,Pagel v. SEC, 803 F.2d 942 (8th Cir. 1986)). After theappropriate timeperiodforreview, thestaff determining requests as in an insider Blue Sheetinformation in thesame manner investigatrading of manipulative tion.The staff looks forevidence related trading, including wash matched if the same stock, sales, orders, or, relevant, partiestrading The staff transactions at theclose of the market. also usuallyobtainsrecords from thetransfer agent. Marketmanipulation often are also financial fraud/financial investigations belowwithrespect statement and thestepsdetailed to thosecases investigations, will also be taken.
statement Financialfraud/financial include frauds the investigations through failures to disclose use offalsefinancial financial and information, information, are normally cases. These investigations document intensive and accounting the staff and to numbers of documents. review, analyzelarge obtain, require The staff will usuallyseekall of therelevant workpapersfrom theissuer's as well as all accountants relevant documents fromthe independent public
Financial FraudFinancial Statement Investigations
The SEC's Investigative Process 635 issuer involved. Frequently, documents from banks, creditors,customers,and otherswith a business relationshipto the issuer will also be subpoenaed. The of the approprithen analyzes the documentsreceivedand takes testimony staff ate personnelfromthe issuer and fromthe independentaccountants. fraudinvestigations make of accounting/financial The varietyand complexity taken in cases. the to generalize about the investigation it difficult steps normally The most common issues encountered in accounting cases involve properly accountingforrevenue,valuation of assets, timingof the creationas well as the adequacy of loss reserves,and, generally,abuse in the application of generally accepted accountingprinciplesto an issuer's transactionsand/or the failure of an independentaccountantto apply generallyaccepted accountingprinciplesor to employ generally accepted auditing standards in the audit of an issuer's financial statements.See generally Report of the National Commission on Fraudulent Financial Reporting,October 1987.
Broker-Dealer Investigations /Failure-to-Supervise

In addition to its investigative as noted above, the Commission has authority, records of broker-dealers the books and to ( 17(a), registered authority inspect be These entities and their Act). Exchange principals may subject to an or for to suit administrative proceeding failing permit a requested injunctive civil The Commission both brings injunctiveactions and administrainspection. tive proceedingsto remedysubstantial violations of the federal securitieslaws and the rules relating to broker-dealers.These cases involve, inter alia: (1) violationsof the net capital rule (17 C.F.R. 207.1 5c3-l), which insures that a the claims of maintainssufficient broker-dealer liquid assets to satisfypromptly customers and to cover potential market and credit risks, and specifies the rule (17 C.F.R. methodsforcomputingnet capital; (2) the customerprotection 207.1 5c3-3), which preventsa broker-dealerfrom misusing or misallocating customerfundsand securities;(3) the books and recordsand reporting requirements (17 C.F.R. 207.17a-3, 17a-4, 17a-5, 17a-8, 17a-ll), which obligate broker-dealersto maintain and keep currentcertain books and records and to file certain reports with the Commission; and (4) violations of the general antifraudprovisionsof the federal securitieslaws. Exchange Act 10(b); rule 10b-5 [17 C.F.R. 240.10b-5]. The latter category of violations subsumes, among other things,marketmanipulation, making false and misleading statements of material fact in connectionwith the offeror sale of securitiesby the broker-dealer,failing to disclose its insufficient capital, misappropriation of customerfundsand securities,and excessive markups. The Commission may charge the firmand individuals associated therewith both with directviolationsof the law and, when appropriate, failure to supervise otherswith a view to preventing such violations. a The staff broker-dealer based on a referralfroma may begin investigation customer or broker-dealer complaints,or oversight self-regulatory organization, an of the The staff conduct broker-dealers'books inspections. may inspection
636
and records, subpoena such materials, and take the testimonyof relevant and of customers, if necessary. employeesand supervisors,
//.CHALLENGES TO AND PROCEDURAL ISSUES IN INVESTIGATIONS A. FIRST AMENDMENT

First amendmentissues have arisen in a varietyof cases involvingapplication of the federalsecuritieslaws to conductwhich is associated with publishing. In connectionwith news letterpublications "of general and regular circulation" the Supreme Court has held that,under the Investment AdvisersAct, such fall within the statute's exclusion for bona fide publications publicationsand are Lowe v. SEC, 472 not subject to the registration of the statute. requirements U.S. 181 (1985). In SECv. McGoff,647 F.2d 185 (D.C. Gir. 1981), cert,denied, 452 U.S. 963 and directorof a publishing company and (1981), the respondents,an officer two holding companies having an interestin the same publishing company, asserted theirfirst amendmentrightto freedomof the press as a defenseto the Commission's application for an order enforcinga subpoena issued in an investigationinto potential violations of the anti-fraud,reporting,beneficial ownership,and proxy provisionsof the securitieslaws. The Court of Appeals the district affirmed court'sorderenforcing the subpoena subjectto the condition that the respondentsnot be required to furnishany document which solely relates to editorialpolicy or solely relates to information obtained as part of the of news for publication. process gathering In SEC v. Wall Street Publishing Institute,Inc., 851 F.2d 365 (D.C. Cir. 1988), cert, denied, 109 S. Ct. 1342 (1989), the Court of Appeals held that, under section 17(b) of the SecuritiesAct (the anti-touting provisions),payments to a publisherto carryarticlesessentially"touting"a companyor an investment a quid pro quo (where these paymentscan be shown to constitute opportunity forpublicationof the articles) may be required to be disclosed under the statute. The Court stated that an injunctioncould be fashioned in such a case which would not infringeupon fully protected speech or interferewith editorial practice. See generally Fedders, The Securities and Exchange Commission and the Remarks at The AmeriFirst Amendment- Enforcement Not Infringement, can University,Washington, D.C. (October 22, 1984); The Federal Securities Laws, The First Amendmentand CommercialSpeech: A Call For Consistency, 59 St. John's L. Rev. 57 (1984).
Privilege Journalists9
Journalistshave a qualified federalcommonlaw privilegeto refuseto divulge sources. Riley v. City of Chester,612 F.2d 708 (3d Cir. 1979). A journalist's "resource materials" (i.e., unpublished materials) may also be protectedby the
The SEC's Investigative Process 637 630 F.2d 139 (3rd Cir. 1980), cert, UnitedStatesv. Cuthbertsen, privilege. denied subnom., Cuthbertsen v. CBS, Inc.,449 U.S. 1126 (1980); vonBulowby v. vonBulow,811 F.2d 136 (2d Cir. 1985), cert, denied,481 U.S. Auersperg 1015 (1987). The privilege to the and can belongs journalist, onlybe waivedby thejournalist. Cuthbertson v. CBS, Inc., 630 F.2d 139. The privilege may be overcome a clear that the is and information material by showing sought is the of the to maintenance and cannot be obtained relevant, necessary claim, from other sources. Pretrial ProdIn re Coordinated in Petroleum Proceedings uctsAntitrust 680 F.2d 5 Cir. cert, denied sub nom., (2d 1982), Litigation, Arizonav. McGraw-Hill, Inc., 459 U.S. 909 (1982).
B. FOURTH AMENDMENT
In general, the fourth amendment requiresthatadministrative agencysubbe in in limited relevant and in poenas scope, specific sufficiently purpose, directive so that will not be burdensome. v. See compliance unreasonably Cityof 387 U.S. 541,544 (1967); SEC v. Arthur Seattle, Young& Co., 584 F.2d 1019, 1024 (D.C. Cir. 1978), cert,denied,439 U.S. 1071 (1979). See also United Statesv. Miller,425 U.S. 435, 445-46 (1976); UnitedStatesv. MortonSalt, 338 U.S. 632, 652-53 (1950); Oklahoma PressPublishing 327 Co. v. Walling, U.S. 186,208-09(1946). While a corporation in certain amendment may have a fourth privilege an officer, or third to instances, personmaynotplead it personally employee, books and recordsimplicating them.Braswell v. United suppresscorporate States,108 S. Ct. 2284 (1988); Lagow v. United States,159 F.2d 245 (2d Cir. 331 U.S. 858 (1946), reh.denied332 U.S. 785 (1947). denied, 1946),cert, The issuanceof a subpoenaforbank records to an individual does relating not violatethe individual's fourth amendment Donaldson v. United rights. 400 U.S. 517, 522 (1971); and UnitedStatesv. Miller,425 U.S. 435, States, 441_44(1976). The fourth amendment forissuanceof a search probablecause standards warrant are not applicableto judicial enforcement of subpeonas.Oklahoma Press Publishing, 327 U.S. at 195. The SupremeCourt in UnitedStatesv. 410 U.S. 1 (1973) heldthat: Dionisio, It is clearthata subpoena to appearbefore a grand juryis nota "seizure" in the FourthAmendment even that summonsmay be sense, though or burdensome. inconvenient See also Donovanv. Lone Steer,Inc., 464 U.S. 408 (1984) (issuanceof an administrative for amendment subpoenadoes not violatefourth requirement of judicial search warrant;subpoenaedpartymay questionreasonableness in subsequent enforcement actionin federal court.) subpoena
638
C. FIFTH AMENDMENT
Any evidence givenby a witness may be used againstthatpersonin any or federal, state,local, civil,or criminalproceeding administrative, foreign or other the Commission brought by any agency.As provided by the fifth of theUnitedStates,a witness to amendment to the Constitution may refuse him to tend to incriminate him or evidence that fine, give any subject may or forfeiture. penalty,
Assertion
the staff will insistthata witnessappear and assertthe fifth Generally, amendment in person. privilege The privilege is a personal one and must be invoked notbyhis bythewitness, thewitness, notmerely counsel. The testimony musttendto incriminate subject If the dangerof self-incrimination is the witnessto disgraceor disrepute. or byrunning ofthestatute of removed becauseofa previous ofimmunity grant the privilege UnitedStatesv. Bloom,450 F. limitations, may notbe invoked. Pa. 336-338 323, 1978). (E.D. Supp. Waiverofprivilege ofan incriminating fact disclosure mayoccur. Voluntary whereno further relevant facts waivestheprivilege as to thefactand all other 340 U.S. 367 (1951). incrimination wouldresult. States, Rogersv. United The fifth self-incrimination. See Wilson amendment against privilege protects v. UnitedStates,221 U.S. 361 (1911); Bellis v. UnitedStates,417 U.S. 85 and sole proprietorships, and not (1974). It onlycan be invoked byindividuals withhold Nor a officer or testimony bycorporations partnerships. may corporate thatthecorporation wouldbe incriminated. or documents on thegrounds solely of a sole proprieSEC v. Kingsley, 510 F. Supp. 561 (D.D.C. 1981). Records in theindividual result the act of be since torship production may may protected their authenhis and the of the existence records, thereof, possession admitting v. 465 U.S. 605 United States Doe, records, (1984). Corporate by ticity. him. even if theymay incriminate mustbe produced contrast, by an officer 417 Braswellv. United States, States,108 S. Ct. 2284 (1988); Bellis v. United U.S. 85 (1974); UnitedStatesv. Fago, 319 F.2d 791 (2d Cir. 1963). No of corporate records on thegrounds can be asserted privilege by thecustodian and that the"actofproduction" wouldhavetestimonial significance incriminate theindividual. 108 S. Ct. 2284 (1988). But see SEC Braswellv. United States, v. FirstJersey Securities, Inc., 843 F.2d 74 (2d Cir. 1988) (approving practice other than of compelling to documents produce through person corporation employee claiming privilege). No fifth is available as to recordsrequiredto be amendment privilege 335 U.S. 1 maintained States, Shapirov. United bylaw,as withbroker-dealers. (1948); SEC v. Olsen,354 F.2d 166 (2d Cir. 1965). A subpoenato a third forrecords to someone else does not party pertaining violatethe latterindividual's fifth amendment even if he owns the rights, records. Couchv. United 409 U.S. 322 (1973). States,
Courtshave held that,in litigation, the Commission can draw an adverse inference who invokes his fifth amendment againsta witness privilege against self-incrimination. See Baxter v. Palmigiano,425 U.S. 308 (1976); SEC v. 476 F.2d 755 (2d Musella,578 F. Supp. 425 (S.D.N.Y. 1984); SEC v. Stewart, Cir. 1973). While a witness couldinvoke theprivilege an investigation during and thereafter decide to testify in any subsequentlitigation, the effect of the privilege the at least at of that the will, asserting during inquiry stage result in thestaff thattheCommission shoulddraw an process, likely arguing adverse in determining inference whether to authorize an enforcement action. As notedabove, the Commission conduct an may inquirypursuantto a formal order entered to section of the Actin connection Securities 8(e) pursuant withan investigation and examination ofpossible omissions or misstatements in a registration statement. in thelanguage As provided ofsection 8(e), thefailure theissuer or theunderwriter tocooperate is grounds for a stoporder to byeither issue.The failure to cooperate includes theassertion ofthefifth amendment in to questions the registration statement. See In re Blimpie response regarding Securities Act Rei. No. America, 6, 5046, Corp.of (May 1971); In re Scientific Research Securities Act Rei. No. Co., 5040,(Jan. 26, 1970). Development
Effect
All federal are controlled 6001-6005oftitle18 of immunity grants bysections theUnitedStatesCode and maybe authorized General. solelybytheAttorney The actualprocess use immunity is granted in a Commission investiwhereby the Commission's issuanceof a written orderwhich gationinvolves immunity recites thattheorder has beenauthorized Generaland compels bytheAttorney the witnessto testify and provideinformation in the inquiry."Inadvertent can occur,forexample, whenthefifth amendment immunity" grants privilege is asserted and the demandcompelling continues. See, e.g., United testimony Statesv. Abrams, 357 F.2d 539 (2d Cir. 1988), cert,denied,384 U.S. 1001 (1966). To ensure oncethefifth amendment has that, against anyargument privilege beenasserted, result in conferring suchimmunity, the anycontinuing questions staffwill usually state,on the record,that it has no authority to confer has no intention ofdoingso, and thatanyquestions askedfrom that immunity, on in thetestimony will be withtheunderstanding thatthewitness need point toanswer on thebasisthattheresponse the onlydecline maytendtoincriminate witness. If a witness asserts the fifth amendment privilege againstself-incrimination and refuses to answerquestions, the Commission can seek approvalfrom the UnitedStatesDepartment of Justiceto immunize the witness from criminal If the Department of Justice the Commission's prosecution. approves request, theCommission then can issuean order the and compelling immunizing witness his testimony. 18 U.S.C. 6000-6004.The witness cannotcontinue to refuse to
Immunity
640 The Business Vol.45,February 1990 Lawyer; either in theinvestigation or in any related enforcement actiononcethe testify Commission has issueditsorder. v. United 518 F.2d 1295 (9th States, Dupuy Cir. 1975). The immunity conferred is use immunity, as opposedto by theCommission transactional and immunizes the witness to as criminal immunity, only liability, notcivilliability. Use immunity thegovernment from immunized prevents usingthewitness' or information or obtained from thattestitestimony, any directly indirectly the witness. v. 406 441 United U.S. States, (1972). The mony against Kastigar Commission can stillbring a civilenforcement actionagainst thewitness based on theimmunized the could a criminal Moreover, government testimony. bring actionagainstthe witnessforthe conduct about whichthe witnesstestified under ifthegovernment can prove thattheevidence from is derived a immunity, sourcetotally unrelated to theimmunized As the matter, testimony. a practical burdenof demonstrating that the prosecution is in no way taintedby the immunized thatthegovernment testimony maybe quite high.Note,however, can bringa perjury case againstthe witnessif the witnesslies duringthe immunized See Jonesv. UnitedStates,No. 88 Crim. 824 (LBS) testimony. (S.D.N.Y. 1989).
D. PERJURY
Section 1621 of title 18 of the United States Code provides, in part,as follows: . . . having Whoever takenan oathbefore a competent tribunal, officer, or person, in any case in whicha law of theUnitedStatesauthorizes an oath to be administered, thathe will testify, declare,depose,or certify and contrary to such oath statesor subscribes truly,. . . willfully any material matter whichhe doesnotbelieve to be true... is guilty ofperjury and shall,except as otherwise notmore expressly provided bylaw, be fined than$2,000or imprisoned notmorethanfive yearsor both.... See also the recantation 18 U.S.C. 1621 and 1623. Recantation provisions, be evidence of in a lack of intent a may subsequent prosecution.
E. FALSE STATEMENTS
Section1001 oftitle18 oftheUnitedStatesCode provides as follows: withinthe jurisdiction of any department or Whoever,in any matter of the United States and or conceals falsifies, agency knowingly willfully coversup by any trick, or device a material or makes scheme, fact, any or fraudulent or representations, statements or makesor false,fictitious usesanyfalsewritings or document thesameto contain knowing anyfalse, fictitious or fraudulent statement or entry, shall be finednot morethan notmorethanfive or both. $10,000or imprisoned years,
The SEC's Investigative Process 641 that theproposition 396 U.S. 64 (1969), for v. United States, See,e.g.,Bryson in view 1001 for of section construed not to be is narrowly purposes jurisdiction ofofficial theintegrity ofprotecting oftheinterests inquiries.
F. OBTAININGCOPIES OF FORMAL ORDERS

