A year ago, SEC Enforcement czar Robert Khuzami revealed several new “tools” available to Enforcement staff as part of a Commission initiative aimed at encouraging cooperation with ongoing investigations and enforcement actions. Among Enforcement “tools,” you will now find Deferred Prosecution Agreements (“DPAs”) and Non-Prosecution Agreements (“NPAs”), pursuant to which the Commission might suspend or forego enforcement proceedings. And Enforcement staff is making use of their new tools: As we reported earlier this month, in December 2010 the SEC entered into its first NPA since Khuzami’s announcement.
Now that the Commission is officially in the DPA/NPA business, what new features can we expect to see on the enforcement landscape? One strong possibility is the use of independent corporate monitors in an SEC investigatory and/or enforcement context.
Khuzami is a former federal prosecutor so he is well aware of the Justice Department’s established practice of imposing corporate monitorships in connection with DPAs and NPAs. Since the Arthur Andersen scandal, the DOJ has made increasingly frequent use of independent monitors in its deferred and non-prosecution arrangements. Roughly 30% of the DPAs and NPAs entered into by the DOJ require the creation of an independent corporate monitor who is responsible for identifying existing compliance issues, creating or beefing up compliance and ethics programs, and reforming corporate culture to help avoid future compliance issues.
While the SEC’s proposed use of DPAs and NPAs came about as part of a program designed to foster cooperation, there are clues in the SEC’s December 2010 NPA that would seem to suggest that Enforcement staff is pursuing the DOJ model. In its press release announcing the NPA, the Commission listed the corporation’s substantial remedial actions among the reasons for non-prosecution. It looks, therefore, like the Commission is heading down the road to exchanging remedial compliance measures for non-prosecution.
And independent corporate monitors may be the next logical step. Corporate monitorships would serve the same function in enforcement matters that they do in a criminal context: facilitating and encouraging corporate compliance with federal securities laws.
Companies should take note that corporate monitors may be on the horizon in the SEC’s new DPA/NPA era. Corporate monitorships have become “slightly controversial in recent years,” according to a Main Justice report. This is principally because they can be costly, lengthy affairs in which a company cedes control over internal compliance measures to a third party. As a result, some federal judges, including Judge Ellen S. Huvelle, have vigorously questioned the expediency of imposing corporate monitorships.
Still, according to Charles Duross, chief lieutenant of the DOJ’s FCPA team, “Corporate monitors are not going away.” We will have to wait and see whether the SEC chooses to pursue its compliance objectives by swapping DPAs and NPAs for corporate monitorships.