Deciphering SEC Enforcement and Its Impact on e-Discovery

In October 2008, the Securities and Exchange Commission (SEC) for the first time made public its Enforcement Manual, the agency's internal reference guide for Enforcement Division staff in the investigation of potential violations of the federal securities laws. Law firms and corporations involved in matters before the SEC will find it a valuable resource to aid their understanding of SEC operations.

The 129-page Enforcement Manual addresses many topics, chief among them the management of Electronically Stored Information (ESI). It is critical that financial institutions and corporations facing or anticipating SEC investigation become familiar with the guidelines related to the preservation and production of electronic evidence, so they may respond accurately and in compliance with mandated timeframes. Readiness for an investigation under the new guidelines may call for both changes to business policies concerning collection, review and production of ESI, and adoption of new e-discovery tools to properly identify and manage relevant documents.

In preparation for these changes, the SEC upgraded its ability to retain, review and expertly search data that is produced. Although this is similar to the December 2006 amendments to Federal Rules of Procedure, the impact is more clearly defined. The focus is now shifting to increasing the level of preparedness of the responding party in terms of its ability to:

• produce electronically stored information; and
• negotiate scope and form of production at the inception of a subpoena, voluntary request, and a complaint.

By far, the most revealing aspect of the updated manual is the consistent theme of seeking to obtain an inadvertent waiver of privilege, or sanction, for certifying to a completeness of production. These changes translate into one key finding: the risk in litigation is clearly focused on the very earliest stages of discovery. This means that corporations and legal teams need to be very, very prepared. Those caught off-guard or naively unaware, will risk stumbling. Now is the time to be alert relative to e-discovery preparation and practices because the SEC is clearly serious about sanctions, or inadvertent waivers.

SEC e-Discovery Preparedness

The SEC states that it is looking to eliminate paper productions to increase both cost effectiveness and efficiencies in terms of searching, tagging, and reviewing documents. In addition to requiring that paper documents be produced in a scanned collection, the SEC specifically requires that the responding party maintain original paper documents. Organizations need to dovetail their document management system with clear policies for litigation preservation and quality control, whether the origin of the document is electronic or hard copy.

Further, the SEC manual now requires a respondent to determine more details including: the size of the production; disclosure of the software used to store documents; and the medium used for production. Organizations that have undertaken comprehensive data mapping strategies will be well-positioned to respond promptly and comprehensively to these requests.

The new manual delineates three categories of electronic production: 1) scanned collections; 2) e-mail; and 3) native files. The SEC requires that all productions be organized by the custodian, and further clarifies that the production of databases cannot be accepted without prior approval from the SEC's information technology (IT) staff.

Concurrent with the document production to the SEC, the responding party is required to deliver a summary of images, including the number of records, e-mails and attachments. This enables the SEC to confirm that a complete production has been loaded into their review platform. An experienced e-discovery solution provider can assist with this type of summary.

Important electronic documentation details and considerations:

• Format of production: Acceptable electronic media are CD, DVD or hard drive. Take note that the SEC prefers the smallest number of media be used. However, it will provide the hard drive if the collection merits submission on hard drive.
• Responding party obligation to confirm the completeness of production: This is subject to penalty of perjury, and the certification is required for both voluntary production and productions pursuant to subpoena. Of particular note is the use of preservation subpoenas at the inception of an investigation. These can be issued if a reasonable good-faith effort exists that documentation is at risk of destruction. However, this could become exceedingly expensive if the data the SEC is seeking to preserve is derived from a database that is regularly overwritten in its ordinary course of operation.
• SEC internal organization of electronic files: The updated enforcement manual states that the SEC should “strive to maintain and retain documents in an orderly manner.” However, this falls short of the standard chain of custody procedure that is a best business practice for responding party's production.

Best e-Discovery Practices for Managing SEC Enforcement Cases

With the growing SEC enforcement emphasis on electronic submissions, it is clear that to be optimally prepared, many organizations will need to review and possibly change some of their document management policies and systems. Although a highly experienced e-discovery service provider should be consulted to review and advise strategies for a company's unique situation, there are a number of best practices that will help organizations take steps toward improving preparedness.

Voluntary Production of Documents

The SEC routinely relies upon voluntary requests for production. However, the problem with voluntary requests is that the respondent will be subject to the same certification standards as for document productions pursuant to a subpoena, including preparation and submission of a comprehensive privilege log.

Best Practice: To limit the scope of the collection, it is recommended that voluntary production respondents apply the same rigorous standards in negotiating up front as they would in response to a subpoena. Diligent review prior to production is essential. Be circumspect on relevance of identified liability issues, and prepare a comprehensive privilege log that will satisfy all the elements stated in the SEC enforcement manual.

Form of Production

The updated standard states that “the subpoenaed entity is required to produce all subpoenaed items in possession, custody or control.”

Best Practice: It is recommended that upon receipt of subpoena, clarification is sought regarding which third-party providers/vendors the responding will be required to search and produce documents from. Note: it is incumbent upon the responding party to attain an affidavit from the third-party provider/vendor producing documents subject to the subpoena that replicates the certification that is required by the SEC for the directly responding party.

