Cooperating with NYSE Member Reviews

The NYSE's Information Memo

On Sept. 14, 2005, the NYSE issued a memorandum to all Members, Member Organizations and Chief Operating Officers, the subject line of which read simply “Cooperation.” The purpose of the Memorandum was to provide guidance to the stock exchange community on the obligation to cooperate with reviews, examinations and investigations conducted by the Exchange. The Memorandum was divided into two sections, one called “Required Cooperation” and the other entitled “Extraordinary Cooperation.”

'Required Cooperation'

In this brief section, the NYSE Memorandum made clear that “the Exchange expects those who belong to the Exchange community to provide complete information promptly and in a straightforward manner.” At a minimum, “disclosure of reportable matters must be full, accurate, comprehensible and timely” and must not “interfere with the Exchange's ability to efficiently make informed decisions as to whether review of a reported matter is appropriate.” Moreover, where the Exchange undertakes an investigation or proceeding in response to allegations of wrongdoing, “active participation without evasion or delay” is required of Exchange participants. This means “responding to Exchange requests … with responses that are intelligible, accurate, complete and timely, and providing interviews and on-the-record testimony that is forthright and honest.” Where companies or individuals fall short of these minimum requirements, the NYSE “stands ready to protect the market and the investing public by bringing charges for these violations and seeking the appropriate sanctions.”

'Extraordinary Cooperation'

The bulk of the Information Memorandum is devoted to a discussion of what the NYSE terms “Extraordinary Cooperation.” The Exchange made clear that “only where a respondent can demonstrate a record of disclosure and cooperation that is proactive and exceptional may these serve as mitigating factors.” Thus, under the NYSE's framework, “required cooperation” is mandatory, but will not mitigate regulatory sanctions. Instead, only cooperation deemed “extraordinary” can be used to avoid or lessen Exchange sanctions for Member or Member Firm misbehavior.

The Exchange cautioned that “[b]efore suggesting that its cooperation has been exceptional, a firm's reporting must be more than adequate: it should be detailed, complete and candid.” Moreover, companies and their counsel “put themselves at great risk, not only in the context of a single investigation but in the context of an ongoing regulatory relationship with the Exchange, when they portray themselves as having undertaken exceptional cooperation, only to be discovered as having withheld important facts or information.”

While providing that “what constitutes an 'extraordinary' case is not susceptible of generalization,” the Memorandum nevertheless lays out “situations and factors” that are “often considered by [the Exchange] in assessing a firm or individual's cooperation”: 1) prompt, full disclosure coupled with thorough internal review; 2) candor with the Exchange; 3) waiver of the attorney-client privilege; 4) breadth, depth and timeliness of remedial action; 5) responses to investigative requests; 6) aiding the jurisdiction of the Exchange; 7) culture of compliance; and 8) partnering with the Exchange to uncover wrongdoing. With respect to the requirement for prompt and full disclosure, the Memorandum encourages firms to follow “early disclosure with vigorous and thorough internal reviews,” and to “share the facts discovered with the Exchange.” On the related topic of waiver of attorney-client privilege, the NYSE explains that such waiver “can often expedite an investigation and may demonstrate a level of commitment to the Exchange's investigation … sufficient to advance a claim of exceptional cooperation.” The Memorandum goes on to say that “supplying employee interview notes and reports of firm investigations (together with relevant supporting documentation) can be a potent means of demonstrating a firm's commitment to cooperation.”

However, the NYSE makes clear that waiver of attorney-client privilege is not mandatory. The Memorandum provides that the “essence of cooperation is that facts relevant to an investigation must be made available to the Exchange's investigators, and as long as those facts are candidly and completely presented, there will be no adverse effect arising from the non-waiver of a privilege.” Thus, where a decision is made not to waive the attorney-client privilege, “firms and counsel must find ways to convey relevant facts without compromising the privilege sought to be maintained.”

The Information Memorandum notes that the NYSE lacks authority to issue or enforce subpoenas in its investigations, and provides that “it is notable when an individual or firm provides substantial assistance to an investigation by obtaining and providing evidence and/or testimony from persons beyond the jurisdictional reach of the Exchange.” This notion that parties should actively aid the NYSE's ability to gather evidence is elaborated in a section titled “Partnering with the Exchange to Uncover Wrongdoing.”

Partnering

The “Partnering” section begins on an uncontroversial note. “Where an individual or firm brings to the Exchange's attention a pattern or practice that the Exchange had been unaware of, or is the first to come forward to cooperate in an investigation that is underway, that individual or firm will … receive special consideration (including, where appropriate, no Exchange enforcement action).” However, the section goes on to set conditions for such consideration, including “partnering with the Exchange to ferret out related industry wrongdoing and providing substantial assistance in furtherance of the resulting investigation, as well as fully cooperating in all relevant respects discussed above.”