Rules Relatingto Investigations Rule 7(a) of theCommission's [17 C.F.R. or requiredto thatany personwho is compelled 203 et seq. (1964)] provides be in a formal or testimony furnish documents shall,uponrequest, investigation can obtain thatsuch persons order.Rule 7(a) also provides showntheformal withtheexpressapprovalof certain order, upon request, copiesof theformal in their determine that if but such discretion, officials, officials, only supervisory both with the "there exist reasons [for approvingthe request] consistent in the investigation and with the of personsinvolved of privacy protection 17 C.F.R. conduct of the 203.7(a). investigation." unimpeded
ABILITY G. TRANSCRIPTAVAIL
17 C.F.R. Rules Relatingto Investigations, Rule 6 of the Commission's states: 203.6, A personwho has submitted in a evidenceor testimony documentary to shall be entitled, formal upon written request, investigative proceeding evidence or a transcript ofhistestimony a copyofhisdocumentary procure on payment oftheappropriate fees:Provided, thatin a nonpublic however, the Commission formal investigative proceeding mayforgood cause deny shall suchrequest.In any event, upon properidentification, any witness, own testito inspect the official of the witness' have the right transcript mony. As noted in rule6, theCommission can denya request to purchase a copyof v. 594 Courts have this SEC one'stestimony upheld right. Sprecher, transcript. F.2d v. 360 856 F.2d 317 (2nd Cir. 1979); Commercial (7th CapitalCorp. SEC, thewitness's claimthat theSecondCircuit also rejected Cir. 1966). In Sprecher his testimony. 594 F.2d at 319. he shouldbe allowedto tape record Sprecher, The Commission's rules do not provideforany rightto purchasetestimony ofother witnesses. transcripts
H. GOING OFF THE RECORD

is transcribed courtreporter. If at any timea Testimony by an independent desiresto go offthe record, such direction shouldbe indicated to the witness to off the staff The and instructions record, "go persontaking testimony. any are controlled the not the witness or his or her counsel. See record," staff, by by UnitedStatesv. Lieberman, [1979-1980Transfer Binder]Fed. Sec. L. Rep. (CCH) 1 97,167 (D.C. Mass. 1979), holdingthat "due process"was not
Vol.45,February 1990 642 The Business Lawyer; violated whentheSEC went"offtherecord" an investigatory during proceeding.
A witnesshas the rightto be "accompanied, and advisedby represented counsel."Rule 7(b) oftheRules Relating to Investigation, 17 C.F.R. 203.7(b). Rule 7(c) of thoserulesdefines theright to be accompanied, and represented, advisedbycounsel as theright ofa person tohavean attorney withhimduring testifying present formal and to have this (i) advise any investigative proceeding attorney such personbefore, after the conclusion and of such examination, during at the conclusion of the examination to (ii) questionsuch personbriefly of the answers such has and make (iii) clarify any person given, summary notesduring suchexamination fortheuse ofsuchperson. solely Conflicts of interest be given to may arise requiringthat consideration withdrawal. DR-5-105 and See ABA Code of Professional Responsibility 435 U.S. 475 (1978) ("DefenseattorDR-2-110(b)(2); Hollowayv. Arkansas, to advisethe a conflict of interests, neyshave theobligation, upon discovering courtat once of theproblem."). and See also Tague, MultipleRepresentation in Criminal Cases,67 Geo. L. Rev. 1075 (1979). Conflicts ofInterest Counsel forthe witnessand the witnessmust be aware of the potential of interest conflict involved. Counselmustalso giveconsideration to potential future conflicts of interest of a that may rise as a resultof representatives witness 305 F. Supp. an investingation. See, e.g.,Brownv. E.F. Hutton, during 371 (S.D. Tex. 1969). thestaff doesnottakea position on ethical or conflict issueswhich Generally in an investigation. of multiple witnesses mayarisein counsel's representation withcounselthatany such The staff notein its conversations may,however, issue is something or whichcounselshouldevaluateand resolveforhimself herself.
/. ATTORNEYS AND CLIENTS Rightto Counsel
Sequestration
The Commission's Rules Relating to Investigations for limitations on provide counselof his or her choiceduring a person'sabsoluteright to have present Rule 7(b) provides, in part: testimony. shallbe sequestered, witnesses in thediscretion and unlesspermitted [A]11 theinvestigation or thecounselaccomoftheofficer no witness conducting to be presentduringthe panyingany such witnessshall be permitted ofanyother examination witness calledin suchproceeding.
The SEC's Investigative Process 643 Most litigationover this rule has involvedthe issue of counsel's attendance at the testimony of witnesses. In SEC v. Higashi, 359 F.2d 550 (9th Cir. 1966), where counsel for a corporation also sought to represent and attend testimonyof an individual during the investigation,the Ninth Circuit discussed the rationale for the Commission's sequestrationrule: The Commissionpointsout thatviolationsof Federal securitieslaws are oftendifficult to detectand require extensiveinvestigation; that it may be necessary to determinewhether or not individuals are acting in concert; that investigations are sought to be frustrated frequently by non-cooperation and even subornation of perjury; that the purpose of sequestration could be defeated by an attorneyadvising witnesses as to the testimony which had been given by others. Id. at 552. The courtheld, however,thatthe Commissioncould not invokeits sequestration rule on the factspresentin the case and stated: Here the act of sequestrationhas a second and impermissibleeffect;it bears directlyand prejudicially upon the interestsof the witness himself .... [T]o sequester corporationcounsel is to deprive the witness of the servicesof the attorneymost familiarwith the source of his vulnerability. This invocationof the rule exceeds the bounds and purposes of sequestration. Id. In SEC v. Csapo, 533 F.2d 7 (D.C. Cir. 1976), the District of Columbia Circuit held thatthe Commissionhas the burdento produce "concreteevidence" thatthe attorney's and impede the investigation presencewould obstruct priorto any invocationof the sequestrationrule. See also United States v. Steel, 238 F. Supp. 575 (S.D.N.Y. 1965), affd on othergrounds, 359 F.2d 381 (2nd Cir. 1968) (denying a motion to dismiss an indictmentafter counsel in an SEC had voluntarily withdrawnfromrepresentation afterbeing advised investigation that the staffintendedto invoke the sequestrationrule to preventcounsel from a corporationand an individual). representing In SEC v. Whitman,613 F. Supp. 48 (D.D.C. 1985), the court considereda situation in which an accountant,called as a witness, sought to have another accountantpresentduring the testimony to assist the witness' counsel in representingthe witness.The courtrefusedto enforcea Commission subpoena to the extent that the Commission's Rules of Practice excluded non-lawyers from The court's rationale was that a witnesshas a attendinginvestigative testimony. right to his counsel's "representationand advice (not merely presence) at [Commission] proceedings." Id. at 50 (emphasis in original). The court said thata witnesscould have a non-lawyertechnicaladviser attendtestimony "[o]n those limited occasions when a technical adviser is deemed by the witness' to be essential." Id. attorney
644
The attorney-client can be invokedby individual and corporate privilege clients. States , 449 U.S. 383, 390 (1981). UpjohnCo. v. United The attorney-client can be successfully invoked onlyif:theasserted privilege to whomthe oftheprivilege to become a client; theperson holder is or sought ofthebar of a court or his subordinate communication was madeis a member thecommuniis acting as a lawyer; and in connection withthiscommunication without relates toa fact theattorney was informed cation ofwhich byhisclient, ofsecuring either an opinion thepresence ofstrangers for thepurpose primarily and notforthe or assistance in somelegal proceeding, of law or legal services has been claimedand of a crime or and the tort; privilege purpose committing 449 394-95 Co. v. U.S. notwaivedbyclient. United States, 383, (1981). Upjohn 89 F. 358 ShoesMachinery See United Statesv. United 357, (D. Supp. Corp., of the Mass. 1950) forthegeneral requirements privilege. has the burdenof coming The partyinvoking the attorney-client privilege exist.The to theprivilege to showthattheelements forward necessary support the communication was has the burden to show that the party claiming privilege - the privilege 482 F.2d 72, construed. In re Horowitz, confidential is strictly 81, reh. denied,414 U.S. 1052 (2d Cir.), cert,denied,414 U.S. 867; United 561 F.2d 1334, 1139 (9thCir. 1977). Statesv. Osborn, thecommunication In orderto maintain a claimof attorney-client privilege, have been made in confidence and maintained and client must between attorney in confidence: toa third ofa communication [Subsequentdisclosure party bytheparty the communication whatever eliminates withhis attorney may privilege is viewed as an because disclosure whether have originally possessed, intended or as a waiverof the thatconfidentiality is no longer indication privilege. 255 F.2d 482 F.2d at 81-82. See also United Statesv. Tellier, In re Horowitz, v. Texas SEC 358 U.S. 821 447 cert, Cir. denied, (1958); (2d 1958), 441, International Inc., [1979 Transfer Airlines, Binder]Fed. Sec. L. Rep., (CCH) 1 96,945(D.D.C. 1979). See also In re MartinMariettaCorp.,856 F.2d 619 (4th Cir. 1988), cert,denied,109 S. Ct. 1655 (1989) (defensecontractor's and forsettlement ofcriminal to thegovernment disclosures during negotiations and waived administrative work-product attorney-client privilege proceedings the same and othermaterials as to disclosed materials addressing protection matter). subject relationtermination of theattorney-client The privilege applies evenafter existed. while such a the was made as communication as relationship ship long 309 F.2d 8, 15 (4th Cir. 1962). United Statesv. Foster, made by a clientto an The privilege does not extendto communications to the public. withthe intent and purposethatit be communicated attorney v. United 231 F.2d 384,385-86(10thCir. 1955),cert, Wilcoxson denied, States,
Attorney-Client Privilege
The SEC's Investigative Process 645 351 U.S. 943 (1956). Communications between an attorney and a clientmay notbe privileged ifthey are made in preparing documents to be filed withthe Commission In re 727 Grand statements). (e.g., registration Jury Proceedings, F.2d 1352, 1355-58 (4th Cir. 1984); Hirschfeld v. SEC, 617 F. Supp. 262 (D.D.C. 1985). The privilege doesnotapplyifan attorney is acting in a non-legal capacity. Statesv. Barione,400 F.2d 459, 461 (6th Cir. 1969), cert, United 393 denied, U.S. 1027 (1969) (attorney nonmaterial or clerical services). performing An attorney cannot use theprivilege to avoidanswering questions concerning theidentity of his client, characteristics of the client, and the mental physical of theclient.UnitedStatesv. Kendrick, 331 F.2d 110, 114 (4th Cir. capacity Behrens v. 170 F.2d 628 Hironimus, 1964); 627, (4th Cir. 1948). Documents and information the thirdpartiesare acquiredby lawyerfrom notprotected the See United v. States 328 by privilege. Goldfarb, F.2d 280, 282 Cir. Colton v. United 306 F.2d (6th States, 1964); 633, 639 (2d Cir. 1962). But see thediscussion ofthework-product doctrine below.
Work-Product Doctrine
Written materials or obtained whilerepresenting a prepared by an attorney client in anticipation oflitigation havea qualified from See immunity discovery. Hickmanv. Taylor, 329 U.S. 495 (1974). The immunity is qualifiedbecause thematerials be discoverable a of needby may upon proper showing substantial theparty if the substantial of the materials cannot seeking discovery equivalent be obtained other means without undue R. Fed. Civ. P. 26(b)(3). by hardship.
Underfederal law thereis no accountant-client no recognition of privilege, state-created accountant-client and no accountant imprivilege, work-product United Statesv. Arthur munity. Youngr Co., 465 U.S. 805 (1984); Couchv. UnitedStates, 409 U.S. 322 (1973); In re GrandJury 658 F.2d Proceedings, 782 (10thCir. 1981).
/. OTHER PRIVILEGES Accountant-Client Privilege
A privilege has been recognized in privatecivil actionsforself-evaluative thatare required law or See O'Connorv. Chrysler reports by regulation. Corp., 86 F.R.D. 211 (D. Mass 1980); New YorkStockExchange,Inc. v. Sloan, 22 Fed. R. Serv.2d 500 (S.D.N.Y. 1976); Bredicev. Doctor'sHospital,50 FRD 249 (D.D.C. 1970) afFd,479 F.2d 920 (D.C. Cir. 1973); seegenerally Crisman & Mathews,LimitedWaiverofAttorney-Client and Work Product Privilege Doctrine in InternalCorporate An EmergingCorporate Investigations: "SelfEvaluative" 21 Am. Crim.L. Rev. 123 (1983). In In re an ApplicaPrivilege, tiontoEnforce Administrative No. 89 (N.D. Tex. filed SubpoenaDuces Tecum,
Self-Evaluative Privilege
646 The Business Vol.45,February 1990 Lawyer; March 27, 1989), however, theCommission enforcement ofa subpoena sought served firm thatcalledfortheproduction of "internal audit upon a brokerage - reports of self-audits of thefirm's The reports reports" compliance program. are mandated firm had refused to by NASD and NYSE rules.The brokerage the were for that a critical produce reports, claiming they protected by privilege The Commission of the reportswas self-analysis. argued that production and in relied on cases which such a was in required privilege heldinapplicable othergovernment Trade Commission v. See Federal agencyinvestigations. Statesv. Noall, 587 F.2d TRW, Inc., 628 F.2d 207 (D.C. Cir. 1980); United 441 U.S. 923 (1979); see also United 123 (2d Cir. 1978),cert, Statesv. denied, 164 Electric 788 F.2d Cir. United States v. (3rd 1986); Westinghouse Corp., 465 U.S. 805 Memorial Arthur ir Co., (1984); forMcHenry Young Hospital v. Shadur, was rendered in 664 F.2d 1058 (7thCir. 1981). No decision County the case, sincethe firm withthe firm and the Commission settled the matter thematerials in response to thesubpoenabefore any rulingon the producing Commission's application.
Broker-Customer Privilege
There is no broker-customer See McMann v. SEC, 87 F.2d 377 privilege. denied subnom., McMann v. Engel,301 U.S. 684 (1937). (2d Cir., 1937),cert,
Banker-Depositor Privilege
Thereis no banker-depositor Statesv. Miller,425 U.S. 435 United privilege. 582 F.2d 1244 v. United States Blackwood, (10thCir. 1978); butsee the (1975); ofThe Rightto FinancialPrivacy Actof 1978,below. discussion
Confidential communications between Blau v. United spousesare privileged. to a husband or wifemayrefuse 340 U.S. 332 (1951). Apartfrom this, States, madein thepresence of actsor communications abouta spouse'scriminal testify third butcannot be prevented bythespousefrom testifying voluntarily. parties, Trammel v. United 445 U.S. 40 (1980). States,
Husband-Wife Privilege
thecommon In non-diversity federal actions, cases,suchas theCommission's v. 531 is not United States law physician-patient Meagher, recognized. privilege v. 542 F.2d 752 (5thCir. 1976),cert, 429 U.S. United States Witt, denied, 853; F. Supp. 696 (S.D.N.Y. 1982),affd,697 F.2d 301 (2d Cir. 1983); In re Grand Jury Subpoena(Misai), 460 F. Supp. 150 (D.C.W.D. Mo. 1978). The psychoIn re Zuniga, 714 has been recognized. however, therapist-patient privilege, U.S. but see UnitedStatesv. F.2d 632 (6th Cir. 1983), cert, 464 denied, 983; for 790 F.2d 1468 Cir. basis (9th 1986) (constitutional psychotherapistTalley, has beenrejected). privilege patient
Physician-Patient Privilege
There is a generally forconfidential communications acknowledged privilege to a clergyman. Totten 92 Eckmannv. v. United U.S. 105 States, (1876); Cf. Bd. ofEduc.ofHawthorn 106 F.R.D. 70 (E.D. Mo. 1985); but SchoolDistrict, see United 615 F.2d 828 (9th Cir. 1980) (questions Statesv. Webb, ofwhether theprivilege is availableundertheFederalRules of Evidence reserved because thenecessary was not v. 655 United States Gordon, established); confidentiality F.2d 478 (2nd Cir. 1981) (privilege not applicablewhen a priestwas not consulted as a spiritual counselor).
Priest-Penitent Privilege
StateSecrets Privilege
Government Privileges
Federal common law recognizes the right of the United Statesto asserta on the basis of national The can onlybe asserted privilege security. privilege by the government the of the head who has control over the (i.e., department v. Reynolds, United States 345 U.S. 1 (1953); Ellsberg v. Mitchell, 709 matter). F.2d 51 (D.G. Gir. 1983), cert, deniedsub nom.,Russo v. Mitchell, 465 U.S. 1038 (1984). Legislators3 Privilege The Speechand Debate Clause of theConstitution protects againstinquiry intolegislative actsand intothemotivation forthoseacts.The privilege extends to acts that have been a to deliver vote or to a only already performed;promise solicit votes at somefuture or to introduce a bill is nota legislative act for time, oftheprivilege. Statesv. Helstocki, United 442 U.S. 477 (1979). The purposes does not extend to state United States v. Gillock, 445 U.S. privilege legislators. 360(1980). The privilege aides to theextent thatthey maybe invoked by congressional are carrying outdelegated and to the extent that the members of responsibilities involved and do claim the Miller v. Transamerican Congress may privilege. Press,Inc., 709 F.2d 524 (9th Cir. 1983).
K. THE FREEDOM OF INFORMATION ACT

Under the Freedomof Information Act ("FOIA"), information and documents submitted to theSEC in thecourseof its investigatory activities maybe disclosed to third There are a variety of exceptions to disclosure under parties. the FOIA, and 17 C.F.R. 200.83 providesa procedure by which persons information to theCommission treatment. submitting mayrequestconfidential The ruledoesnotcreate newor alteranyexisting substantive forpersons rights nordoes it affect theCommission's or information, submitting right, authority, to disclose information in context other thantheFOIA. obligation any
Purposeand Scope
648
The procedures provided in the rule are applicable only when no other statuteor Commission rule establishesa mechanismforrequestingconfidential treatment,or where the Commission has not specified that an alternative for exhibits to procedure be followed (e.g., when requesting confidentiality statements). registration
Covered Treatment Information bytheFOIA Confidential Rule

subConfidentiality may be requested for documentaryor oral information mittedto the Commission voluntarilyor pursuant to any requirementof law, such as a subpoena. with respect to documentswhich in the normal Requests for confidentiality course of business would be placed in public files are not covered by this rule, but by otherprovisions(e.g., 17 C.F.R. 204.24b-2).
Reasons Treatment forRequesting Confidential

Section 200.83(c) specifiesthree reasons for requesting confidentiality: personal privacy; business confidentiality; and any other reason permittedby law (e.g., the FOIA's disclosureexceptions).
Treatment Requesting Confidential

Information forwhich confidential is requested should be: treatment is not re(i) segregated from informationfor which confidentiality quested; and (ii) appropriatelymarked as confidential; a written for confidentialtreatmentwhich (iii) accompanied by request the information as to which confidentialtreatmentis respecifies quired. All informationsubmitted for which confidentialtreatment is requested should be marked by the person submitting the recordswith a stamp, legend,or otherformof notice: "ConfidentialTreatment Requested by [name]." If this is should be impractical, a cover sheet indicating the claim of confidentiality attachedto each group of documents. should be made in writing to the Commission Requests for confidentiality personnel receiving the information,and a copy of the request should be delivered or mailed to the Commission's FOIA officer. The envelope or cover page should clearly indicate "FOIA Confidential Treatment Request" and contain the name, address, and telephonenumberof the requestor. In those circumstancesin which a person is requesting confidentiality with respect to testimonygiven in the course of a Commission investigation,the is providedor as soon thereafter as request should be made at the timetestimony
The SEC's Investigative Process 649 treatment should be submitted requestfor confidential possible.A written after within days thirty testifying. ifa FOIA request is filed whiletheCommission is investigating a Generally, from for the Commission asserts an disclosure matter, exemption "continuing and documents law enforcement activities" ofall information whilethecase or remains Thus, whilea case is open,theFOIA does not openor active. inquiry information from disclosure of thecase file. require normally
In the eventa requestfordisclosure pursuantto the FOIA is made for information forwhich has been theperson confidentiality requested, requesting will be informed of the At that theperson whohas time, confidentiality request. submitted information will be required to substantiate theclaimofconfidentiala listoftherequirements needed to substantiate See 17 C.F.R. 200.83(a) for ity. a request for confidentiality. Determinations as to thevalidity ofa request forconfidential treatment will fordisclosure notbe madeuntila request oftheinformation is madeunderthe FOIA.
Substantiation Treatment ofRequest forConfidential
Treatment Effect ofNotRequesting Confidential