Certification of Completeness

For all forms of production, the SEC requires a certification that the responding party has met its obligation of a thorough search and comprehensive production. Concurrent with the certification, the SEC is seeking immediate submission of the responding party's privilege log.

Best Practice: It is recommended that the respondent take steps to negotiate the form of the certification with the SEC. This will help to ensure that the organization represents that it has complied in good faith and provided for continuing production, as additional relevant documents are located. The respondent should negotiate the elements of the certificate of production ' prior to commencing review ' upon receipt of the subpoena or voluntary production request.

Financial Data

The SEC enforcement manual advises corporations to focus on electronic documents as a “rich source of metadata that is easier to navigate.” However, acknowledging that many companies and financial institutions are reluctant to permit the wholesale production of proprietary programs, the manual does permit Web-based production or production on a dedicated hard drive.

Best Practice: It is recommended that review be conducted using an online review application. In fact, providing the SEC access to your online review tool can be preferable to making the production directly. Most e-discovery service providers can easily grant the SEC special access rights to enable easy and specialized navigation. For example, access to only the production set can be set up, while maintaining the ability to quarantine the review of production. This preserves the right to produce the documents directly to the SEC until such time as the form of production is agreed upon and relevancy issues are resolved.

Collaboration: The Key to Strategic Preparation

The SEC enforcement manual changes provide a new window of transparency. It clearly reveals SEC expectations and how enforcement issues will be handled. It also provides organizations with a roadmap to ensure advanced preparedness, for any potential involvement in an enforcement case. However, it is also clear that corporations and their legal advisors shouldn't go it alone. With the increased SEC emphasis on electronic documentation, the best-prepared organizations will be those that strategically and proactively collaborate with their IT teams and a knowledgeable e-discovery solution provider.

Opportunities to collaborate are revealed throughout the SEC enforcement manual. Therefore, the most important strategic advice is this: Be proactively prepared by establishing sound e-discovery and document management practices based on the advice of your best legal counsel. This will help to protect a corporation's best interests over the long term.

Virginia P. Henschel is vice president, E-Discovery Affairs for Applied Discovery, Inc. She provides thought leadership and industry knowledge to clients and the industry through position papers, speaking engagements and other channels. Prior to joining Applied Discovery, Ms. Henschel was E-Discovery Counsel at a Fortune 100 corporation, where she managed all facets of ESI for litigation, including designing and managing defensible data collection, review and production for large, complex legal matters. She can be reached at [email protected].

In October 2008, the Securities and Exchange Commission (SEC) for the first time made public its Enforcement Manual, the agency's internal reference guide for Enforcement Division staff in the investigation of potential violations of the federal securities laws. Law firms and corporations involved in matters before the SEC will find it a valuable resource to aid their understanding of SEC operations.

The 129-page Enforcement Manual addresses many topics, chief among them the management of Electronically Stored Information (ESI). It is critical that financial institutions and corporations facing or anticipating SEC investigation become familiar with the guidelines related to the preservation and production of electronic evidence, so they may respond accurately and in compliance with mandated timeframes. Readiness for an investigation under the new guidelines may call for both changes to business policies concerning collection, review and production of ESI, and adoption of new e-discovery tools to properly identify and manage relevant documents.

In preparation for these changes, the SEC upgraded its ability to retain, review and expertly search data that is produced. Although this is similar to the December 2006 amendments to Federal Rules of Procedure, the impact is more clearly defined. The focus is now shifting to increasing the level of preparedness of the responding party in terms of its ability to:

• produce electronically stored information; and
• negotiate scope and form of production at the inception of a subpoena, voluntary request, and a complaint.

By far, the most revealing aspect of the updated manual is the consistent theme of seeking to obtain an inadvertent waiver of privilege, or sanction, for certifying to a completeness of production. These changes translate into one key finding: the risk in litigation is clearly focused on the very earliest stages of discovery. This means that corporations and legal teams need to be very, very prepared. Those caught off-guard or naively unaware, will risk stumbling. Now is the time to be alert relative to e-discovery preparation and practices because the SEC is clearly serious about sanctions, or inadvertent waivers.

SEC e-Discovery Preparedness

The SEC states that it is looking to eliminate paper productions to increase both cost effectiveness and efficiencies in terms of searching, tagging, and reviewing documents. In addition to requiring that paper documents be produced in a scanned collection, the SEC specifically requires that the responding party maintain original paper documents. Organizations need to dovetail their document management system with clear policies for litigation preservation and quality control, whether the origin of the document is electronic or hard copy.

Further, the SEC manual now requires a respondent to determine more details including: the size of the production; disclosure of the software used to store documents; and the medium used for production. Organizations that have undertaken comprehensive data mapping strategies will be well-positioned to respond promptly and comprehensively to these requests.

The new manual delineates three categories of electronic production: 1) scanned collections; 2) e-mail; and 3) native files. The SEC requires that all productions be organized by the custodian, and further clarifies that the production of databases cannot be accepted without prior approval from the SEC's information technology (IT) staff.