What exactly the Exchange means by “partnering” to “ferret out related industry wrongdoing” is unclear. The phrase suggests that Members and Member Firms may be expected to undertake investigations of other Members or Member Firms on behalf of the Exchange. Such a requirement would go well beyond established notions of cooperation and disclosure relating to a Member's own misbehavior. Indeed, the NYSE's language brings to mind ' 5K1.1 of the United States Sentencing Guidelines, which provides for reduced sentences for those who give substantial assistance in the investigation or prosecution of another person who has committed an offense. Individuals seeking the benefits of ' 5K1.1 can be required to engage in covert or undercover activities for the government. Does the NYSE want its Members or Member Firms to undertake undercover action in support of NYSE reviews? That is hard to believe, but the vague language makes it difficult to know exactly what the Exchange will expect from the community it regulates.

Conclusion

The NYSE Information Memor-andum is novel in establishing two levels of cooperation and in providing that only those Members or Member Firms demonstrating “extraordinary cooperation” will be able to avoid or mitigate regulatory sanctions. Particularly noteworthy is the suggestion in the Memorandum that regulated persons and entities should “partner” with the Exchange to “ferret out” wrongdoing by others. It remains to be seen how far the Exchange will go in requiring members to investigate each other.

The framework that prosecutors and regulators use to assess a corporation's response to corporate wrongdoing changed forever on June 16, 1999. That day, then-Deputy Attorney General Eric Holder announced DOJ's new principles for the prosecution of corporations. The so-called Holder Memorandum emphasized cooperation with prosecutors and the requirement that corporations make full and voluntary disclosure of wrongdoing if they hoped to avoid or mitigate prosecution.

The twin themes of cooperation and disclosure have become the standards by which federal and state prosecutors and regulators now judge a corporation's response to instances of corporate misbehavior. Following the Holder Memor-andum, the SEC, in October 2001, issued the so-called “Seabord Report,” which established require-ments for “self-policing, self-reporting, remediation and cooperation” for publicly traded corporations hoping to avoid or minimize regulatory sanctions. In 2003, following the formation of the federal Corporate Fraud Task Force, then-Deputy Attorney General Larry Thompson revised the Holder Me-morandum to increase “emphasis on and scrutiny of the authenticity of a corporation's cooperation.” The Thompson Memorandum openly targeted companies that, “while purporting to cooperate,” engage in “conduct that impedes the investigation (whether or not rising to the level of criminal obstruction).”

This September, the New York Stock Exchange (NYSE) detailed in an Information Memorandum its own framework for assessing the response of NYSE Members and Member Firms to allegations of wrongdoing. The Information Memorandum appears to raise the bar for cooperation and disclosure beyond levels previously required by DOJ and the SEC. Indeed, the memorandum suggests that those seeking leniency should “partner” with the NYSE to “ferret out related industry wrongdoing.”

The NYSE's Information Memo

On Sept. 14, 2005, the NYSE issued a memorandum to all Members, Member Organizations and Chief Operating Officers, the subject line of which read simply “Cooperation.” The purpose of the Memorandum was to provide guidance to the stock exchange community on the obligation to cooperate with reviews, examinations and investigations conducted by the Exchange. The Memorandum was divided into two sections, one called “Required Cooperation” and the other entitled “Extraordinary Cooperation.”

'Required Cooperation'

In this brief section, the NYSE Memorandum made clear that “the Exchange expects those who belong to the Exchange community to provide complete information promptly and in a straightforward manner.” At a minimum, “disclosure of reportable matters must be full, accurate, comprehensible and timely” and must not “interfere with the Exchange's ability to efficiently make informed decisions as to whether review of a reported matter is appropriate.” Moreover, where the Exchange undertakes an investigation or proceeding in response to allegations of wrongdoing, “active participation without evasion or delay” is required of Exchange participants. This means “responding to Exchange requests … with responses that are intelligible, accurate, complete and timely, and providing interviews and on-the-record testimony that is forthright and honest.” Where companies or individuals fall short of these minimum requirements, the NYSE “stands ready to protect the market and the investing public by bringing charges for these violations and seeking the appropriate sanctions.”