The Commission will presumethat any personwho has not requested confidential treatment in thosesituations in whichthe rule is applicablehas waivedanyinterest in asserting an exemption from disclosure undertheFOIA. this presumption, Commission Notwithstanding personnel may contactany who wouldbe affected to determine if theywish to person by such disclosure makea request forconfidentiality. Such a request mustbe madein accordance withtheprovisions oftherule. Information submitted to the Commission with a confidential treatment requestmay still be disclosedto thirdpartiesunder variouscircumstances without totheconfidential treatment so longas thatdisclosure is regard request, notmade pursuant to theFOIA. For instance, thesubmitted material maybe disclosed: to witnesses in investigations; in response to requestsforaccess to Commission files madeby,e.g.,other to third agencies; party litigants pursuant to a judicial subpoena;and forotherlawfulpurposes. In thisregard, counsel whosubmit information totheDivisionofEnforcement often to impose attempt conditions on use or transfer of that information. In the absenceof written theseattempts are unavailing. See, e.g., SEC agreement by the Commission, Form1662.
L. THE PRIVACY ACT OF 1974 In General

The PrivacyAct of 1974, 5 U.S.C. 552a, governs the procedures foroband information obtained from individuals. taining, maintaining, disseminating
1990 650 The Business Vol.45,February Lawyer; the Act establishes forthe solicitation and Generally speaking, requirements members of the maintenance regarding by agenciesof personalinformation is requiredto (1) identify all the Commission public. Amongotherthings, of maintains and publish a publicnotice ofrecords" whichtheagency "systems notice to any of records; a prescribed of suchsystems theexistence (2) provide a from whomthe Commission individual (3) maintain requestsinformation; disclosure ofall disclosures ofinformation record individuals, concerning except or who have an official need forthe information to Commission employees made to the public underthe Freedomof Information disclosures Act; (4) to themselves and have individuals to have accessto records pertaining permit amendedif theyare inaccurate, to have such records an opportunity except from theserequirements. thathavespecifically beenexempted records whois "a citizen oftheUnited Actonlyappliesto an individual The Privacy residence."5 U.S.C. for permanent States or an alien lawfullyadmitted and partnerships are not afforded businesses, 552a(a)(2). Thus, corporations, conferred undertheAct. therights from is requiredto provide individuals The noticewhichthe Commission detailsregarding: information includes whomit solicits theinformation is beingrequested and whether (i) underwhatauthority or voluntary; is mandatory compliance will be used; forwhichtheinformation (ii) theprincipal purposes and uses" ofinformation; (iii) the"routine information. ofnotproviding on theperson (iv) theeffects forrequesting information enforcement The Commission's usually authority to a of an informal or preliminary arises in the context inquiryor pursuant for of the authority In notifying individuals formalorderof investigation. with as to whether is made the distinction information, compliance requesting a requestfora voluntary or voluntary. the requestis mandatory Although ofinformation submission investigation, maybe madein thecourseofa formal thata compulsory wouldbe notified theindividual requestcould be made via of a voluntary ifnecessary. Notifications concerning requests subpoenapower, to 17 C.F.R. 202.5 to cover nature refer inquiries. preliminary thelistof RoutineUses, The notices Act,including required by thePrivacy on SEC Form1662. are setforth
as defined All of the Commission's of records," by the Act,have "systems and notices The Commission's in theFederalRegister. beenpublished systems FR 167, in 40 records wereoriginally to enforcement withrespect published and consolidated. See beenupdated 27, 1975 and haverecently Privacy August Act Rei. No. 11, 54 Fed. Reg. 24,454 (May 30, 1989). Amongotherthings, whichinforma"routine uses" for and notices include thevarious thesesystems be used. tionin theserecord may systems
ofRecords Systems
RoutineUses
in section "Routineuses,"as defined (a)(7) oftheAct,is theuse oftherecord forwhichit and related whichis compatible for a purpose with, to,thepurpose the 5 U.S.C. 552a(a)(7). A primary was collected. underlying Actis to purpose The forwhichit was collected. to thepurposes restrict theuse of information because disclosure uses" is "routine of pertinent generally particularly concept without obtained to an individual cannotbe made of the information relating to an unless disclosure is made involved of the individual pursuant permission to a routine which is disclosure The use, pursuant exception exception. primary includes:to otherenforcement (use #3); to selfagenciesand organizations and courtappointed to receivers, trustees, (use #9); regulatory organizations course of an the or to a officers (use (use #12); investigation personduring #13).
Disclosures and Accounting

oftheCommission who disclosures madetoofficers and employees Exceptfor to an individual in theperformance havea needfortheinformation pertaining or disclosures of Information of their Act,an duties, required by theFreedom of and purposeof each disclosure mustbe keptof thedate,nature, accounting an individual. "Disclosure"includesany regarding any personalinformation meansof disclosure oral,etc.)or any typeof accessto thedocuments. (written, Act;5 U.S.C. 552a(c).) (See section (c) ofthePrivacy
Civil Penalties
An individual of the may bringan actionagainstan agencyforviolations the Act to order Act. The courts have under authority compliance byan Privacy and fees. In the courts and to award costs addition, agency litigation attorney to award minimum haveauthority statutory damagesof $1000 and any actual damagesin excessofthatamount. The Privacy a right Actprovides ofactionagainst an agency that: . . . notto amendan individual's in record (A) makesa determination withhis request . . .; accordance to comply withan individuales] (B) refuses request[to produceinfortheindividual]; mation concerning withsuch (C) failsto maintain any record concerning any individual and completeness as is necessary to assure relevance, timeliness, accuracy, fairness in any determination character, relatingto the qualifications, or opportunities to theindividual, thatmaybe made of,or benefits rights, on the basis of such record, a determination and consequently is made whichis adverse to theindividual; or withany otherprovision of [theAct],or any rule (D) failsto comply in sucha way as to havean adverse effect on an thereunder, promulgated ... individual.
Vol.45,February 1990 652 The Business Lawyer; 5U.S.G. 522a(g)(l). The Commission has adoptedregulations itsenforcement records exempting oftheActregarding amendment ofrecords and accessby from therequirements The requirement thatthe Commission maintainrecords subjectindividuals. does not permit and relevance with such accuracy, timeliness, completeness, in its of information individuals to challenge the Commission's maintenance to use of the course of an files i.e., prior investigation; investigative during an in any determination the individual. information Moreover, concerning to make a collateralattackon any individualmay not use this provision "whichhas alreadybeen the subjectof or forwhichadequate determination Act of Management and Budget,Privacy review is available."Office judicial 40 Fed. Guidelines and Responsibilities, Reg. 28,949,28,969 Implementationthe may notbe reliedupon to challenge (July9, 1975). Thus, thisprovision or of information used timeliness, relevancy by the accuracy, completeness, individual who has In an in itsenforcement Commission proceedings. addition, or willful for intentional been injuredby agencyaction may recover only ofthePrivacy Act.5 U.S.C. 552a(g)(4). violations
Criminal Penalties
of the Act for any agencyofficer or employee It is a criminalviolation that disclosure of if officer or knows to disclose a record the employee willfully is prohibited information thespecific bytheAct.5 U.S.C. 552a(i)(l). It is also a a system of to maintain foranyofficer or employee violation criminal willfully 5 the Act's notice U.S.C. without records 552a(i)(2). requirements. meeting theseprovisions may be finednot morethan$5000. In Anyonewho violates of theAct,a fine whoviolate for to criminal addition personnel penalties agency under false other notmorethan$5,000maybe imposed who, person uponany and willfully requestsor obtainsfroman agencyany knowingly pretenses, an individual. record concerning
M. SUBPOENAS TO FINANCIALINSTITUTIONS FOR CUSTOMER RECORDS- THE RIGHT TO FINANCIAL PRIVACYACT OF 1978
Actof 1978 (the "RFPA"), 12 U.S.C. 3401 The Rightto FinancialPrivacy in obtaining authorities et seq., places variouslimitations upon government to proauthorities record accessto financial information, requires government for and of requests forfinancial withnotice videa customer records, provides the or of actions government authority againstagents employees disciplinary or intentionally. theRFPA willfully whoviolate in federal courtin an action of theRFPA is subject to redress Anyviolation RFPA also creates a relief. The forcivildamages and/or injunctive appropriate
Summary
The SEC's Investigative Process 653 novelcause ofactionbywhichcustomers in advance, maychallenge, anyaccess financial records. to their The RFPA governsCommission access to and disclosure of the records It maintained financial institutions the accounts of their customers. by regarding the to to in which Commission seeks to obtain access instance pertains every and also restricts thesubsequent to other suchrecords transfer of suchrecords federal agencies. theRFPA prohibits theCommission from accesstothe Specifically, obtaining financial records ofa financial institution's unless such accessfalls "customer," customer within one oftheexceptions to theRFPA or is accomplished through or financial Commission Once authorization, subpoena, judicial subpoena. are obtained of these be transferred to records one means,theymay through federal with certain another specified procedures agency onlyuponcompliance to ensureproper use oftherecords. See 12 U.S.C. 3412. designed There are a number of exceptions to theRFPA, including a specialone for 21(h) of theExchangeAct.The remaintheCommission, contained in section an overview of thoseprovisions derof thisportion of thepresentation provides to Commission of the RFPA whichare mostrelevant and the investigations to the section 21(h). RFPA, including exceptions
The RFPA generally disclosure institution" to the prohibits by a "financial of a "customer's" "financial where Commission Commission records," except 12 in connection witha "legitimate law enforcement accessis required inquiry." thesebasicterms as follows: U.S.C. 3401 defines is broadlydefined to include,among a. The term"financialinstitution" creditunions,and companies all banks,consumer finance others, businesses, The issuingcreditcards locatedwithinthe United States or its territories. definition does not includebroker-dealers, investment or investment advisers, to theCommission's See UnitedStatesAttorneys companies subject jurisdiction. Manual, title 9, 9-4.811. b. The term "customer"is definedto include only natural personsor in of fiveor fewer individuals thatutilizea financial institution partnerships with an accountmaintained under the person'sor partnership's connection name.The definition doesnotinclude associations, corporations, larger partnerNational Bank v. United See Pittsburgh ships,or otherlarge legal entities. 11' F.2d 73 (3rd Cir. 1985); cf.Donovanv. NationalBank ofAlaska, States, 696 F.2d 678 (9th Cir. 1983); butsee Hunt v. SEC, 520 F. Supp. 580, 597 Statesv. Whitty, 688 F. Supp. 48, 58 n.9 (D. Maine (N.D. Tex. 1981); United 1988) (sole proprietorship maybe a "customer"). c. The term record*' is defined to meanan "original of,a copyof, "financial or information known to havebeenderived heldbya financial from, anyrecord institution to a customer's withthe financial institupertaining relationship records to a personthat tion."The RFPA does notdirectly protect pertaining
Definitions
1990 654 The Business Vol.45,February Lawyer; of another customer or items appear in theaccount (e.g., checkendorsements), if the drawnby an individual intotheaccountof a corporation and deposited of the account. itemis obtained a search corporation's through d. The term"legitimate law enforcement to mean "a inquiry"is defined or failure lawful or official into a violation of, investigation inquiring proceeding or civilstatute or any regulation, to comply with,any criminal rule,or order issuedpursuant thereto."
to accessto customer As a prerequisite financial records underany provision oftheRFPA, theCommission mustsubmit to thefinancial institution a written withall applicableprovisions statement itscompliance oftheRFPA; certifying institution is prohibited from accessabsentsuchcertificaa financial affording tion. 12 U.S.C. 3403(a) and (b). Good-faith relianceupon such certification absolves thefinancial institution ofanycivilliability from disclosure. 12 arising U.S.C. 3417(c).
Certification ofCompliance Requirement
Restrictions AccesstoFinancial Records uponGovernment

Unless accessto customer financial records is pursuant to an exception, the RFPA prohibits of or the United States from anyagency department obtaining institutions from records unlesstherecords financial (and financial providing) are reasonably described and access is accomplished one of the five through accessmechanisms the RFPA: customer (1) authorization, recognized by pursuant to 12 U.S.C. 3404; (2) administrative to 12 U.S.C. subpoena,pursuant to 12 U.S.C. 3406; (4) judicial subpoena, 3405; (3) searchwarrant, pursuant to 12 U.S.C. or written 3407; (5) formal pursuant request,pursuantto 12 U.S.C. 3408. See 12 U.S.C. 3402 and 3403(a). The mechanisms endorsed by 12 U.S.C. 3406 and 3408 (search warrants and formalwritten requests)are unavailable to theCommission. Note therequirement of 12 U.S.C. 3402 that the records whichis intended to preclude described," soughtbe "reasonably "blanket"requestslackingin specificity. these restrictions, Notwithstanding financial institutions are permitted to makelimited disclosure (butnotrequired) financial ofcustomer records whennotifying authorities of government possible violations oflaw. See 12 U.S.C. 3403(c).
Access Mechanisms of the RFPA Available to the Commission Customer Authorization

In accordancewith the procedures of 12 U.S.C. 3404, a customer may access to his or her financialrecordsby executingan voluntarily permit validforno morethanthree whichidentifies therecords authorization, months, to be disclosedto the Commission and the purposesforwhichdisclosure is authorized. The authorization mustalso statethe customer's under the rights
The SEC's Investigative Process 655 RFPA, including the right to revoke the authorization at any time prior to disclosureand the factthat the authorizationcannot be required as a condition to doing business with the financial institution.Financial institutionsare required to keep a record of each disclosure pursuant to an authorizationand must make the recordsavailable forthe customer'sinspection.
Administrative Subpoena
12 U.S.C. 3405 governs administrativesubpoenas. The following three conditionsmust be satisfied: (1) there is reason to believe that the recordsare relevantto a legitimate law enforcement inquiry; (2) a copy of the subpoena has been servedupon the customeror mailed to his last known address on or beforethe date on which the subpoena or A notice, customer summons was served on the financial institution. motion to challenge form,and sworn statementmust accompany the subpoena; (3) ten days have expired fromthe date of serviceof the noticeor fourteen days have expired fromthe date of mailing to the customerand the customerhas not filed a sworn statementand motion to quash in an appropriatecourt,or the customer'schallenge proceedingis complete.
Judicial Subpoena
A judicial subpoena is any courtorder requiringthe productionof records;in this context,it most likely would be a trial or discoverysubpoena directed at customerrecords held by a non-litigantfinancial institution.The procedural protectionsprovided by 12 U.S.C. 3407 forjudicial subpoenas are similar to those providedby 12 U.S.C. 3405 foradministrative subpoenas.
Notice Customer
Two of the access mechanismsof the RFPA (administrativesubpoena and judicial subpoena) require that the Commission provide the customer with of the factthat access to financial recordsis being advance writtennotification The text of the notice required in each instance is specified in the sought. RFPA. 12 U.S.C. 3405(2) and 3407(2). The noticemust contain (1) a descripof the subpoena); (2) a statement tionof the recordssought(throughattachment of the purpose of the pertinent law enforcementinquiry (e.g., a generic of the offense(s)involved); (3) an explanation of the procedureby classification which a customermay challenge the intendedaccess in court; and (4) the name and address of the Commission employee designated to receive service of any customerchallenge papers. Together with this notice,the customermust also be forms. providedblank customerchallenge motionand sworn statement
656
Customer ChallengeProceeding
In accordance with 12 U.S.C. 3410, customersmay file a court challenge seeking to preventCommission access to their financial records.The challenge must be filed within ten days of service (or fourteendays from the date of mailing) of the customernotice. 12 U.S.C. 3410(a). The customer'sapplication must include a sworn statementattestingto the complainant's identityas the customerwhose financialrecordsare soughtand also specifying the factualand/ or legal basis upon which the Commission's intendedaccess is challenged. Once a customerproperlyfiles a challenge action, the Commission must show that there is both a "demonstrable reason to believe" that the Commission's law enforcement inquiry is legitimateand a "reasonable belief that the records soughtare relevantto the inquiry. The RFPA requires that federal courts decide customer challenges within seven calendar days of the filingof the Commission's response. If the court thatthe Commissionhas met its burden,it mustdeny the customer's determines motion and, in the case of an administrative or judicial subpoena, order the 12 U.S.C. 341 If to be enforced. the court determinesthat the 0(c). subpoena Commission has not met its burden, the subpoena will be quashed. The court that therehas not been "substanmay also quash the subpoena upon a finding tial compliance" with the provisionsof the RFPA. The Commissionmay appeal as a finalorderany orderquashing a subpoena. Any denial of a customerchallenge,however,is not appealable as a finalorder until afterthe conclusionof any collateral legal proceeding(e.g., a Commission enforcement proceeding)broughtagainst the customerbased upon the financial recordsinvolvedin the customerchallenge action; even then,the appeal may be taken only as part of any appeal of the collateral legal matter. 12 U.S.C. that no such collateral proceedingis 3410(d)(l). If the Commission determines to be brought,the customermay appeal an adverse customerchallenge ruling within thirty of such determinadays of the Commission's promptnotification tion. 12 U.S.C. 3410(d)(2).
Interagency Transfer ofRecordsObtainedUndertheRFPA

12 U.S.C. 3412 restricts the Commission's transfer of any recordsoriginally obtained under the RFPA. Such recordsmay be transferred to "another agency or department"only if a Commission officialcertifiesthat there is reason to believe that the records are relevant to a legitimatelaw enforcement inquiry withinthejurisdictionof the receivingagency. 12 U.S.C. 341 2(a). Additionally, the customernormallymust be providedwith noticeof any such transfer within fourteen The RFPA's proscription of uncertified transdays afterthe transfer. fer to "another agency or department" appears to apply only to interagency transfers within the federalgovernment; transfers to state or local agencies, to or to are apparently not self-regulatory organizations, foreign governments, Nikrasch v. 698 443 S.W.2d State, (Tex. Ct. App. 1985). prohibited. Cf. virtue of section of the 21(h)(9) Additionally,by Exchange Act, transfersof
Process 657 The SEC's Investigative the of Justice are exemptfrom to the Department records customer financial 3412. 12 U.S.C. of notice customer provisions
with which ofrelevant a number 12 U.S.C. 3413 contains dispense exceptions someor all oftheRFPA's requirements: 12 U.S.C. 3413(a). The RFPA does not a. Non-customer information, withor whichis "not identified information record or to to a pertain a of records the financial derived from as being identifiable particular customer;" 12 U.S.C. 3413(d); ofrequired b. Financialinstitution filing reports, 12 U.S.C. the with c. Court and administrative customer, litigation 3413(e)and(f); 12 U.S.C. 3413(g); d. Account information, identifying 12 U.S.C. 3413(h). The general e. Financial institution investigation, of theRFPA do notapplywheretheCommission requires procedures with a lawfulinvestigation recordsin connection access to financial or at any oftherecords, in possession institution at thefinancial directed whichis nota "customer." other legalentity
to theRFPA Exceptions
in are to be reimbursed institutions thatfinancial 12 U.S.C. 3415 provides to their incident them incurred costsdirectly forreasonable mostinstances by foraccessundertheRFPA. The Federal withCommission requests compliance 12 U.S.C. 3415. 12 C.F.R. S to implement BoardadoptedRegulation Reserve S generally of Regulation to thereimbursement 219. Exceptions requirements in theRFPA. contained theexceptions track
Reimbursement ofFinancial Institutions
actionestablished to thecustomer In addition by 12 U.S.C. 3410, challenge a separatecause of actionto seekmoney thecustomer theRFPA also affords of the in violation of his records withany disclosure damagesin connection of$100 without minimum a statutory RFPA. The customer regard mayrecover ofrecords tothevolume involved, discretionary punitive damages, compensatory attorand reasonable or intentional," is "willful damageswheretheviolation the See 12 U.S.C. 3417(a). Damages are assessable against ney'sfeesand costs. individual butnotagainst institution thefinancial Commission involved, and/or See 12 U.S.C. 3418; Hunt v. relief mayalso be obtained. Injunctive employees. SEC, 520 F. Supp. 580 (N.D. Tex. 1981). of fora mandatory The RFPA also provides by the Office investigation thatthe determines in whichthecourt of any instance Personnel Management or an officer ofwhether "raisequestions a violation circumstances surrounding
Civil Remedies oftheRFPA forViolations
658
employee of the [defendant]departmentor agency acted wilfullyor intention"12 U.S.C. 341 7(b). ally with respectto the violation
Section21(h) oftheSecurities Actof1934 Exchange In General

