A public statement jointly issued by all four current members of the Commission indicated that an undercover criminal securities fraud investigative unit proposed by SEC staff had never been activated despite the SEC’s having received assurances from the DOJ that the program’s records could be exempted from the reporting requirements of the Privacy Act. The Fraud Surveillance Task Force’s stated purpose was to put the SEC in a better position to develop evidence of criminal securities violations that it could then refer to DOJ or other criminal law enforcement agencies for possible criminal prosecution. According to the Commission’s statement, the task force was proposed in 2011 and the DOJ issued the previously unpublished opinion from the DOJ’s Office of Legal Counsel on July 3, 2012.
Task force never implemented. The Commission’s statement recited the SEC’s general enforcement authorities which focus on the bringing of civil enforcement cases, although the SEC can refer matters to DOJ or other criminal law enforcement agencies for further action. The proposed undercover unit, in the Commissioners’ words, could have allowed the "Commission’s staff members posing as investors [to] communicate with suspect individuals without disclosing their affiliation with the Commission."
The Commissioners said that now that the OLC memorandum suggesting that the task force was eligible for a Privacy Act exemption was public, they wanted to "clarify" that the SEC never "implemented" the task force. Said the Commissioners: "If the Commission were to put into place a program such as the one contemplated by OLC’s 2012 opinion, any such program would have to be approved in advance by the Commission pursuant to an appropriate process and with appropriate safeguards."
Undercover operations. The OLC memorandum explained that the question posed by the SEC to DOJ was whether the SEC could exempt records of the proposed task force from the reporting requirements of the Privacy Act. The Privacy Act generally requires a federal agency that collects information from the public to explain its authorities for the information collection, the purposes of the information collection, and the impact on an individual who refuses to comply with the information collection. The OLC memorandum also noted that the DOJ had consulted with the Office of Management and Budget (issues guidelines and regulations for Privacy Act matters), and the OMB did not object to an earlier informal recommendation by the OLC that the SEC could exempt the task force from the Privacy Act.
The OLC memorandum also cited passages from an SEC staff request letter highlighting key features of the task force. The OLC memorandum stated:
- "SEC staff contemplates that a significant part of the FST’s investigative efforts would involve contacting individuals suspected of conducting criminal securities fraud schemes through e-mail, mail, or telephone. FST investigators would pose as potential investors in the schemes and seek information from the promoters in an attempt to develop evidence to support criminal prosecutions" (internal citations omitted).
- "A cadre of SEC staff members would be designated to serve on the FST and would be specially trained and separately supervised in connection with their FST activities. The FST would undertake an investigation only if its staff had a bona fide basis to believe that the targets were engaged in conduct amounting to a criminal violation of one of the securities laws" (internal citations omitted).
With respect to the Privacy Act, the OLC memorandum mulled language regarding whether the task force was a "component" of an agency whose "principal function" is doing criminal enforcement work. The OLC concluded that "component" is akin to "a constituent part," which the task force would be relative to the SEC. The OLC also opined that the work of the task force would be akin to that of "police" or "prosecutors." As a result, the OLC said the task force would qualify for the records exemption under the Privacy Act.