'Extraordinary Cooperation'

The bulk of the Information Memorandum is devoted to a discussion of what the NYSE terms “Extraordinary Cooperation.” The Exchange made clear that “only where a respondent can demonstrate a record of disclosure and cooperation that is proactive and exceptional may these serve as mitigating factors.” Thus, under the NYSE's framework, “required cooperation” is mandatory, but will not mitigate regulatory sanctions. Instead, only cooperation deemed “extraordinary” can be used to avoid or lessen Exchange sanctions for Member or Member Firm misbehavior.

The Exchange cautioned that “[b]efore suggesting that its cooperation has been exceptional, a firm's reporting must be more than adequate: it should be detailed, complete and candid.” Moreover, companies and their counsel “put themselves at great risk, not only in the context of a single investigation but in the context of an ongoing regulatory relationship with the Exchange, when they portray themselves as having undertaken exceptional cooperation, only to be discovered as having withheld important facts or information.”

While providing that “what constitutes an 'extraordinary' case is not susceptible of generalization,” the Memorandum nevertheless lays out “situations and factors” that are “often considered by [the Exchange] in assessing a firm or individual's cooperation”: 1) prompt, full disclosure coupled with thorough internal review; 2) candor with the Exchange; 3) waiver of the attorney-client privilege; 4) breadth, depth and timeliness of remedial action; 5) responses to investigative requests; 6) aiding the jurisdiction of the Exchange; 7) culture of compliance; and 8) partnering with the Exchange to uncover wrongdoing. With respect to the requirement for prompt and full disclosure, the Memorandum encourages firms to follow “early disclosure with vigorous and thorough internal reviews,” and to “share the facts discovered with the Exchange.” On the related topic of waiver of attorney-client privilege, the NYSE explains that such waiver “can often expedite an investigation and may demonstrate a level of commitment to the Exchange's investigation … sufficient to advance a claim of exceptional cooperation.” The Memorandum goes on to say that “supplying employee interview notes and reports of firm investigations (together with relevant supporting documentation) can be a potent means of demonstrating a firm's commitment to cooperation.”

However, the NYSE makes clear that waiver of attorney-client privilege is not mandatory. The Memorandum provides that the “essence of cooperation is that facts relevant to an investigation must be made available to the Exchange's investigators, and as long as those facts are candidly and completely presented, there will be no adverse effect arising from the non-waiver of a privilege.” Thus, where a decision is made not to waive the attorney-client privilege, “firms and counsel must find ways to convey relevant facts without compromising the privilege sought to be maintained.”

The Information Memorandum notes that the NYSE lacks authority to issue or enforce subpoenas in its investigations, and provides that “it is notable when an individual or firm provides substantial assistance to an investigation by obtaining and providing evidence and/or testimony from persons beyond the jurisdictional reach of the Exchange.” This notion that parties should actively aid the NYSE's ability to gather evidence is elaborated in a section titled “Partnering with the Exchange to Uncover Wrongdoing.”

Partnering

The “Partnering” section begins on an uncontroversial note. “Where an individual or firm brings to the Exchange's attention a pattern or practice that the Exchange had been unaware of, or is the first to come forward to cooperate in an investigation that is underway, that individual or firm will … receive special consideration (including, where appropriate, no Exchange enforcement action).” However, the section goes on to set conditions for such consideration, including “partnering with the Exchange to ferret out related industry wrongdoing and providing substantial assistance in furtherance of the resulting investigation, as well as fully cooperating in all relevant respects discussed above.”

What exactly the Exchange means by “partnering” to “ferret out related industry wrongdoing” is unclear. The phrase suggests that Members and Member Firms may be expected to undertake investigations of other Members or Member Firms on behalf of the Exchange. Such a requirement would go well beyond established notions of cooperation and disclosure relating to a Member's own misbehavior. Indeed, the NYSE's language brings to mind ' 5K1.1 of the United States Sentencing Guidelines, which provides for reduced sentences for those who give substantial assistance in the investigation or prosecution of another person who has committed an offense. Individuals seeking the benefits of ' 5K1.1 can be required to engage in covert or undercover activities for the government. Does the NYSE want its Members or Member Firms to undertake undercover action in support of NYSE reviews? That is hard to believe, but the vague language makes it difficult to know exactly what the Exchange will expect from the community it regulates.

Conclusion

The NYSE Information Memor-andum is novel in establishing two levels of cooperation and in providing that only those Members or Member Firms demonstrating “extraordinary cooperation” will be able to avoid or mitigate regulatory sanctions. Particularly noteworthy is the suggestion in the Memorandum that regulated persons and entities should “partner” with the Exchange to “ferret out” wrongdoing by others. It remains to be seen how far the Exchange will go in requiring members to investigate each other.