Section 21(h) of the Exchange Act contains a special exception for the Commission from the otherwise applicable customer notice provisions of the RFPA. During its investigations, the Commission may obtain customerfinancial recordspursuant to an administrative subpoena withoutprior notice to the customerto whom the financialrecordsrelate. Section 21(h)(2) specifiesthe manner and the circumstances under which the Commission may delay noticeto the customer.The Commission must make an ex parte showing to an appropriate district court that it seeks financialrecords to an administrative authorized pursuant subpoena by the federal securities laws and that the Commission has reason to believe one or more of the following: (1) delay in obtaining access to such financial records or the required notice,will resultin: fromprosecution; (a) flight or tamperingwith evidence; (b) destruction (c) transferof assets or records outside the territoriallimits of the United States; (d) improperconversionof investorassets; or or trace the (e) impeding the ability of the Commission to identify source or dispositionof funds involved in any securitiestransactions; or trace the record or (2) such financial recordsare necessaryto identify beneficialownershipinterest in any security; involve: (3) the acts, practices,or course of conductunder investigation (a) the disseminationof materially false or misleading information issuer, or market,or the failure to make concerningany security, disclosures required under the federal securities laws, which remain uncorrected; or (b) a financial loss to investorsor other persons protectedunder the securitieslaws which remains substantiallyuncompensated;or (4) the acts, practices,courses of conductunder investigation: financialspeculation in securities;or (a) involvesignificant of any financialor investment (b) endangerthe stability intermediary. The Commission's application fora delay in notice must be made with reasonable specificity.
CourtOrder
described thecourt above,whichmaybe madein camera, Upon theshowing is directed section to enter an order the notice to the 21(h)(4) by delaying fora periodnotto exceedninety customer and an the order days prohibiting financial institution involved from that have been obtained or records disclosing thata requesthas beenmade.The Commission also obtain extensions of may to See section further 21(h)(4)(B). up ninety daysupon application.
DelayedNoticeto Customer
At theexpiration of theperiodof delayof notification ordered by thecourt, thecustomer theCommission mustprovide a copyofthesubpoena issuedto the institution with a noticethat describes financial the natureof the together indicates thatfinancial records held by thesubpoenaed financial investigation, institution had beensupplied to theCommission to section 21(h), and pursuant thepurpose states oftheinvestigation.
Customer Procedure and Relief Challenge

The customer courtthat issued the delay orderto may move the district If in the the court determines thatthere wereimproprieties reopen proceeding. it order relief to that 12 theuse of section 21(h), may comparable provided by U.S.C. 3417. See sections 21(h)(7) and (8) oftheExchangeAct.
N. THE ELECTRONIC COMMUNICATIONSPRIVACY ACT OF 1986

2701 et seq.]:
the Electronic Communications Act of 1986 [18 U.S.C. Generally, Privacy accessto and disclosures of stored electronic communications (i) governs maintained and records services) (e.g.,messages byremte computing electronic communications bills); concerning (e.g.,telephone company forcustomer notice of and challenge to governmental access (ii) provides to thecontents ofstored electronic and communications; civiland criminal forviolations. (iii) provides penalties
Since the Commission seek the actual contents would rarely of stored electronic communications from theentities covered this its restrictions act, by upon such accesshave littlepractical impactupon the Commission's investigations. oftenhas need fortelephone recordsduringthe However,the Commission courseof its investigations, In this insider particularly trading investigations. act to the that access records from a regard, requires generally telephone be a formal order must be must issued (i.e., telephone by subpoena company and thetelephone cannot tollrecords to company voluntarily provide telephone to thedisclosure theCommission), unlessthecustomer consents of therecords. 18 U.S.C. 2703(c)(l)(B). The act also requiresthat the Commission pay
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1990 The Business Lawyer;Vol. 45, February
telephonecompanies forthe costsof producingrecords(other than telephonetoll records). 18 U.S.G. 2706.
O. THE FAIR CREDIT REPORTING ACT

The Fair Credit Reporting Act, 15 U.S.C. 1681 et seq. (FCRA), places on the release of consumerreportsprepared by consumerreporting restrictions agencies. For purposes of the FCRA, a "consumer reportingagency" is any person "regularly engage[d] in whole or in part in the practice of assembling or on consumers for the purpose of furevaluating consumer credit information nishing consumer reportsto third parties." 15 U.S.C. 1681a(f). A "consumer oral or othercommunication report" is broadlydefinedto include "any written, of any information by a consumer reportingagency bearing on a consumer's creditstanding,creditcapacity,character,general reputation, creditworthiness, is to be used or mode of living,"when such information personal characteristics, or for other in determiningthe consumer's eligibilityfor credit,employment, purposes specifiedin the FCRA. 15 U.S.C. 1681a(d). The FCRA limitsdisclosureof the consumerreportsby consumerreporting agencies to the followingsituations: (i) in response to a courtorder; (ii) in accordance with writteninstructions by the consumer; who intends to use the informationfor employment (iii) to a person in credit transaction,insurance underpurposes or connectionwith a other benefit,or otherwise in writing,the issuance of a license or connectionwith a business transactioninvolvingthe consumer. While the courts have not addressed the applicability of the FCRA limitaof the FCRA have been the restrictions tions in Commission investigations, in contexts. See U.S. v. Puntorieri,379 other to the federal government applied F. Supp. 332 (E.D.N.Y. 1974) (1RS summons; governmentagency seeking consumer report must obtain a court order or otherwise comply with the FCRA); In re Grand Jury Subpoena to Credit Bureau, 594 F. Supp. 229 (M.D.Pa. 1984) (grand jury subpoena duces tecum issued without judicial approval is not a "court order" forpurposes of FCRA).
P. SECTION 6103OF THE INTERNAL REVENUE CODE

Section 6103 of the Internal Revenue Code, 26 U.S.C. 6103, deals with the Section 6103 of tax returnsand related tax liabilityinformation. confidentiality into two categories. divides tax returnsand related tax liabilityinformation 1. Taxpayer return information is defined by the statute to mean tax returnsand related tax liability information furnishedto the Internal
The SEC's Investigative Process 661 Revenue Service ("1RS") by, or on behalf of, the taxpayer. 26 U.S.C. 6103(b). a. Taxpayer returninformation may only be released by the 1RS to another governmentalagency by order of a federal court. The statuteprovidesthat a governmental agency may make an ex parte to a federal or request judge magistrateto release taxpayer return The judge or magistratemay order the information information. disclosed only if he determines that: (i) thereis reasonable cause to that a specificcriminal based reliable information, believe, upon there is reasonable cause to believe that act has been committed; (ii) is or may be relevantto a matter the taxpayer returninformation relating to the commission of the criminal act; and (iii) the taxis sought exclusivelyfor use in a federal payer returninformation criminal investigationor proceeding concerningthe criminal act, and the informationsought cannot reasonably be obtained from anothersource. 26 U.S.C. 6103(i)(l)(B). b. Taxpayer returninformation obtained pursuant to a court order judicial or administrative may be disclosed in Commission-related of a non-tax criminal proceedingsonly if theyinvolveenforcement statuteor related civil forfeiture provisionand the court findsthat the information "is probativeof a matterin issue which is relevant in establishingthe commissionof a crimeor the guilt or liabilityof a party" or to the extent determinedby the court pursuant to 18 U.S.C. 3500 or rule 16 of the Federal Rules of Criminal Procedure. 26 U.S.C. 6103(i)(4)(A). 2. Non-taxpayer returninformation is definedby the statuteto mean tax to the 1RS by, or on behalf that was not furnished liabilityinformation of, the taxpayer. 26 U.S.C. 6103(i)(2). Non-taxpayer returninformaand other data of testimony tion includes materials such as transcripts related to the enforcegatheredby the 1RS pursuant to an investigation mentof the tax laws. Section 6103 providesthat non-taxpayerreturninformation may be disclosed in and for use in Commission the 1RS investigations preparation for by of a nonand judicial proceedingsthatpertainto the enforcement administrative tax criminalstatute.26 U.S.C. 6103(i)(2)(A). Willful violationof the securities laws carriespotentialcriminalpenalties. See, e.g., SecuritiesAct 24; Exchange Act 32; Trust Indenture Act 325; InvestmentCompany Act 49; Advisers Act 217. However, the Department of Justice, not the Commission, has authorityto prosecute criminal actions. Thus, while the Commission might it cannot use that obtain returninformation during the course of investigations, frominvestithat result in the majorityof enforcement information proceedings such information disclosure of In section 6103 conditions the gations. addition, to agencies on their establishmentand maintenance of extensive safeguard
662
procedures to ensure the confidentialityof the information. 26 U.S.C. 6103(p)(4). Unauthorized disclosure of non-taxpayer return informationis a felony punishable by five years imprisonment,a $5000 fine, and dismissal from or employee of the employment.26 U.S.C. 7213. Civil liabilityfor any officer United States found to have knowingly or negligentlydisclosed any nonin violationof section6103 is minimumdamages of taxpayerreturninformation $1000 foreach unauthorizeddisclosure,plus costs. 26 U.S.C. 7430.
Q. TESTIMONY BY TAX RETURN PREPARERS

It is a misdemeanorforany tax returnpreparerto disclose or use information furnishedto the preparer in connectionwith the preparation of a tax return other than in the preparation of such return.26 U.S.C. 7216. This provision does not apply, however,to disclosure to federalregulatoryagencies, including the Commission,and tax returnpreparersthus may not refuseto testify based on this statute.26 C.F.R. 301.
R. NOTICE OF THIRD PARTY SUBPOENAS TO "TARGETS" OF COMMISSION INVESTIGATIONS

The Commissionis not required to notify "targets"of its nonpublic investigations of possible violationsof the federalsecuritieslaws when it issues subpoenas to "third parties" fortestimony or documents.The Supreme Court, in SEC v. O'Brien, 467 U.S. 735 (1984), reversed an en bane decision of the Ninth Circuit Court of Appeals which held that the Commission was required to providenoticeof all thirdpartysubpoenas to enable the targetsof the investigation the ability to ensure that the Commission was issuing only judicially enforceablesubpoenas. Citing the Commission's broad investigatory responsibility under the federal securities laws, the Court found no statutory,due of such subpoenas to process,or general standardregarding judicial enforcement support the propositionthat notice is in any way required. See also SEC v. Pacific Bell, 704 F. Supp. 11 (D.D.C. 1989).
S. FAILURE TO COMPLY WITH COMMISSION SUBPOENA-SUBPOENA ENFORCEMENT Introduction

