Paul Atkins, chairman of the Securities and Exchange Commission, noted in a recent speech what he said are some long overdue changes to the agency's Wells notice process, including lengthening the time firms have to prepare a defense from two weeks to four.
"The Wells procedures have proven their value over the years and even have been adopted by other regulatory agencies, such as the CFTC, although sometimes perhaps more in form than in substance," Atkins said in an Oct. 7 speech. "Eighteen years ago, on this platform, I raised the need for a revisiting and refreshing of the Wells process. The Commission has not yet done so. It is incumbent on us to rectify that."
The SEC sends a Wells notice to firms when it's planning to bring an enforcement action; the notice is issued at the conclusion of an SEC investigation.
Potential respondents or defendants, Atkins stated, "are then provided an opportunity to make written or video submissions to the Commission setting forth their interests and position on the subject matter of the investigation."
These "Wells submissions" provide in most cases a last opportunity for potential respondents or defendants to persuade the staff that an enforcement action, either in whole or in part as the staff intends to recommend it, is not warranted. They also provide the Commission with a different, and potentially convincing, view of the facts and law concerning the matter.
Wells submissions "can and do change the trajectory of enforcement actions—not in every case, of course, but in enough cases to matter," Atkins continued. SEC staff "do not always get things right the first time, and the Wells process is a valuable procedural device that helps to guard against plain mistakes, extreme legal theories, misinformation, biases, and conflicts of interest."
The Wells process "should be viewed as an extension of due process and fundamental constitutional rights that play an integral role in protecting citizens from a powerful government agency that could become policeman, prosecutor, judge, jury, and executioner all in one," Atkins added.
'Realistic' Submission Periods
SEC staff, Atkins said, "must also be realistic about time periods for submissions, especially in long, complicated cases."
Going forward, SEC staff will provide the other side with at least four weeks to make Wells submissions.
"This is a welcome change from the practice in recent years, where the staff insisted on a two-week response time with limited opportunities for extensions," attorneys at Foley Hoag wrote in a recent blog post.
'Open Sharing of Facts'
Writing in Fortune on Oct. 24, attorneys John Carney and Nikita Mistry state that Atkins is "reversing years of one-sided dynamic," and promises in his speech "a more open sharing of facts gained in the investigation, affording potential corporate and individual defendants with meetings with senior SEC Staff to discuss any potential action, doubling the time allowed to submit a written submission, and encouraged the early use of white papers to resolve factual disputes — among other reforms."
Atkins is also "suggesting that potential defendants take advantage of the Wells opportunity," Nicolas Morgan, founder of the Investor Choice Advocates Network, said in an email to ThinkAdvisor. "Not all do — sometimes because they think it's a waste of time, that the staff will mischaracterize the Wells or downplay its strengths, or that particular defenses would best be preserved for court."
"Atkins is also suggesting that the staff might be (will be?) more open to what's informally known as a 'reverse Wells,' which is when the staff shows its cards and describes the best evidence and arguments supporting its recommended enforcement action," said Morgan, a former SEC enforcement attorney. "In my experience, a 'reverse Wells' can often bring a potential defendant to the settlement table or avoid misunderstandings or overlooked evidence that might change the staff's mind. Not all Enforcement staff have been willing to engage in this process in the past."
As the Foley Hoag attorneys state, the full Commission, when asked to approve settlements or filing charges, will also now "receive an expanded set of material, including Wells submissions made in response to charges the staff has decided not to pursue as well as earlier submitted white papers."
Atkins, Morgan continued, "made a very important point in his speech when he said, 'If we reward the staff only for bringing enforcement actions, then we have discouraged the staff from determining not to recommend an enforcement action.'"
Measuring success in the Enforcement Division "has historically meant allocating a 'stat' to the office and staff responsible for bringing a case once the Commission authorizes the staff recommendation," Morgan relayed.
This "stats" based system "was widely criticized" in the 2010 report of the SEC's Office of Inspector General in Paul Allen Stanford's Ponzi scheme, Morgan continued.
Atkins's focus in the speech "on what is being measured is critical," Morgan added.
"No incentive currently exists that would reward staff for closing investigations that should be closed," Morgan said. "Amid a 15% reduction in Enforcement Division headcount — Atkins's approach will enable more effective allocation of the agency's limited resources toward pursuing cases involving genuine securities violations and investor harm, rather than expending effort on weak or unfounded matters that drain capacity, increase unnecessary litigation, and undermine due process."
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