Concurrent with the document production to the SEC, the responding party is required to deliver a summary of images, including the number of records, e-mails and attachments. This enables the SEC to confirm that a complete production has been loaded into their review platform. An experienced e-discovery solution provider can assist with this type of summary.

Important electronic documentation details and considerations:

• Format of production: Acceptable electronic media are CD, DVD or hard drive. Take note that the SEC prefers the smallest number of media be used. However, it will provide the hard drive if the collection merits submission on hard drive.
• Responding party obligation to confirm the completeness of production: This is subject to penalty of perjury, and the certification is required for both voluntary production and productions pursuant to subpoena. Of particular note is the use of preservation subpoenas at the inception of an investigation. These can be issued if a reasonable good-faith effort exists that documentation is at risk of destruction. However, this could become exceedingly expensive if the data the SEC is seeking to preserve is derived from a database that is regularly overwritten in its ordinary course of operation.
• SEC internal organization of electronic files: The updated enforcement manual states that the SEC should “strive to maintain and retain documents in an orderly manner.” However, this falls short of the standard chain of custody procedure that is a best business practice for responding party's production.

Best e-Discovery Practices for Managing SEC Enforcement Cases

With the growing SEC enforcement emphasis on electronic submissions, it is clear that to be optimally prepared, many organizations will need to review and possibly change some of their document management policies and systems. Although a highly experienced e-discovery service provider should be consulted to review and advise strategies for a company's unique situation, there are a number of best practices that will help organizations take steps toward improving preparedness.

Voluntary Production of Documents

The SEC routinely relies upon voluntary requests for production. However, the problem with voluntary requests is that the respondent will be subject to the same certification standards as for document productions pursuant to a subpoena, including preparation and submission of a comprehensive privilege log.

Best Practice: To limit the scope of the collection, it is recommended that voluntary production respondents apply the same rigorous standards in negotiating up front as they would in response to a subpoena. Diligent review prior to production is essential. Be circumspect on relevance of identified liability issues, and prepare a comprehensive privilege log that will satisfy all the elements stated in the SEC enforcement manual.

Form of Production

The updated standard states that “the subpoenaed entity is required to produce all subpoenaed items in possession, custody or control.”

Best Practice: It is recommended that upon receipt of subpoena, clarification is sought regarding which third-party providers/vendors the responding will be required to search and produce documents from. Note: it is incumbent upon the responding party to attain an affidavit from the third-party provider/vendor producing documents subject to the subpoena that replicates the certification that is required by the SEC for the directly responding party.

Certification of Completeness

For all forms of production, the SEC requires a certification that the responding party has met its obligation of a thorough search and comprehensive production. Concurrent with the certification, the SEC is seeking immediate submission of the responding party's privilege log.

Best Practice: It is recommended that the respondent take steps to negotiate the form of the certification with the SEC. This will help to ensure that the organization represents that it has complied in good faith and provided for continuing production, as additional relevant documents are located. The respondent should negotiate the elements of the certificate of production ' prior to commencing review ' upon receipt of the subpoena or voluntary production request.

Financial Data

The SEC enforcement manual advises corporations to focus on electronic documents as a “rich source of metadata that is easier to navigate.” However, acknowledging that many companies and financial institutions are reluctant to permit the wholesale production of proprietary programs, the manual does permit Web-based production or production on a dedicated hard drive.

Best Practice: It is recommended that review be conducted using an online review application. In fact, providing the SEC access to your online review tool can be preferable to making the production directly. Most e-discovery service providers can easily grant the SEC special access rights to enable easy and specialized navigation. For example, access to only the production set can be set up, while maintaining the ability to quarantine the review of production. This preserves the right to produce the documents directly to the SEC until such time as the form of production is agreed upon and relevancy issues are resolved.

Collaboration: The Key to Strategic Preparation

The SEC enforcement manual changes provide a new window of transparency. It clearly reveals SEC expectations and how enforcement issues will be handled. It also provides organizations with a roadmap to ensure advanced preparedness, for any potential involvement in an enforcement case. However, it is also clear that corporations and their legal advisors shouldn't go it alone. With the increased SEC emphasis on electronic documentation, the best-prepared organizations will be those that strategically and proactively collaborate with their IT teams and a knowledgeable e-discovery solution provider.

Opportunities to collaborate are revealed throughout the SEC enforcement manual. Therefore, the most important strategic advice is this: Be proactively prepared by establishing sound e-discovery and document management practices based on the advice of your best legal counsel. This will help to protect a corporation's best interests over the long term.

Virginia P. Henschel is vice president, E-Discovery Affairs for Applied Discovery, Inc. She provides thought leadership and industry knowledge to clients and the industry through position papers, speaking engagements and other channels. Prior to joining Applied Discovery, Ms. Henschel was E-Discovery Counsel at a Fortune 100 corporation, where she managed all facets of ESI for litigation, including designing and managing defensible data collection, review and production for large, complex legal matters. She can be reached at [email protected].