As set forthabove, the Commission is vested with the power to subpoena witnesses, to compel their attendance, to take evidence, and to require the production of books, papers, correspondence,memoranda, or other records See section 19(b) of which the Commission deems relevantto its investigation. the Securities Act, 15 U.S.C. 77s(b); section 21(b) of the Exchange Act, 15 U.S.C. 78u(b). See also section 42(b) of the InvestmentCompany Act, and section 209(b) of the Investment AdvisersAct.
The SEC's Investigative Process 663 Commission are notself-enforcing. Thus, ifa subpoeinvestigative subpoenas witha subpoena, theCommission mustapplyto a naed party refuses to comply federal district court foran order the enforcing subpoena. Section thebasis forCommis21(c) oftheExchangeActgenerally provides It states: sionsubpoena enforcement actions. In case of contumacy to obeya subpoenaissuedto, any by,or refusal the Commission may invokethe aid of any courtof the United person, thejurisdiction of whichsuchinvestigation or proceeding is Stateswithin in requiror carries on business, carried resides on, or wheresuchperson ofwitnesses and theproduction ofbooks, and testimony ingtheattendance and otherrecords. memoranda, papers,correspondence, Any such court toappearbefore theCommission suchperson mayissuean order requiring or member or officer thereto produce by the Commission, designated if so ordered, or to give testimony the matterunder records, touching or in question. investigation If a subpoenaed to refuse witness continues to testify or produce therequired thentheCommission can movefor documents after a court has issuedan order, order. 21(a) oftheExchange a contempt See section Act,15 U.S.C. 78u(c). of Act also makes it Section the a misdemeanor, 21(c) punishable Exchange without ofone yearor a $1000 fine (or both)ifa person, just byimprisonment in contumacious conduct or refuses to obeya subpoenaissuedin cause,engages Lit. Rei. Nos. 4078 (S.D.N.Y. a lawfulinquiry. See unitedStatesv. Smith, and 4379 (S.D.N.Y. 1969). 1968) Section 21(c) of the Exchange Act providesthat subpoena enforcement in anyjurisdiction or proceeding actions where"suchinvestigation maybe filed or resides or carries on business." Section is carried where such on, 22(b) person of the Securities Act provides for subpoenaenforcement actionswithinthe ofwhichthesubpoenaed is found or resides. jurisdiction person The federal district courtshave exclusive of Commission subjurisdiction enforcement actions. of the Section Securities 15 U.S.C. 22(b) Act, poena lack 77v(b); section 21(b) of theExchangeAct,15 U.S.C. 78u(c). Statecourts over a suit to with a Commission subjurisdiction seeking enjoincompliance ce Box v. Amarillo Nat'l Bank,[1979 Transfer Binder]Fed. Sec. poena.See Boy L. Rep. (CCH) 1 96,905(N.D. Texas 1979). Aside fromthe strictly associatedwith the issue of legal considerations carries the certain consesubpoenaenforcement, process negative potentially to a whose conduct be under The of quences person may scrutiny. filing such actions the Commission makes the fact of the by investigation public, alongwith details in the which included the Commission's any papers support application.
664
The Commission action is initiatedgenerallyby subpoena enforcement to the courtforan ordercompelling application compliance, accompanied by memorandum oflaw and affidavit. Because of the need forexpeditious action,Commission subpoenaenforcementproceedings in nature.Commission are treated as summary subpoena enforcement actionsutilizethe summary authorized procedures by the provisionsof Fed. R. Civ. Proc.81(a)(3). The advantage of thisprocedure is thatit avoidsthe discovery of the Federal of Rules Civil Procedure. The procedures nature of enforcement has been subpoena summary proceedings recognized by the SupremeCourt in Donaldsonv. UnitedStates,400 U.S. 517, 528-29 7 Moore,FederalPractice (1971). See generally 81.01(b) at p. 4413 (2d ed.) The summary natureof subpoenaenforcement stemsfrom the proceedings that their conduct law enforcement activities in requirement agencies promptly order to protect thepublic."[T]he very backbone ofan administrative agency's in carrying effectiveness outthecongressionally ... is therapid mandated duties exercise of thepowerto investigate." FederalMaritime Commission v. Portof 521 F.2d 431 (9thCir. 1975). Seattle, of improper a respondent to a hearingor Allegations purposemay entitle limited Without such are inadequate evidence, however, discovery. allegations to permit in a enforcement See SEC v. general discovery subpoena proceeding. 525 F.2d 229 Cir. v. 553 United States Howatt, Fensterwald, 226, (1st 1975); F.2d 231, 232 (D.C. Cir. 1977); UnitedStatesv. McCarthy, 514 F.2d 368, 373-76 (3d Cir. 1975). Commission actions subpoenaenforcement judicial precedence maybe given overotherbusiness to avoid delayswhichcan resultin information becoming staleor in therunning ofstatutes oflimitation. v. Davey,426 F.2d United States Bank of Utah,447 F.2d 166 842, 845 (2d Cir. 1970); SEC v. FirstSecurity Cir. cert, 404 U.S. 820 denied, (10th 1972), (1972). Standards The Commission mustshowthat:(1) the inquiryis beingconducted fora within thepower ofCongress tocommand; (2) thesubpoena legitimate purpose, was issuedin accordance withrequired administrative and (3) the procedures; documents Endicott relevant. Johnson sought by the subpoenaare reasonably 317 U.S. 501, 509 (1943). See SEC v. Arthur Corp.v. Perkins, Young& Co., 584 F.2d 1018 (D.C. Cir. 1978), cert, denied,439 U.S. 1071 (1979); SEC v. 525 F.2d 226, 229 (1st Cir. 1975); SEC v. Brigadoon DistributScotch Howatt, 415 U.S. 915 (1974); denied, ingCo., 480 F.2d 1047,1056 (2d Cir. 1973),cert, SECv. WallStreet Transcript Corp.,422 F.2d 1371,1375 (2d Cir. 1970),cert, denied,398 U.S. 958 (1970); SEC v. GulfResources, Inc., [1983 Transfer 99,174(D.D.C. 1983). Binder]Fed. Sec. L. Rep. (CCH) 1f In orderto showthatan inquiry is beingconducted fora legitimate purpose and within the powerof Congress theCommission to command, must merely
NatureofProceedings Pleadingsand Summary
The SEC's Investigative Process 665 show that the Commission's is a statutorily authorized(e.g., investigation section21(a) of the Exchange Act), administratively approvedinquiryto determine whether of the violations federal securities laws haveoccurred specific or are occurring. See SEC v. Arthur & 584 F.2d Co., 1018, 1021 (D.C. Young Cir. 1978),cert, 439 U.S. 1071 (1979). denied, To show that the subpoenawhichthe Commission is seekingto enforce satisfies administrative the Commission must show that the requirements, was served the ofthe subpoena properly upon subpoenaed party byanymember Commission or anyofficer the Commission. See section 21(b) of designated by the ExchangeAct.The formal orderdesignates officers and rule 14(b) of the Commission's Rules of Practice forthemethods provides by whichsubpoenas be served. may The Commission's burdento show that the subpoenaeddocuments are to a lawfulpurposeis met by demonstrating relevant thatthe testimony or are not documents or irrelevant for lawful sought "plainlyincompetent any Endicott 317 U.S. at 509. In evaluating the Johnson purpose." Corp.v. Perkins, breadth ofa Commission "the test is relevance to the subpoena, specific purpose, and thepurpose is determined SEC v. Arthur by theinvestigators." Young& oftheCommission's for Co., 584 F.2d at 1031. Even whenthepurpose request information is only"official the Commission is still entitled to curiosity," satisfy itself that"corporate behavior is consistent withthelaw and thepublicinterest."Id. at 1030 (quotingUnited Statesv. Morton Salt Co., 338 U.S. at 642). Once theCommission has madetherequisite theburden ofdemonshowing, or shifts to a unlawfulness, privilege strating irregularity, respondent. Brigadoon Scotch,480 F.2d at 1056; SEC v. Kingsley, 510 F. Supp. 561, 563 Statesv. Powell,379 U.S. 48 (1964). (D.D.C. 1981). See also United Courtshaveconsistently heldthattheCommission and similar need agencies not show "probablecause" or that the activity is withinthe investigated ofitsgoverning in orderto obtain of its statutes, coverage judicialenforcement United v. Morton Salt Co., 338 U.S. 632 (1950); SEC v. Wall States subpoenas. Street 398 U.S. denied, Transcript Corp.,422 F.2d 1371 (2nd Cir. 1970),cert, 958 (1970). laws may notprevent theenforcement of Commission subForeignsecrecy 186 oj theShipping poenas.See, e.g.,In re GrandJury Investigation Industry, F. Supp. 298, 321 (D.D.C. 1960); Vescov. SEC, [1970-1971Transfer Binder] Fed. Sec. L. Rep., (CCH) H 93,046 (D.N.J. 1971); Fontaineand Investors OverseasServices v. SEC, 259 F. Supp. 880 (D.P.R. 1966). But cf.SEC v. 470 F. enforcement of investiZanganeh, Supp. 1307 (D.D.C. 1978) (denying where to contacts U.S. were limited). gative subpoena
havebeenchallenged or subpoenas resisted baseduponalleged Investigations staff misconduct.
Misconduct and Negligence Staff
666
In Ayers v. SEC, [1979-1980 Transfer Binder] Fed. Sec. L. Rep. (CCH) If 97,321 (D. Mont. 1980), the plaintiffssought injunctive relief to halt a Commission investigation securities. involvingthe possible sale of unregistered claimed that the Commission had instituted and was conducting The plaintiffs in bad faithin an effort its investigation to "punish" them fortheir successful defenseof the Commission's motionfor preliminaryinjunctionin an unrelated had irreparaenforcement action. They also alleged that Commission attorneys of frauduharmed their business interests rumors by spreadingunsupported bly lent business dealings on their part during investigatory interviewswith their customersand business associates. The courtdenied the Commission's initial motionto dismissthe complaintor, in the alternative, forsummary the argumentsthatthe court judgment,rejecting lacked jurisdiction to entertain the complaint and that, in any event, the had failed to make a colorable showing of bad faithon the Commisplaintiffs sion's part. Althoughinitiallyrecognizingthe broad scope of the Commission's and the narrowlycircumscribed role of the federalcourts investigatory authority in reviewing Commission investigations, the court neverthelessconducted a limited evidentiaryhearing into the Commission's motivesin investigating the plaintiffs. The Commission employees designated as officers to take testimony in the Commission's formalorder appeared and testified at the hearing. Based on a considerationof their testimonyand that of an investorcalled on plaintiffs' behalf, the court determinedthat plaintiffshad failed to meet their "heavy burden" of raising a "substantial question" as to the validityof the Commission's motivesin investigating them and denied their discoveryrequest. It then the motion to dismiss the complaint. See also Commission's renewed granted SEC v. ESM Government Securities, Inc., 645 F.2d 310 (5th Cir. 1981) (appellate court remanded to district court for factual findings regarding whether SEC "intentionallyor knowingly misled" a broker-dealer to gain access to information); Fairchild, Arabatzis & Smith,Inc. v. Sackheim, 451 F. 1189 (S.D.N.Y. 1978) (court dismissedcomplaintto enjoin SEC investiSupp. on of harassmentby staff of CommodityFutures Trading Commisbasis gation sion alleged to be a "taking" of business withoutdue process). In SEC v. Wheeling-Pittsburgh Steel Corp., 482 F. Supp. 555 (W.D. Pa. a enforcement action, the districtcourt denied enforcement 1979), subpoena because it foundthatthe senatorialreferral of the matterto the Commissionwas who motivated. The was senator, politically opposing federal guarantees to finance Wheeling's business, asked the Commission to look into purported misstatements made by the company about the guarantees. The districtcourt did "not suggestthat the agency adopted the motivesof the third-parties"but held that"[wjittinglyor not,the agencyhas permitted, and at timesencouraged, the abuse of its investigatory function."Id. at 565. A panel of the Third Circuit reversed the districtcourt decision, SEC v. Steel Corp., 648 F.2d 118 (3d Cir. 1981), holdingthatthe Wheeling-Pittsburgh
The SEC's Investigative Process 667 of theagency, as an institution, in conducting the testshouldbe thegoodfaith investigation. The properrole of the courtin an enforcement actionis to ensurethat sourcewas not theagency vindictive motive whatever mayhaveprompted assured itself that the agency's the itself. Having adopted by agency the court has is conducted in faith, good adequately protected investigation nor condemn of the investigative and need neither the integrity process, informants. thepersonal intent ofagency condone of the dangersof politicalabuses of governmental The courtwas mindful referrals are unusual or not findthat congressional but did investigations se. unreasonable per to and remanded ordered a rehearing en banevacated The fullThirdCircuit 648 F.2d 118 v. Steel thedistrict court. SEC (3rd WheelingPittsburgh Corp., is Cir. 1981). The opinion emphasizedthat "the ultimatedetermination in an will result the as requestedby whether agency, judicial enforcement, tothedistrict court to remanded Id. at 128. The court abuseofjudicialprocess." to district court and forthe to conduct allow Wheeling-Pittsburgh discovery in was not determine how, if at all, the SEC's orderof private investigation of orders offormal theauthorization with17 C.F.R. 202.5(a), regarding accord interference. tainted or was unduly bythird party investigation 587 F. Supp. 535 (S.D.N.Y. 1984), in See SEC v. FirstJersey Securities, on the motionto dismissproceedings whichthe courtdeniedFirstJersey's The a recessfrom lostfilesduring thatthestaff testimony. allegedly grounds lostdocuments were to showtheallegedly failed noted thatthedefendants court wereprejudiced. and thusthatthey to their defense, necessary
d 748 F.2d Robinson& Co., 565 F. Supp. 711 (1987), off In SEC v. Blinder of a subpoena enforcement in the context 1915 (1987), the courtrejected, of theExchangeAct thattheenforcement theargument provisions proceeding, becausethe Commission of powersof the Constitution violatethe separation of enforcing federallaws. The court function cannotexercisethe executive thoseto issueand thattheCommission's found including investigatory powers, of violation unconstitutional did notinvolve ofsubpoenas, seekenforcement any a lawful, butrather reflected of powersdoctrine theseparation "long-standing administrative practicesustainedagain and again by the courts."See also v. Olson,108 S. Ct. 2597 (1988). Morrison
SeparationofPowers
called forby a subpoena issued in a Where documents and information becauseof a claimthata statelaw are notproduced Commission investigation the actionin advanceof production consent), (e.g., customer requirescertain of the U.S. clause it conflicts with the as is unconstitutional statute supremacy
Clause Supremacy
668
Constitution.In SEC v. Pacific Bell, 704 F. Supp. 11 (D.D.C. 1989), the districtcourt ordered a telephone company to produce telephone records in the requirementof section response to Commission subpoenas, notwithstanding 2891 of the California Public UtilityCode that the California Customer Right of Privacy Act required the customers' consent to the release of the records. Conceding any issues of burdenor relevance,the telephonecompanydeclined to produce the subpoenaed documents solely on the basis of the California law, which required a customer's prior consent to production of the documents. Citing an exemption in the statute for "informationprovided to law enforcementagencies in responseto ... processissued under . . . federallaw," the court held that the Commission fell withinthe exceptionin the statuteand, even if it Id. at 13. did not, the law as applied to the Commission was unconstitutional.
T DISCUSSIONS WITH OTHER GOVERNMENTAL AUTHORITIES AND ACCESS TO THE COMMISSION'S INVESTIGATIVE FILES
Various provisionsof the federal securitieslaws state that information obtained duringthe course of the Commission'senforcement, and other inspection, activitiesis nonpublic and, togetherwith other nonpublic records of the Commission, may not be disclosed without authorization of the Commission. See, e.g., rule 122 under the Securities Act, 17 C.F.R. 230.122 (informationor in the course of an investigation or examination documentsobtained by the staff to of Act sections and the Securities shall, unless made a 8(e) 20(a) pursuant matter of public record, be deemed confidentialand may not be disclosed "unless the Commission authorizes the disclosure of such information or the of such documents as not to the being contrary public interest");see production AdvisersAct, 15 U.S.C. 80b-10(b); section also section210(b) of the Investment 45(a) of the Investment Company Act, 15 U.S.C. 80a-44(a); rule 0-4 under the 17 C.F.R. 240.0-4; rule 104(c) under the Public UtilityHolding Exchange Act, 17 Act of C.F.R. 250.104(c); rule 0-6 under the Trust Inden1935, Company ture Act of 1939, 17 C.F.R. 260.06. In addition to approvingstaff disclosuresof nonpublic information on a casethe Commission has rules that provide authorityto the by-case basis, adopted As indicated below, these rules were staffto disclose nonpublic information. recentlyamended to reflectterminologyadded to the Exchange Act by the Insider Trading and Securities Fraud Enforcement Act of 1988, Pub. L. No. 102 Stat. to a delete 100-704, 4677, preexistingrequirementforconcurrenceof the Commission's General Counsel in grantingcertain access requests, and to provide for disclosure of nonpublic informationto bankruptcytrustees. Exchange Act Rei. No. 26875 (May 30, 1989).
The SEG's Investigative Process 669
Discussions withOtherGovernmental Authorities

Rule 2 of the Commission's Rules Relating to Investigationspermitsmembers of the staff to engage in discussions with various entities concerning 17 C.F.R. 203.2. The rule states: nonpublic investigations. or documentsobtained by the Commission in the course of Information or examination, unless made a matterof public record, any investigation shall be deemed non-public, but the Commission approves the practice at the level of Assistant wherebyofficialsof the Division of Enforcement Director or higher, and Officiais in the Regional Officesat the level of Assistant Regional Administratoror higher, may engage in, and may to engage in, discussionswith authorize membersof the Commission's staff of domestic or foreign governmentalauthorities, foreign representatives securitiesauthorities, organizations,receivers, special counself-regulatory sels, and other similar persons appointed in Commission litigation,the SecuritiesInvestorProtection Corporation,trusteesand counsel fortrustees to section Act, 5(b) of the SecuritiesInvestorProtection pursuant appointed obtained in individual and trusteesin bankruptcy, concerninginformation conducted investigations, includingexaminationsand formalinvestigations to Commission order. pursuant
Access Requests
SEC Form 1662 states: the Commission oftenmakes its During the course of its investigations files available to other governmentalagencies, particularlyUnited States Attorneysand state prosecutors.There is a likelihood that information supplied will be made available to such agencies, where appropriate. Whether or not the Commission makes its files available to other governmatterbetween the Commismental agencies is, in general, a confidential sion and such other governmentalagencies. Thus, a witness will not be advised whetherthere are or have been any communicationsbetween the bodies or prosecutorialagencies. staff and any otherregulatory The grantof access to such filesis a "routine use" under the Privacy Act. Rule 30-4(a)(7) of the Commission's Rules on Organization; Conduct and and Requests delegates to the Director of the Division Ethics; and Information of Enforcement(the "Director") authority to grant access requests to the Commission's nonpublic enforcement and regulatoryfiles. 17 C.F.R. 200.304(a)(7). The rule delegates authority To grant requests for access to, or copies of, materials in the Commission's enforcement and regulatoryfilesupon writtenrequest submittedby [the entities specified in Rule 2 of the Commission's Rules Relating to Provided That requests foraccess to, or copies of,materials Investigations]; in the Commission's regulatory filesshall be grantedonly with the concur-
670
1990 The BusinessLawyer;Vol. 45, February rence of the head of the Commission divisionor office responsibleforsuch filesor his or her delegate.
Access requests within the scope of rule 30-4(a)(7) are normally granted unless doing so would interferewith an ongoing Commission investigation, would in some otherway be adverse to the Commission's enforcement interests, or would be contrary to the public interest. Access requests which are withinthe be submittedto the Commission for scope of rule 30-4(a)(7) may, nevertheless, considerationwhere the staff believes it appropriate. Id. An access grant generally provides authorityto disclose both existing information and informationacquired in the future in the case. However, as discussed below, criminal indictmentis a critical point for considerationsregarding "parallel proceedings."
U. REFERRALS AND SETTLEMENTS OF ENFORCEMENT ACTIONS

The Commission's rule relating to enforcement activity,17 C.F.R. 202.5, makes clear that the Commission may refer, or grant access to, its investigative filesto other agencies whetheror not it appears that there has been a violation of the federalsecuritieslaws, and that the Commission is not required to make before instituting enforceany express preliminaryfindingsor determinations ment proceedings.* In addition, rule 202. 5(f) of the Commission's "Informal and Other Procedures" states the Commission's policy that settlementsof Commission enforcementproceedings do not extend to actual or potential criminal actions based on the same underlyingacts.** This rule is intendedto
*Rule 202.5(b), 17 C.F.R. 202.5(b),provides: After or otherwise, theCommission takeone or moreof investigation mayin itsdiscretion the following actions:institution of administrative of proceeding lookingto the imposition remedialsanctions, initiation of injunctive in the courts, and, in the case of a proceedings willful ofJustice for reference ofthematter to theDepartment criminal violation, prosecution. The Commission thematter refer foraccess to,or grant requests mayalso,on someoccasions, to its filesmade by, domestic and foreign authorities or foreign securities governmental selfsuchas thestock or theNationalAssociaauthorities, regulatory organizations exchanges tionofSecurities or entities. Dealers,Inc.,and other persons **Rule 202.5(f),17 C.F.R. 202.5(0, provides: In thecourse oftheCommission's civillawsuits, and administrative investigations, proceedwithappropriate involved thedisposiauthorization, ings,thestaff, maydiscusswithpersons tionofsuchmatters or in someother matter. It is thepolicy of the by consent, by settlement, or impliedly, thatthedisposition ofanysuchmatter Commission, however, maynot, expressly extend to anycriminal or thathavebeen,or maybe, brought againstanysuchperson charges withrespect involved in an enforcement thereto. anyrecommendation Accordingly, anyperson before matter the Commission or agreesto consent, to anyjudgment or order who consents, does so solely forthepurpose ofresolving or theclaimsagainsthimin thatinvestigative, civil, administrative matter and notfor ofresolving thepurpose thathavebeen, anycriminal charges or might him.This policy thefact reflects thatneither theCommission nor be,brought against its staff has the authority or responsibility forinstituting, or otherwise conducting, settling,
The SEC's Investigative Process 671 oftheCommission's clearnotice to persons Commission provide policy settling enforcement and their counsel and to to proceedings help forestall, the extent like those in United the assertion of claims made possible, by the defendants States v. Fields, [1977-1978 TransferBinder] Fed. Sec. L. Rep. (CCH) 592 F.2d 638 (2d Cir. 1978),cert, 442 If96,074(S.D.N.Y. 1977),rev'd, denied, U.S. 917 (1979). In additionto referrals to otherfederal, civil,or criminalagencies,the matters the suchas the Commission refer to organizations may self-regulatory New York or AmericanStock Exchangesor the National Association of or local or bar or other Securities state state Dealers,Inc., agencies, professional organizations.
V. PARALLEL PROCEEDINGS In General

The federal laws provide forbothciviland criminal securities enforcement, or occurconcurrently often enforcement and Commission precede, investigations federal ofJustice as well as other enforcement with, bytheDepartment activity and state agencies.In general,thereis no legal bar against such parallel Actcontemplate commuActand theExchange BoththeSecurities proceedings. and expressly ofJustice and theDepartment nication between theCommission violations of the of criminal evidence the Commission to transmit authorize Securities Act 20(b); Exchange Act 21(d). to the Department. statutes to the partyinvolved, of substantial Absentsome showing parallel prejudice 1 v. 397 U.S. not States are United Kordel, (1970); objectionable. proceedings '3 F.2d 427 (2nd Cir. 1985). v. Gel Spice Co., 11 United States securities of violations of thefederal ramifications The issueof thecriminal considerable attention laws has received See, e.g.,Morvillo, Emerging recently. Theories in Criminal Securities Law, N.Y.L.J., June2, 1987 at 1; Peloso,The Criminalization Laws, N.Y.L.J., May 28, 1987,at 1; Di Blasi & ofSecurities Nat. L.J.,Sept.21, 1987,at be a Criminal Felt,ShouldStock Offense? Parking 21. Investigations is SEC v. The leadingCommission case dealingwithparallel proceedings 449 cert, F.2d 1368 Cir. Dresser 628 denied, Industries, 1980) (en bane) (D.C. of a enforcement therespondent to U.S. 993 (1980). In Dresser, sought prevent a materials about duces tecum. The Commission subpoenasought subpoena The Commisof a grand matter whichwas also thesubject jury investigation. to the filesin thematter accessto its investigative sionhad previously granted of Department Justice.
ofcriminal That authority in theAttorney and responsibility are vested disposing proceedings. oftheDepartment ofJustice. Generaland representatives
672
Dresser argued that the grantof access was a "referral" of the matterto the Department of Justice for criminal prosectionand relied primarilyupon the decision of the Supreme Court in United States v. LaSalle National Bank, 437 U.S. 298 (1978). In LaSalle, the Supreme Court held that the Internal Revenue Service ("1RS") could not issue an administrativesubpoena after making a of criminalreferral to the Departmentof Justicebecause the statutory authority the 1RS to pursue civil proceedings terminated upon such a referral,and because the 1RS did not have statutory authorityto use its summons power to criminal conduct. Id. at 312. Dresser also argued that the "policy investigate interests"articulatedin LaSalle - primarilythe desire to avoid broadeningthe - precludedenforcement criminaldiscovery of the subpoena government's rights because the Commission,as part of its continuing of grant access, would provide the subpoenaed information to the Departmentof Justice. In its initial panel decision,SEC v. Dresser Industries,Appeal No. 78-1702, the Slip op. (D.C. Cir., November 19, 1979), the Court of Appeals affirmed enforcement of the subpoena but prohibitedthe Commission fromtransferring information obtained pursuant to the subpoena to the Department of Justice once the grand jury had begun its investigation. Id. at 22. The panel decision was later vacated by the court,which reheard the case en bane. In its en bane decision,the court foundthat LaSalle applies solely to the statutoryscheme of the Internal Revenue Code, in which the IRS's civil authorityceases for all practical purposes upon referralof a taxpayer's case to Justice; it does not apply to the securities laws, in which the SEC's civil enforcement authoritycontinues undiminished afterJusticeinitiatesa criminalinvestigation by the grandjury. Dresser, 628 F.2d at 1378. The court furthernoted that the strict limitations on criminal discovery imposed by the Federal Rules of Criminal Procedure apply only aftera grand jury has returned an indictment.During the grand jury investigation,the fromDresser pursuDepartment of Justicecould obtain the same information ant to grandjury subpoena that the Commissioncould obtain with an administrativesubpoena. Thus, in this case (where no indictment had been returned), the court found that enforcement of the Commission's subpoena would not broaden the government's criminaldiscoveryrights.Id. at 1381. The court also rejectedthe panel's limitationson the transfer of information between the Commission and the Department of Justice. The court relied on the express authorizationin the securitiesstatutesfor the transfer of informawithout to the General and tion, limitation, Congress' approval in the Attorney of the Practices of the "close working Act legislativehistory Foreign Corrupt between the the Commission and relationship" Department of Justice in criminal prosecutions.Id. at 1385-86. The court also found littleor no judicial on the transfer to the Department of information precedentforthe prohibition of Justice and refusedto accord any weight to SEC v. Gilbert,79 F.R.D. 683 (S.D.N.Y. 1978), the only case cited by the panel in supportof the limitationon
The SEC's Investigative Process 673 transfer. Cf.SEC v. Horowitz& Ullman,P.C., [1982-1983Transfer Binder] Fed. Sec. L. Rep. (CCH) If98,488(N.D. GA. 1982).
Litigation
The rationale of Dresserand othercases considering parallelinvestigations the continuation of civilenforcement also supports litigation despitethe existenceof parallelcriminal See generally UnitedStatesv. Kordel, proceedings. 397 U.S. 1 (1970); SEC v. FirstFinancialGroupof Texas,Inc., 659 F.2d 660 to civil suit filedby the Commission); (5th Gir. 1981) (LaSalle inapplicable to granta 95 F.R.D. 529 (S.D.N.Y. 1982) (courtrefused SEC v. Rubinstein, in a civil proceeding ordersealing discovery and preventing the protective from information to theDepartment Commission ofJustice); SEC v. disclosing Musella, [1982-1983TransferBinder] Fed. Sec. L. Rep. (CCH) H 99,516 and other fairness, concerns, however, (S.D.N.Y. 1983). Due process, maysway resolution ofthecriminal a court togrant a stayin thecivilproceeding pending see, e.g., Corbinv. Federal Deposit InsuranceCorp.,74 F.R.D. 147 matter; Fed. R. Civ. P. order,see generally (E.D.N.Y. 1977); to granta protective to condition in the civil proceeding, see SEC v. 26(c); or otherwise discovery 79 F.R.D. 683 (Commissionprohibited fromsharinginformation Gilbert, butsee SEC v. Rubinobtained civildiscovery withU.S. Attorney); through decision refused to issue order 95 F.R.D. 529 (courtthatissuedGilbert stein, Commission from to and prohibiting information sealingdiscovery providing U.S. attorney).
W. DISCLOSURE OF GRAND JURY MATERIALS PURSUANT TO RULE 6(E) OF THE FEDERAL RULES OF CRIMINAL PROCEDURE Introduction
In manyinstances, information neededbytheCommission mayalreadyhave beenobtained bya federal grand juryand be in thehandsofa U.S. Attorney's Rule 6(e) of the Federal Rules of CriminalProcedure office. (the "Rule") codifies the traditional of grandjury secrecyby prohibiting U.S. principle offices from "matters beforethe grandjury" Attorneys' disclosing occurring as authorized violation except bytheRule. Fed. R. Crim.P. 6(e)(2). A knowing oftheRule maybe punished as a contempt ofcourt. Id. Violations oftheRule civil litigation to suppress may also lead to motionsin the Commission's to evidence or for other relief correct the disclosure. See, e.g., designed improper v. DiBona, 601 F. Supp. 1162,1166,ajfdon reconsideration, United States 610 F. Supp. 449 (E.D. Pa. 1984); Donovanv. Smith, 552 F. Supp. 389, 390 (E.D. Pa. 1982); see also unitedStatesv. Sells Engineering, Inc., 463 U.S. 418, 46768 (1983) (Burger, 1977 GrandJury In re C.J., dissenting); April Subpoenas, 584 F.2d 1366, 1370 (en bane) (6th Cir. 1978), cert,denied,440 U.S. 944 (1979).
674 The Business Vol.45,February 1990 Lawyer; The Rule specifically authorizes disclosure a courtorderto "an without in use the for the for of suchattorney's performance attorney government duty." Fed. R. Crim.P. 6(e)(3)(A)(i). However, Commission are not"attorattorneys thescopeoftheRule. Fed. R. Crim.P. 54(c); within neysforthegovernment" 414 F. Supp. 74, 76 (S.D.N.Y. 1976). see,e.g.,In re GrandJury Investigation, of the Rule limited ofgrand disclosures 3(C) Paragraph permits jurymaterials. It states: Disclosure otherwise before prohibited bythisruleofmatters occurring the grandjury may also be made . . . when so directedby a court to or in connection witha judicialproceeding .... preliminarily Petitions mustsatisfy to thisprovision two separaterequirements. pursuant the Rule itself One requirement is imposed that the materials be sought by to or in connection with a The second "preliminary] judicial proceeding." that there be a need" for the materials has been requirement "particularized the courts. Lower courts have in wide discretion imposedby determining whether to orderdisclosure. See United Statesv. JohnDoe, Inc., 481 U.S. 102 (1987).
MaterialsSubjecttoRule 6(e)
The restrictions of "matters imposedby the Rule apply onlyto disclosure beforethe grandjury." Fed. R. Crim. P. 6(e)(2). This restricts occurring disclosure of - see, e.g., In re Grand Jury of grandjury testimony (i) transcripts October 510 F. Supp. 112, 114 (D.D.C. 1978 2, (79-2), Empaneled 1981); - see, to assistthe grandjury in its deliberations (ii) material prepared In re Grand 697 F.2d 512 Cir. Matter, 511, (3d 1982); e.g., Jury - see,e.g.,United ofthegrand v. States (iii) summaries jury'sinvestigation 601 F. at 1165 Pa. DiBona, (E.D. 1984); Supp. thenature ofevidence before thegrand (iv) statements regarding produced the of witnesses before the jury, identity appearing grand juryand the of their substance the views members of the testimony, expressed by the and deliberations of the Fund grand jury, grand for jury see,e.g., Constitutional Government v. NationalArchives & RecordsService, 656 F.2d 856, 869 (D.C. Cir. 1981). A significant issue ariseswithrespect to disclosure of materials subpoenaed of the grand to) thegrandjury but prepared by (or submitted independently suchas business do notin and records. suchdocuments juryprocess, Arguably, of themselves revealwhatoccurred before thegrand thecourts jury.However, thathaveexamined thisissuehavearrived at conflicting results. A number ofcourts haveheldthat these documents are notsubject totheRule ifthey are sought for their ownsakeand notto learnwhattookplacebefore the
The SEC's Investigative Process 675 589 F.2d 285, 291 (7th Cir. grandjury. See, e.g., UnitedStatesv. Stanford, 505 F. 440 U.S. 983 (1979); In re GrandJury denied, 1978),cert, Proceedings, October 1978 Me. In re Grand 981 2, (D. 1981); Jury Empaneled Supp. 978, held that Others have F. at 115 510 (D.D.C. 1981). every (79-2), Supp. totheRule, since or reviewed document juryis subject subpoenaed bythegrand of any document reviewed examination by a grandjury will reveal,to some what occurred before the extent, grand jury.See, e.g., In re Sealed Case, 801 F.2d 1379,1381(D.C. Cir. 1986); In re Grand ofCuisinarts, Investigation Jury on other 1022 n.17 Conn. F. 516 Inc., 1981), affd (D. grounds, Supp. 1008, theopposite havealso adopted 665 F.2d 24 (2d Cir. 1981). Severalcourts rule, of the grandjury material thatdocumentary prepared independently holding processis always outsidethe scope of the Rule. See, e.g., UnitedStates v. 511 F.2d 622, 627 n.5 (2d Cir. 1975), cert, denied,422 U.S. 1042 Weinstein, Ice Cream Co. v. Golden (1975); Deerfield Papers,Inc., 87 Specialty Quality are haveheldthatdocuments courts F.R.D. 53, 59 (E.D. Pa. 1980). Stillother what took reveals the essence of if disclosure to the Rule their place in subject of the grandjury.See, e.g., In re thegrandjury roomor the innerworkings 449 630 F.2d 996, 1001 (3d Cir. 1980),cert, GrandJury denied, Investigation, F. 996 596 U.S. 1081 (1981); In re Electronic Surveillance, (E.D. Supp. 991, Mich. 1984); cf.Fiumarav. Higgins,572 F. Supp. 1093, 1105 (D.N.H. 1983); 98 F.R.D. 672, 677 (E.D. Ark.1983). McArthur v. Robinson, ofwhattookplace before thegrand disclosure WhiletheRule prohibits jury, in be drawnoverall matters uthat a veilofsecrecy itdoesnotrequire occurring v. a SEC Dresser the worldthathappen to be investigated by grandjury." of disclosure Industries, Inc., 628 F.2d at 1382. The Rule does notprohibit (i) documents simplybecause theywere once subpoenaedby a grand if from therespondent the are sought and notfrom jury, they directly id. at See, 1383; jury. grand e.g., on thesamesubject matter as testimony (ii) testimony bya witness given In re 610 before thegrand Grand See, e.g., Jury Investigation, jury. F.2d 202, 217 (5th Cir. 1980); in a criminal and testimony introduced trial.See, e.g.,Sisk (iii) documents 791 F.2d 58, 60 (6th Cir. 1986); In re Special v. Commissioner, 662 F.2d 1232, 1236-37n.10 (7th Cir. February1975 GrandJury, Statesv. Baggot, 463 U.S. 476 (1983); 1981),affdsub nom.,United to a search obtained the U.S. Office (iv) materials Attorney's pursuant by of that the have not otherwise warrant materials course, (provided, become materials). grand jury
WheretheCommission has initiated an enforcement actionin District Court, "in with"that be materials accessto grand mayclearly sought connection jury v. Baggot, 463 U.S. 476, 479 (1983); seealso In re States See United proceeding.
witha Judicial to or in Connection "Preliminarily Proceeding"
Vol.45,February 676 The Business 1990 Lawyer; & Co., 622 F.2d 166, 171 (5th Gir. 1980). Administrative /. Ray McDermott have been held not to constitute however, "judicial proceedings, generally under the Rule. See, e.g., UnitedStatesv. Bates,627 F.2d 349, proceedings" 351 (D.C. Gir. 1980). In a leadingcase, the SupremeCourt held thatdisclosure of grandjury civiltax liability materials to the1RS foruse in an investigation to determine was not "preliminary to a judicial proceeding." UnitedStatesv. Baggot,463 U.S. at 480. The Court statedthatdisclosure is "preliminary to" a judicial in preparawhen the of disclosure is "to assist proceeding "primary purpose" tionor conduct ofa judicialproceeding. . . ." Id. Severalcaseshavebeendecided since Baggot which considerwhether an investigation is preliminary to a in under the outlined that but the issue case, judicial proceeding analysis remains 741 F.2d 250 (9thCir. 1984); see also In re unsettled. See In reBarker, Federal GrandJury 760 F.2d 436 (2d Cir. 1985); In re Grand Proceedings, 613 F. (Daewoo), Jury Proceedings Supp. 672, 678 (D. Ore. 1985).
"Particularized Need9'
In a seriesof cases,the SupremeCourtheld thatdisclosure of grandjury a showing materials of"particularized to theexplicit need,"in addition requires of rule 6(e). Illinoisv. Abbot& Associates, Inc., 460 U.S. 557, requirements 441 U.S. 211, 222 566-67 (1983); Douglas Oil Co. v. PetrolStopsNorthwest, 360 U.S. 395, 400 (1959); Plate Glass Co. v. United States, (1979); Pittsburgh & GambleCo., 356 U.S. 677, 682 (1958). In United UnitedStatesv. Proctor Statesv. Sells Engineering, Inc., 463 U.S. 418 (1983), the Court held that mustalso makethatshowing. like movants, parties, private government The "particularized need"standard a movant to show requires in another thatthe material... is neededto avoid a possibleinjustice that the need for disclosure is than the needfor greater judicialproceeding, and that the is continued structured to cover material secrecy, request only ... so needed. Id. at 443 (quoting 441 U.S. at 222). DouglasOil Co. v. Petrol StopsNorthwest, thatthestandard is a "highly flexible The Courtindicated one,adaptableto and thatit "accommodates consideradifferent circumstances," any relevant thatweighforor against disclosure in a to government movants, tions, peculiar Statesv. JohnDoe, Inc., 481 U.S. 102 givencase." Id. at 445; see also United need"determination involves a balancing of (1987). Becausethe"particularized theneedforcontinued theneedfordisclosure and is "adaptable secrecy against to different no one factor or set of factors circumstances," necessarily requires in the offactors disclosure. a number havereceived However, repeated emphasis case law.
Narrowness oftheRequest
mustbe specific and focused. See, e.g., Requestsforgrandjury materials Lucas v. Turner, 725 F.2d 1095,1102 (7thCir. 1984); In re The May 18, 1981 v. GrandJury, 602 F. Supp. 772, 776 (E.D.N.Y. 1985): Grumman Aerospace TitaniumMetals Corp., 554 F. Supp. 772, 774 (E.D.N.Y. 1982); SEC v. Everest Management Corp.,87 F.R.D. 100, 106 (S.D.N.Y. 1980).
or Transcripts Documents
documents in thepossession ofthegrand juryhavebeenheldto Requestsfor of for considerations thanrequests different and lessexacting involve transcripts See, e.g., In re GrandJury (Miller BrewingCo.), 687 Proceedings testimony. 552 F.2d 768, 772 n.2 F.2d 1079 (7th Cir. 1982); StateofIllinoisv. Sarbaugh, 434 U.S. 889 (1977); SEC v. Everest denied, (7thCir. 1977),cert, Management ofCuisinarts, Investigation Corp.,87 F.R.D. at 105. But see In re GrandJury Inc., 516 F. Supp. at 1022 n.17. Degree ofNeed for Disclosure needis notestablished thatgrand Particularized bya showing jurymaterials v. Sells useful or relevant. United States are merely Inc., See, e.g., Engineering, & GambleCo., 356 U.S. at 682. 463 U.S. at 445-46; United Statesv. Proctor to sense of an inability Particularized need mustbe shown"in the relevant and the obtain timely diligently pursued, particular through ordinary processes, of documents, from thegrand or theparticular documents, category requested F.2d In re 801 at 1382. Sealed Case, jury."
Costsand Delay in UsingAlternative Means to Obtain Information

Particularized needis generally notestablished thatobtaining by a showing othermeanswill involve grandjury materials through delay and substantial v. SellsEngineering, costs. States See,e.g.,United Inc.,463 U.S. at 431; United v. Proctor & GambleCo., 356 U.S. at 682; In re Sells,719 F.2d 985, 991 States the costsand delay (9th Cir. 1983). However,some courtshave considered in obtaining involved the information as one factor, along with others,in whether need has been established. See, e.g., In re determining particularized 717 F.2d 1136, 1139 (7th Grand (MillerBrewing Jury Proceedings Company), Cir. 1983); SEC v. Everest Management Corp.,87 F.R.D. at 105. Failure of OtherMeans totheRule willusuallybe availableonlyiftheCommisDisclosure pursuant sion can show,through detailedand specific thatit has triedand averments, failed to obtain the information other means, includingavailable through methods. UnitedStatesv. Sells Engineering, Inc., 463 U.S. at 431; discovery
678
The BusinessLawyer;Vol. 45, February 1990
Lucas v. Turner, 725 F.2d at 1102;In re Petitions forDisclosure ofDocuments, 617 F. Supp. 630, 632 (S.D. Fla. 1985). In determining whichmethods a movant shouldpursue, a court government may"takeintoaccount anyalternative discovery tools available by statute or regulation to the agencyseeking disclosure." United Statesv. Sells Engineering, Inc., 463 U.S. at 445. UnavailabilityofInformation of materials, suchas wheretheonlycopiesof documents are Unavailability in contained thegrand need.See, e.g.,In juryfiles, mayestablish particularized re Grand JuryProceeding(Miller Brewing Co.), Ill F.2d at 1139. The of a witness'testimony becauseof the assertion of a privilege, unavailability such as the privilege againstself-incrimination, mayalso establish particularizedneed.In re Corrugated 687 F.2d 52, 57 (5th Container Antitrust Litigation, Cir. 1982); In re Grandfury Testimony, 309 F.2d 1050, 1053 (S.D. Ohio of courtshave held thatthe movant musthave 1970). However,a number to compelresponses from the witness before need is attempted particularized demonstrated. v. Titanium Metals Corp.,554 F. See, e.g.,Grumman Aerospace Supp. at 777. Recollection,and Testing Credibility Impeachment,Refreshing of Witnesses Use of grandjury materials to impeacha witness, refresh or recollection, or has a for otherwise test at trial been as basis credibility deposition recognized need. UnitedStatesv. Proctor& GambleCo., 356 establishing particularized Plate Glass Co. v. UnitedStates,360 U.S. at 399; U.S. at 683; Pittsburgh v. Fischbach and Moore,Inc., 116 F.2d 839, 845 (9thCir. 1985); United States SEC v. NationalStudent Marketing Corp.,430 F. Supp. 639, 641 (D.D.C. 1977). Public Interest The "particularized need" determination accommodates relevant consideraifany, tions"peculiarto government "the publicinterest, movants," including served to a governmental Statesv. Sells Engineerby disclosure body."United mustbe stated withspecificity; ing,Inc., 463 U.S. at 445. The publicinterest statements thatdisclosure willserve thepublicinterest will however, conclusory notestablish need.See, e.g.,In re theMay 18, 1981GrandJury, particularized 516 F. Supp. 27, 28 (E.D. Pa. 602 F. Supp. at 776; In re GrandJury Matter, 1981). Need for ContinuedSecrecy WhentheCommission seeksgrand thependency ofthe jurymaterials during it will have an "especially to grand jury investigation, heavyburden"to carry obtaindisclosure to theRule. In re FederalGrandfuryProceedings, pursuant
The SEC's Investigative Process 679 760 F.2d at 439; UnitedStatesv. Payden,613 F. Supp. 800, 810 (S.D.N.Y. and Moore,Inc., 116 F.2d at 844. 1985); see also UnitedStatesv. Fischbach when the has ended itsinvestigation and is no longer in Conversely, grand jury the in interest continued is reduced and the Commission will operation, secrecy havea lighter burden tocarry. Id.; In re Grand Jury Proceedings (Daewoo),613 F. Supp. at 679; SEC v. EverestManagement 87 F.R.D. at 104. The Corp., in continued interests are not eliminated after termination ofthegrand secrecy 441 U.S. See,e.g.,DouglasOil Co. v. Petrol juryinvestigation. StopsNorthwest, at 222; StateofIllinoisv. Sarbaugh, 552 F.2d at 775.
The Rule provides thatgovernment petitioners "may" fileex partepetitions disclosure. Fed. R. Crim. P. The rule does not,however, 6(e)(3)(D). seeking with a to ex parte in every case. provide government petitioners right petition The government ex where to the mayproceed parte necessary preserve secrecy ofgrand See In re GrandJury 610 F.2d at 37; juryproceedings. Investigation, In re SpecialMarch 1981 GrandJury, 753 (F.2d 575 (7th Cir. 1985); cf.In re 11A F.2d 969, 975 (9th Cir. 1985). Where ex parte proceedings Kiefaber, cannot bejustified, written notice ofthepetition must be served on those persons as thecourt direct where thfe materials are in with and, may sought connection to that Fed. R. Crim. P. See In existing litigation, parties litigation. 6(e)(3)(D). re SpecialMarch 1981GrandJury, 602 F. Supp. at 580.
Procedural Requirements
///. COLLATERAL DISCLOSURE EFFECTS RELATING TO AN SEC ENFORCEMENT ACTION A DISCLOSURE

The disclosure of an issueror an individual involved in an SEC obligations enforcement or action a wide of factors, investigation depend upon variety the nature of the disclosure the or the individincluding document, company's ual's status and thecontext in whichtheproceeding such as whether it is arises, a pendingproceeding, and whether therehas been the entry of findings of violation or theentry of an administrative or courtorder.Set forth below are various relevantprovisions to consultand a brieflist highlighting certain relevant judicialproceedings. Registrant a. Rule 408 [17 C.F.R. 230.408] ("Additional Information" in [required registration statements]). b. Rules 12b-20and 14a-9 [17 C.F.R. 240.12b-20, 240.14a-9](Informationrequired to be included in periodic and proxy statements so reports as to ensure thatstatements madeare notmisleading). c. Item3 ofForm10-K [17 C.F.R. 229.103] ("Legal Proceedings").
680 The Business Vol.45,February 1990 Lawyer; d. Item303 of Form10-K [17 C.F.R. 229.303] ("Management's Discussionand Analysis"). e. Items2 and 3 ofForm10-Q [See 17 C.F.R. 249.308a]. of material Variousregistration forms pending legal prorequiredisclosure authorities. known to be contemplated and proceedings bygovernment ceedings
ExecuS-K [17 C.F.R. 229.401]("Directors, a. Item401(0 ofRegulation in Certain Persons Involvement and Control tiveOfficers, Promoters, Legal Proceedings"). 4 ofRegulation S-K [17 C.F.R. 229.103]("Legal b. Item103,Instruction Proceedings"). and c. Schedule13D, Item3(d), (e) [17 C.F.R. 240.13d-101]("Identity Background"). d. Regulation14(a), Item 7 [17 C.F.R. 240.14a-101] ("Directorsand Officers").
or Director Officer ofRegistrant
and materiality, In addressing the questionsof disclosure analysisof the be considered. that should on the factors cases guidance mayprovide following a profitable affect is likely to adversely a. "Wherea nominee's background to the shareholdshouldbe disclosed assetsuch background company ers."Kass v. Arden-Mayfair, Inc., 431 F. Supp. 1037, 1046 (CD. Cal. Crisis:The 1977). See also cases citedin Herlihy& Levine,Corporate OverseasPaymentProblem,8 Law & Pol. in Int'l. Bus. 547, 573 (1976). b. See SEC v. Freeman, Binder]Fed. Sec. L. Rep. (CCH) [1978 Transfer to withfailing was charged 1978), wherea person f 96,361(N.D. 111. him.It was arguedthat ofproceedings theprior disclose against history was not law violations forsecurities of a priorindictment disclosure that: stated thecourt In responding required. which thattheonlyfactor thisargument, counselforgets In making would If investors is materiality. the need fordisclosure determines to do is "unfit thesefactsthatthe defendant indeedconcludefrom the own counsel's then business," high degreeof proves argument of a context In the information. of in kind inherent this materiality of information to conceive it is difficult heldenterprise, smallclosely thana decision on an investor's influence whichwouldhavea greater on the misconduct securities-related fraud or other of priorhistory in the of dominant the enterprise. figure part in of injustice If Mr. Freemanfeelsthathe has been the victim side his him from thesepastproceedings, explaining nothing prevents
Relevant JudicialProceedings
Process 681 The SEC's Investigative to potentialinvestors. But the policy of the of each controversy oftheinvestor fulldisclosure, not securities laws is protection through of the of we cannot Thus, protection reputation promoters. accept counsel's fora rulewhichwouldpermit sellers ofsecurities argument to remain silent whenfacts existwhich turn might away. Such buyers mustbe considered information material sensible standard. byany in United Statesv. Matthews, 787 F.2d 38 (2d Cir. 1986), However, in thecontext thecourt, ofa criminal for violations ofsection proceeding criminal 14(a) of the ExchangeAct,held thatuso long as uncharged conduct is notrequired tobe disclosed rule byany lawfully promulgated of such conduct cannotbe the basis of a by the SEC, nondisclosure criminal Id. at 49. In this case a corporation solicited prosecution." in material of an individual's nomination to the of board proxy support which material omitted disclosure of his directors, any allegedparticipationin a conspiracy to bribecertain statetax officials. c. SEC v. SavoyIndustries, 587 F.2d 1149, 1165 (D.C. Cir. 1978) ("the fact of [thedefendant's] in viewofhis past troubles with participation, thesecurities ofdatumthatis contemplated laws,is just thetype bythe ofSchedule13D"). requirements d. Trans WorldAirlines, Inc. v. Catalano,[1979-1980Transfer Binder] Fed. Sec. L. Rep. (CCH) % 97,159 (S.D.N.Y. 1979) wherethecourt discusseda failureto disclosefacts,rendering the statements made misleading. In thatcase, the defendant described his occupations as including in commodities and without thata metals, trading precious disclosing statecourt had found himliableforfraud in connection withtrading in silvercontracts. the defendant's characterization as "sheer Describing and "misleading," thecourt entered an injunction puffery" prohibiting him from in further fraudulent in connection with engaging practices his proxy in regard activities to TWA. e. SEC v. Century Fund, [1979 Transfer Binder]Fed. Sec. L. Mortgage Utah 1 96,777 (D. 1979) (failureto disclosepending Rep. (CCH) criminal heldto be material charges against director/controlling person omission). f. Bertoglio v. TexasInternational Co., [1979-1980Transfer Binder]Fed. Sec. L. Rep. (CCH) 1 97,342(D. Del. 1980),where thecourt heldthat a nominee's solicitation materials were defective in not proxy disclosing his "questionable involvement" witha bankrupt eventhough company, that conductoccurred more than fiveyears earlier.Notingthat the Commission's Schedule14A established disclosure reonlyminimum and thatcompliance withtheschedule does notnecessarily quirements thata proxy statement satisfies rule 14a-9,thecourt stated: guarantee
1990 Vol.45,February 682 The Business Lawyer; the SEC's adoptionof a rule The policyconsiderations underlying ofbusiness five for of a experiyears disclosure imposing period only relevance of 'ancient aroundthediminishing revolve encemostlikely old true where a ten or fifteen-year This is particularly history.' is Such a rationale record. unblemished incident marsan otherwise theESI consent in a case liketheone at bar,where farlesscompelling law and business in a seriesof securities orderin 1964 was thefirst time.If TI untilthe present forMr. Ling thatcontinue difficulties ESI and the from ofLing'sdeparture had beeninformed shareholders consent theywould have been morelikely agreement, accompanying The Courtis law violator. securities him as a "recidivist" to review to a shareholder's not material was that this fact conclude reluctant to serve as a director. to of Ling'squalification assessment on Finance's Viewsand Comments See also Divisionof Corporation Contributions to the Disclosures by MakingofIllegal Campaign Relating Rei. No. Act Their Public Companies 8265, and/or Officers, Exchange March 8, 1974. See generallyOlson, Should Management'sPersonal vol. 1, no. 3, at 1 (SeptemtoShareholders be Disclosed Problems , Insights, ber 1987).
of "Statement issueda releasecaptioned On August1, 1988,theCommission of CompaniesAffected DisclosureObligations the Commission by Regarding Procurement DefenseContract theGovernment's Inquiryand RelatedIssues." affected reminded theCommission ActRei. No. 6791. In thisrelease, Securities no new disclosure but announced their disclosure of obligations companies ifany, ofconsidering theimportance The releasereiterated what, requirements. the with in connection be met must disclosure companies public by obligations scandal. fraud procurement business[in oftheregistrant's a description The requirement regarding to disclosure includes variousCommission pertaining anymaterial filings] of be that business of a may subjectto renegotiation company's portion the of election at the subcontracts or of contracts or termination profits on government or its subsidiary's A company's dependence government. wherethe loss of such also would be requiredto be disclosed contracts Likeadverseeffect would have a material contracts upon the company. in loss certain disclose must a at contingencies wise,companies, minimum, statements. financial their required involvofmaterial Disclosure also is required legalproceedings pending its subsidiaries. or a ing company
Disclosure Investigations ofPendingGovernment
The SEC's Investigative Process 683 nominees,executiveofficers, Legal proceedingsinvolvingdirectors, proand control should likewise be disclosed where material to moters, persons the abilityor integrity of such person. The potentialeffects of the government's inquiry must be discussed in the Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD& A"), in a company's annual and quarterly reports as well as transactional filings if, in light of the associated probabilitiesand magnitudes,the effects may be material. The Commission's rules also require disclosureof any additional material information, beyond information specificallyrequired to be disclosed, that is necessaryto make the required statements not misleading,as to the business, financial results and condition, and the management of the company. The release is significant not only as to companies affectedby the procurement fraud scandal, but also because it contains a summary referenceto the rules and prior Commission releases which generally address this disclosure issue. Further, the Commission highlightedthe evaluation of "materiality" which must be undertakenin connectionwith proceedingswhich mightaffecta company's operations or its management,and remindedcompanies to evaluate such disclosurein connectionwith MD&A discussions.
B. PROCESSING OF DISCLOSURE DOCUMENTS DURING PENDENCY OF AN ENFORCEMENT INVESTIGATIONOR INQUIRY.

A full discussionof the processingof disclosuredocumentsby the Division of Corporation Finance is beyond the scope of this presentation.See generally rules 202.2, 202.3 [17 C.F.R. 240.202.2, 202.3], "Pre-filing Assistance and Advice" and "Processing of Filings." Such documents may reInterpretative ceive (1) a fullreviewof all aspects of the filing;(2) a full financialreview; (3) a monitoringof the filing(a review for one or more specific items); or (4) no review. See SEC Budget Estimate for 1990, at p. 1-1. The criteria for the Commission's determinationas to what filings to review and what level of review theyreceiveare not generallypublicized, forobvious reasons. First time or new issuer registration statements are virtuallyassured of being reviewed,as are certain other types of documents(e.g., mergerproxies). Id. at 1-5. Generin complyingwith the full discloally, the commentprocess assists registrants sure requirementsof the federal securities laws and ensures that investors receivethe information investment decisions. necessaryto make informed Where an issuer is under investigation and the mattersunder review by the staff of the Division of Enforcement are materialor significant to the disclosures in the filing,the staffof the Division of Corporation Finance may not be in a position to comment upon such disclosures and thereforewill be unable to exerciseits delegatedauthority with respectto declaringa registration statement
684
as discussed below. However, there are instances in which the queseffective, tions raised regardingthe adequacy of disclosuresrelate to a limitedor confined area, and the staff may be in a positionto issue commentson the balance of the the action to be taken with respectto the statement. In determining registration investior when thereis an enforcement of a filing report particular processing a number of the staff or carefully generally weighs gation inquiry pending, the of action the for factors, contemplatedby type corporate including, example: disclosure document and the subject matter of the investigation;the current and the nature and extent of the public disclosure status of the investigation; Set forthbelow is a presentationof the matter under investigation. concerning alternatives. possible
Partial RevieworMonitoring ofa Filing and a "Carve-out" Inquiry ByAn Enforcement ofAreasCovered
Absent unusual or compellingreasons, the staffgenerallydoes not comment in a disclosuredocumentwhich relates to the subject matter on the information of a Commission investigationor inquiry inasmuch as the facts necessary to complete the review of these disclosures are being developed by way of the inquiry.When the areas which are the subjectof the Commission's enforcement inquiry are limited as to scope or impact, the staffof the Commission would generallyreview and commentupon the remainingsubstantiveareas. While the conceptcontinuesto be employedtoday,the most prevalentuse of - that is, the review and commenton the substantiveareas of the "carve-out" - occurredduring the documentwhich are not within the scope of the inquiry were the subject of inquiries regarding the late 1970s when many registrants possible improper (or illegal) foreignor domestic payments.Under these cirwere the disclosuredocumentswere examined and, while comments cumstances, provided,the commentsclearly indicated that the review and commentprocess did not extendto those areas which were subjectto the inquiry. Similarly,other during the pending inquiry also were examined filingsmade by the registrant and the same "carve-out" positiontaken. where a "carve-out" is applicable, the followingcommentis In circumstances generallyissued by the Division of Corporation Finance: As you know, the staff of the Division of Enforcement is currently (inquiry) into possible violationsof the federal conductingan investigation the securitieslaws by the Company. In view of the pending investigation, on thosematterswhich are the subject staff is unable to reviewor comment are given regarding the factthe comments of the investigation. Accordingly, as a finding the otheraspects of the filingshould in no way be interpreted to include failure therein the contained staff that information the (or by or thatno is or accurate the matter information) complete subject regarding additional disclosure is required or necessary.The staffurges all further personswho are responsibleforthe accuracy and adequacy of this material
The SEC's Investigative Process 685 to take the steps necessaryto assure thatall mattersof which a shareholder are included in the disclosuredocument. reasonablyshould be informed
Acceleration and the"TandyLetter"

The "Tandy Letter" was developed in 1976 as a result of the numerous problemswhich arose as a result of continuedcorporatemergers,acquisitions, and public offerings during a period when corporatedisclosure as to questionable or illegal paymentsor practiceswas the subject of a substantialnumber of (The term "Tandy inquiries or investigations by the Division of Enforcement. Letter" derived from the name of the company involved the firsttime this process was employed.) The "Tandy Letter" refersto a request by the staffwhere it has to take affirmative date of a Securities action, such as the acceleration of the effective Act registration that a letter be furnished statement, providing the following writtenrepresentations fromthe managementof the registrant: In the eventthat the company requests accelerationof the effective date of the pending disclosuredocumentthe company should furnisha letterat the timeof such request which acknowledgesthe following: The disclosurein the filingis the responsibility of the Company, and the Company further that the action of the Commission acknowledges or the staffacting pursuant to delegated authorityin declaring the or accelerating the effectivedate thereof does not filing effective, relievethe Company fromits full responsibility forthe adequacy and of the disclosures in the and accuracy filing; that should the Commission or the staffdeclare the disclosure document effective or accelerate the effective date thereof,the company will not assert this action as a defensein any proceedinginitiatedby the Commissionor any person under the federalsecuritieslaws of the United States. Generally, a "Tandy Letter" is appropriate only when a question of accelerataction by the staff is involved, ing a statutory waiting period or otheraffirmative amendmenteffective. e.g., declaringa post-effective
No Review and No Comment

Generally, if a filinghas otherwisebeen selected for review, the staffof the Commission will commenton a document,or portions thereof,except in the situationwhere the mattersunder inquiry are so pervasive or deemed of such importanceto the registrant's operations or financialconditionas to be considered necessaryto an investment decision. Under these circumstances, the staff, absent completionof the investigationby the Division of Enforcement, lacks sufficient information on the mattersunder inquiry to completeits analysis and to formulate comments.
686
Where the staffdeterminesthat it is unable to review and commentupon a disclosure document,the followingis an example of the typical commentthat may be given. In view of the pending inquiry by the Division of Enforcementinto in the disclosuredocument,the staffof the mattersrelatingto information Division is not in a position to complete its review and formulateany commentson the disclosuredocument. All persons responsibleforthe adequacy and accuracy of the document of which a shareholdershould are urged to be certainthat all information be informed is included therein; or Under the circumstances,should the company and its management proceed with the use of the disclosure document in its present form,the staffwould consider the necessityof recommending appropriate action to the Commission.
and Acceleration Full Review, Comment,

In rare instances,when the type of proposed corporate action dictates that review, even one limited in scope and comment,is in the public interestand essential for the protectionof investors,a full review (including a review of matterswhich are the subject of the investigation)will be accorded the filing. Such review will be based only upon the information publicly available. When it is determinedto commenton the documentin this exceptional situation,the would be that: typicalcommentto the registrant in These commentsare based upon an examination of the information of the and statement the registration and/or periodic reports Company other informationpublicly available regarding the Company and the industryin which it operates. These documentsdo not, directlyor indior factsbeing obtained or developed by the any information rectly,reflect of Enforcement Division pursuant to (e.g., formal order of investigation, informalinquiry). Accordingly,the fact that the staff has rendered comments on the documents should be deemed a findingthat the disclosures are either adequate or accurate. Those persons responsible for the accuracy and adequacy of the documentsare urged to be certainthatall mattersof which an investor should be informed have been included in the disclosure documents.
Acceleration Considerations
on Acceleration PowersUnder Effect ofEnforcement Inquiry 8 (a) and 8(c) oftheSecurities Actof 1933 Sections
unless Section 8(a) of the SecuritiesAct providesthata registration statement, on the twentiethday afterfiling.Section 8(a) also amended, becomes effective period. Very early in the historyof providesforaccelerationof that twenty-day the Commission it was determinedthat the twenty-dayperiod would be, in many instances, an impractical standard where a registrationstatementwas In order to avoid the necessityof commencingan enforcemateriallydeficient. mentproceeding, various administrative practiceswere developed,includingthe review and commentprocess and the delaying amendmentunder rule 473 [17 C.F.R. 230.473]. See generally Woodside, Development of SEC Practices in Processing RegistrationStatementsand Proxy Statements,24 Bus. Law. 375 (1969). In consideringa request by an issuer to accelerate the effective date of a statement to a date earlier than the twentieth after registration day filing,as section of the Securities the when Act, staff, 8(a) prescribedby acting pursuant to delegated authority, considersthe following: (i) information regardingthe issuer available to the public; (ii) the facilitywith which the nature of the securitiesto be registered, theirrelationshipto the capital structure of the issuer, and the rights of holdersthereof can be understood; and protection of investors; and (iii) the public interest (iv) the adequacy of the information. Also, considerationof the public interestand the protectionof investorsis mandated by section 8(c) of the Act in declaring any post-effective amendment effective. Unlike section 8(a), section 8(c) of the Act requires that in declaring effective a post-effective amendmentthe Commission must determinethat the amendment "on its face, appears to the Commission not to be post-effective in or inaccurate incomplete any material respect. . . ." In exercisingits statutory authorityunder section 8(a), the Commission or staff mustconsiderthe provisionsof rule 461. One of those provisionsis that the Commission may refuse acceleration of the effectivedate of a registration statement: Where the Commissionis currently of the issuer,a making an investigation the issuer,or one of the underwriters of the securitiesto person controlling be offered pursuant to any of the Acts administeredby the Commission. or Where there have been transactions in securities of the registrantby persons connected with or proposed to be connected with the offering which may have artificially affectedor may artificially affectthe market price of the securitybeing offered.
688
Moreover, if an inquiry is not already underway and serious omissions or false statements are reflected on the faceof the filing, such matters will generally be referred to the Division of Enforcement.
Effectofan Inquiry InstitutedUnder Section 8(e)

If thereare questions as to false statements or material disclosuredeficiencies in a registration the matterpursuant the staff statement, may seek to investigate to a formal order of examination and investigationsunder sections 8(e) and 20(a) of the SecuritiesAct. An examinationand investigation undertakenpursuant to section 8(e) of the SecuritiesAct to determinewhethera stop order should be issued with respect to a registrationstatementmay preclude any sale of securities under that statement registration pursuant to section 5(c) of the Act. Section 5(c) makes it unlawful to offerto sell or buy securitiesunless a registration statementhas been filedand such registration statement is not subject to a refusalorder,stoporder or "subject to any public proceedingor examination." While there is no clearly dispositivecase law on point, even if an inquiry under section 8(e) is of barringoffers to sell or sales of commenced,such inquirymay have the effect securities until the examination and investigationis complete. See McLucas, Stop Order Proceedings Under The SecuritiesAct of 1933: A Current Assessment,40 Bus. Law. 515, 526-28 (1985). See Las Vegas Hawaiian Development
Co. v. SEC, 466 F. Supp. 928 (D. Hawaii 1979).
Decision Not to Exercise Delegation ofAuthority to Accelerate
Date Effective
The failure to grant promptlya registrant'srequest for acceleration is, in an administrative effect, denial, a power that the Commission has not delegated to deny accelerationand the to the staff. Only the Commissionhas the authority staff,if it declines to exercise its delegated authorityto accelerate, must then take the matterto the Commission.
Absence ofthe AutomaticDelaying Amendment

As noted above, section8(a) of the SecuritiesAct providesin part that: date of a registration statement except as hereinafter provided,the effective thereof or such earlier date as the shall be the twentieth the after filing day .... If any amendmentto any such statement Commission may determine is filed prior to the effectivedate of such statement,the registration statementshall be deemed to have been filed when such amendmentwas filed. In order to provide an easy methodto preventa registration statementfrom eitherin deficient formor at a date earlier than that desired becomingeffective the Commission adopted rule 473, under the Securities Act, by the registrant,
The SEC's Investigative Process 689 could, if it so desired, "automatically" delay the effective wherebya registrant date of any registrationstatementby use of a "permanent delaying amendment." use the delaying amendmentso as to affordthe Generally, most registrants staff timeto determine whethera reviewwill be undertakenand, if so, to receive commentson the documentbeforeit becomes effective. The filingof a registration statement amendment withoutthe delaying or removal of the amendment by a registrant prior to completionof the process raises the immediateprospect of a stop order examinationor, if deficiencies are clear, a stop order.
IV. COMPLETION OF INVESTIGATION A. STAFF RECOMMENDATION

The staffmay determineat the conclusion of an investigationto take no action. The staffis not required to informa witness or an individual or entity whose activities were under scrutinyof the terminationof an investigation withoutaction. However, the staff advise a witnessthat its may, in its discretion, has been terminated. See U.S. Securities and Exchange Commisinvestigation sion, Procedures Relating to the Commencementof EnforcementProceedings and Terminationof StaffInvestigations, SecuritiesAct Release 5310 (Sept. 27, 1972). In SecuritiesAct Release 5310, the Commission instructed the staff thatin cases where such action appears appropriate,it may advise a person under inquiry that its formalinvestigation has been terminated. Such advice is not an exoneration or an indication that no action may resultfromthe staff'sinvestigation. ultimately If the staffdeterminesthat remedial action is necessary as a result of its it will make a recommendation to the Commission that identifies investigation, the proposed defendantsor respondents,states the evidentiaryand legal basis supportingthe claimed violation, and sets fortha proposed remedy and the rationale therefor.The staff,at the time it makes its recommendation,will forward to the Commission any Wells Submissions received from proposed defendants. See SecuritiesAct Release 5310.
B. WELLS SUBMISSIONS
In General
Securities Act Release 5310 dealt with certain recommendationsof the AdvisoryCommitteeon EnforcementPolicies, called the "Wells Committee," afterits chairman.See SecuritiesAct Release 5310. In the release, the Commission discussed its discretionary practice "of permitting persons involved in an to a statement to investigation present [the Commission] setting forththeir interests and position." In order to advise the public of its practice,the so-called Wells Committeeprocedurewas shortly thereafter set forth in the Commission's
690
regulations relating to Informal and Other Procedures. See Securities Act Release 5320 (Oct. 12, 1972, 37 FR 23829, Nov. 9, 1972). That release added subsections(c) and (d) of 17 C.F.R. 202.5. In Release 5310 the Commission indicatedthat: In determining what course of action to pursue, interested persons may findit helpfulto discuss the matterwith the staffmembersconductingthe The staff, in its discretion, defendants investigation. may advise prospective or respondentsof the general nature of its investigation,including the indicated violations as they pertain to them,and the amount of time that may be available forpreparinga submission. The release stated that the benefitof such submissions was likely to be greatest in connectionwith questions of policy and on occasion, questions of law, bearing upon the question of whether a proceeding should be initiated with considerationsrelevantto a particular prospectivedefendant together or respondentwhich mightnot otherwisebe broughtclearly to the Commission's attention. In consideringthe issues which merit treatmentin a submission, Release 5310 states,at page 3: Where a disagreement exists betweenthe staff and a prospective responit is likelythat this [disagreement] dent or defendantas to factual matters, can be resolved in an orderlymanner only throughlitigation.Moreover, the Commission is not in a position to, in effect, adjudicate issues of fact beforethe proceedinghas been commencedand the evidence placed in the record. In addition, where a proposed administrativeproceeding is involved, the Commission wishes to avoid the possible danger of apparent contentions, especially as prejudgmentinvolved in consideringconflicting to factualmatters, beforethe case comes to the Commission fordecision. the language of the Release, many Wells Submissions do Notwithstanding to be given the address factualissues, evidentiary matters, weight,and inference with the staff'sposioften factual evidence,and they disagreements highlight tion. The Wells Submission practice has not created nor has the Commission and solicitation procedure. employed any formal, pre-proceedingnotification Release 5310 was not intended to, and did not, confer any rights upon the However, while there is no requirement subjectsof Commission investigations. that a Wells noticebe specifically providedto persons or entitieswhich may be recommendation the subject of an enforcement by the staffand no due process for will to the staff attach this providethe opportunity rights generally practice, nears completion.Such an opportunity such a submission as an investigation will not be provided when there are concerns about dissipation of assets, destruction of documents, or any other situations which may require the
The SEC's Investigative Process 691 Commission to act quickly to protect thepublicinterest. SEC v. See generally National StudentMarketingCorp., 538 F.2d 404 (D.C. Cir. 1976) (per cert, deniedsub nom.,White& Case v. SEC, 429 U.S. 1073 (1976), curiam), and cert, denied, Lord,Bissell & Brookv. SEC, 429 U.S. 1073 (1977).
Whileno statistics on theuse oftheWellsprocess a substantial number exist, of proposed and defendants do make such submissions. The subrespondents missions are evaluatedcarefully, not only by the Commissioners and by the enforcement butalso byother offices and divisions within theCommission staff, which have an in interest the matters in involved the case ofthe may (e.g.,Office Chief DivisionofCorporation A few worth Accountant, Finance). points noting abouttheprocess are thefollowing: in proposed (i) A submission may note factualand legal deficiencies enforcement action. takes the position thata submission (ii) The Divisionof Enforcement as an admission or forimpeachment may be utilizedsubsequently should be signedby personshaving purposes;factualsubmissions of facts statedtherein, whilecounselshouldsignsubmisknowledge sionsmaking of the (But see belowfora discussion legal arguments. initialdecision in theKerncase regarding use of a Wells submission in subsequent enforcement and theadmissability of such proceedings submissions.) (iii) Submissions may be particularly helpfulin analyzingthe role of defendants or persons "peripheral" chargedwith"aidingand abetting." issuesmaybe highlighted, (iv) Novel,unique,or unusualpolicy especially thenature ofrelief and thestatutory sought provisions allegedto have beenviolated. is likelyto be moreeffective than a lengthy (v) A concisesubmission discourse. mustbe "timely submitted." (vi) A submission
Considerations in MakingWellsSubmissions Strategic
Freedom ActConsiderations in Making ofInformation WellsSubmissions

or Enforcement Action DuringPendency ofActive Investigation
a Wells Submission from (1) Exemption 7(A) of the FOIA may protect release.See NationalLabor RelationsBoard v. Robbins mandatory Tireand RubberCo., 437 U.S. 214 (1978). considerations as (2) Personal 7(C)) apply,inasmuch privacy (Exemption theidentities ofthesubjects ofCommission are generally investigations confidential.
1990 Vol.45,February 692 The Business Lawyer; information commercial and sensitive (3) Trade secrets may also be ex4). (Exemption empt.
exists availableundertheFOIA unlessthere (1) Submissions maybecome ofpersonal invasion an unwarranted privacy. In particular cases, it is, of course,possiblethatthe releaseof a must be denied for otherreasons.For example,even submission thecircumactionhas beenconcluded, enforcement whereparticular See In re are likely. thatadditional stances proceedings mayindicate RequestofDow Jones& Co., FOIA Rei. No. 12 (June 19, 1975), 7 thereleaseofa submisin someinstances, SEC Docket186. Further, in ofa fairtrialor impartial a person sionmight adjudication deprive the disclose the Commission's than other action, identity proceedings or proceof a confidential source,discloseinvestigative techniques In such of law enforcement thesafety dures,or endanger personnel. would be the submission (or appropriate instances, parts thereof) See 5 U.S.C. 552(b)(7)(B), (C), (D), (E), and (F); butsee withheld. ofsubsection sentence theultimate 552(b): shall be provided of a record segregable portion Anyreasonably of the pordeletion after such record to any personrequesting underthissubsection. whichare exempt tions ofWells Submissions portions (2) The Commission specific maywithhold of whichwould have a the disclosure thatrevealpersonalmatters, or would cause undue and severeimpactupon a person'sprivacy - such mattersshould be specifically embarrassment unwarranted of the at thetimeof themaking of thestaff to theattention brought submission. has been made soleyon behalfof corporations, (3) Wherea submission do notapply.See In re Requestof of personal considerations privacy FirstNationalCityBank, FOIA Rei. No. 36 (November 4, 1976), 8 SEC Docket322. between in civilproceedings private (4) Submissions maybe discoverable Transfer & Ross Touche v. See Co., [1976-1977 litigants. Goldberg Binder]Fed. Sec. L. Rep. (CCH) 1 95,759(S.D.N.Y. 1976).
Proceeding ofEnforcement Completion After
See In re JungJa Malandris,FOIA Rei. No. 8 (May 29, 1975), 7 SEC stated: theCommission Docket58. In thatrelease, in contained accesstotherecords must The Commission deny frequently file where it has taken no enforcement an investigatory action,since
No Enforcement Whom Submissions Against ofPersons WereEver Brought Proceedings
The SEC's Investigative Process 693 disclosure willoften invadethepersonal ofpersons who havebeen privacy no but whom have been However, charges brought. investigated against is demonstrated wherea particularized need forrecords whichoutweighs from an invasion of personal discloany possibleharmresulting privacy, files is proper. sureofsuchinvestigatory Sincetherequested materials to theprivate evidentiary appear relevant if even disclosure of the material in the filemight be action, evidentiary an invasion of it is not an "unwarranted" considered privacy, clearly invasionof privacy to disclosethe filesto the requestor; see 5 U.S.C. 552(b)(7)(C). Cf. Getmanv. NLRB, 450 F.2d 670, 674 (D.C. Cir.), 404 U.S. 1204 (1971). forstaydenied, application
in WellsSubmissions Use ofStatements As Evidencein Subsequent Proceedings

The Divisionof Enforcement's is thatWells Submislongstanding position from sionsare madein a context different offers of settlement and negotiations and may be used as evidencein subsequentproceedings for,as examples, or corroborative or as admissions impeachment purposes by a party opponent. See rules408 and 801(d)(l)-(2), Wigmore, FederalRules of Evidence 1061 in a letter a prospective (1972). The Divisionincludesa statement advising defendant of a proposed recommendation of enforcement actionthatthe staff seeks to introduce Wells Submissions as evidencein Commission routinely enforcement when the staff deems proceedings, appropriate. in a recent administrative law judge refused to However, case,a Commission the introduction of a Wells Submission as evidence and denied the permit Division ofEnforcement's motion for or reversal, reconsideration or, subsequent to the for to the Commission, alternatively, certify ruling interlocutory appeal on thegrounds, inter are settlement documents and alia, thatWellsSubmissions thattheuse ofsubmissions as evidence wouldhavea chilling effect. In re Allied StoresCorporation and GeorgeKern, Administrative File No. 3Proceeding 6869 (March 21, 1988). The initialdecisionon the merits of the case as to and the Division of GeorgeC. Kern,Jr., is on appeal to the Commission, Enforcement has arguedthattheruling as to theuse of Kern'sWells Submissionis in error. In reKern,Administrative File No. 3-6869(June8, Proceeding other the Division's brief has 1989). Among things, arguesthattheCommission releasedWells Submissions to thirdpartymembers of the publicpursuant to FOIA requests. See In re RequestofFirstNat'l CityBank,FOIA Rei. No. 36 has compared 4, 1975). Priorto the Kern case, the Commission (November Wells Submission with the made respondents' arguments arguments bya party at trial.See In re Bill R. Thomas, Administrative File No. 3-6618 Proceeding 7, 1987). (January
694
C. DOCUMENT RETENTION
the Commission retains the followingdocuUpon closing its investigations, mentsin its files: taken in an investigation and the exhibitsto (i) Transcriptsof testimony such testimony; (ii) Formal ordersof investigation, subpoePrivacyAct accountingforms, Wells Submissions, FOIA requests, and confinas, correspondence, dential treatment requests; (iii) Other inter- or intra-agencymemoranda, including all notes and to believes important that the staff otherrecordsprepared by the staff retain; (iv) Records that have been made part of the record in an injunctiveor administrative proceeding; to retain; believes important (v) Such otherrecordsthat the staff (vi) Other material that must be held due to FOIA concerns.
Documents not listed above are discarded or, upon request, may be returned them.* to the partythat submitted
and see U.S. Securities the SEC's investigative *For additionalinformation process, regarding and SEC Form2222 (June1989); U.S. Securities on Bounties, Commission, Information Exchange for PersonsRequestedto Supply Information Information Supplemental ExchangeCommission, to a Commission Pursuant or Directedto SupplyInformation Subpoena,SEC Form Voluntarily Procedures and ExchangeCommission, 1662 (June 1989); U.S. Securities Relatingto the ComAct Securities and Termination mencement of Staff Investigations, Proceedings of Enforcement 17 C.F.R. 202.1-203.8 and OtherProcedures, Release 5310 (Sept. 27, 1972); and Informal (1960).

SEC Investigative Process: An Overview of Procedural Considerations

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SEC Investigative Process: An Overview of Procedural Considerations

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An Overview of Various Procedural Considerations Associated With the Securities and Exchange Commission's Investigative Process Author(s): William

An Overviewof Various Procedural ConsiderationsAssociatedWiththe Securities and Exchange Commission'sInvestigative Process

Process 627 The SEC's Investigative

An Overviewof Various Procedural ConsiderationsAssociatedWiththe Securities and Exchange Commission'sInvestigative Process

I. COMMISSIONINVESTIGATIONS** A. SOURCES OF INVESTIGATIONS

The Business 1990 Lawyer;Vol. 45, February

The SEC's Investigative Process 629

Function ofFormal Orders

Z). INVESTIGATIVE TECHNIQUE In General

InsiderTradingand Other Market-Related Investigations

Financial FraudFinancial Statement Investigations

Broker-Dealer Investigations /Failure-to-Supervise

The Business 1990 Lawyer;Vol. 45, February

//.CHALLENGES TO AND PROCEDURAL ISSUES IN INVESTIGATIONS A. FIRST AMENDMENT

The Business 1990 Lawyer;Vol. 45, February

The SEC's Investigative Process 639

F. OBTAININGCOPIES OF FORMAL ORDERS

H. GOING OFF THE RECORD

/. ATTORNEYS AND CLIENTS Rightto Counsel

The Business 1990 Lawyer;Vol. 45, February

/. OTHER PRIVILEGES Accountant-Client Privilege

The SEC's Investigative Process 647

K. THE FREEDOM OF INFORMATION ACT

The Business 1990 Lawyer;Vol. 45, February

Covered Treatment Information bytheFOIA Confidential Rule

Reasons Treatment forRequesting Confidential

Treatment Requesting Confidential

Substantiation Treatment ofRequest forConfidential

Treatment Effect ofNotRequesting Confidential

L. THE PRIVACY ACT OF 1974 In General

The SEC's Investigative Process 651

Disclosures and Accounting

Certification ofCompliance Requirement

Restrictions AccesstoFinancial Records uponGovernment

Access Mechanisms of the RFPA Available to the Commission Customer Authorization

The Business 1990 Lawyer;Vol. 45, February

Interagency Transfer ofRecordsObtainedUndertheRFPA

Reimbursement ofFinancial Institutions

Civil Remedies oftheRFPA forViolations

The Business 1990 Lawyer;Vol. 45, February

Section21(h) oftheSecurities Actof1934 Exchange In General

The SEC's Investigative Process 659

Customer Procedure and Relief Challenge

N. THE ELECTRONIC COMMUNICATIONSPRIVACY ACT OF 1986

1990 The Business Lawyer;Vol. 45, February

telephonecompanies forthe costsof producingrecords(other than telephonetoll records). 18 U.S.G. 2706.

O. THE FAIR CREDIT REPORTING ACT

P. SECTION 6103OF THE INTERNAL REVENUE CODE

The Business 1990 Lawyer;Vol. 45, February

Q. TESTIMONY BY TAX RETURN PREPARERS

R. NOTICE OF THIRD PARTY SUBPOENAS TO "TARGETS" OF COMMISSION INVESTIGATIONS

S. FAILURE TO COMPLY WITH COMMISSION SUBPOENA-SUBPOENA ENFORCEMENT Introduction

The Business 1990 Lawyer;Vol. 45, February

NatureofProceedings Pleadingsand Summary

havebeenchallenged or subpoenas resisted baseduponalleged Investigations staff misconduct.

Misconduct and Negligence Staff

The Business 1990 Lawyer;Vol. 45, February

The Business 1990 Lawyer;Vol. 45, February

The SEG's Investigative Process 669

Discussions withOtherGovernmental Authorities

U. REFERRALS AND SETTLEMENTS OF ENFORCEMENT ACTIONS

V. PARALLEL PROCEEDINGS In General