Holland & Knight is excited to announce the return of its SECond Opinions Blog Summer Series featuring posts written and researched by the associates in our Securities Enforcement Defense Team. The first blog in this series comes from Dallas Associate Abigail Schultz, who focuses her practice on a variety of litigation and dispute resolution matters, including internal and regulatory investigations and enforcement actions. Abigail assists companies on a wide range of legal and compliance issues involving financial and lending institutions, employment matters, developing technology and more.
In recent remarks at the Securities Enforcement Forum West 2024, U.S. Securities and Exchange Commission (SEC) Director of the Division of Enforcement Gurbir Grewal extolled the benefits of and expounded on the elements of cooperation between the SEC and those it investigates. Director Grewal opened by reminding parties of the value in cooperation: It affects the Commission's determinations on charges, remedies and undertakings; allows a respondent to demonstrate its good behavior through an SEC finding that it cooperated; and moves the investigation along toward resolution faster and more efficiently. And in case the benefits of cooperation aren't convincing, Director Grewal warned against playing the odds opposite the SEC. With the SEC deploying data analytics, "risk-based initiatives" and its very active whistleblower program, he suggested that "it's really no longer a question of if we'll find out about a violation, but often when."
So how does a company (or individual, though a person's own cooperation is subject to slightly different factors) actually cooperate? Spoiler alert: The longstanding and storied Seaboard Report, published in 2001, still lays the roadmap for parties trying to cooperate with the SEC before and during an investigation. In his remarks, Director Grewal reiterated the Report's four principles – self-policing, self-reporting, remediation and cooperation – and added a fifth of his own: collaboration. But, as this post considers, perhaps of equal importance as how to cooperate is the value of cooperation when determinations about whether and to what extent a party is deemed to have cooperated, and how to credit that cooperation, are left to the sole discretion of the SEC staff.
Self-Policing
Director Grewal observed that the first principle, self-policing, begins "well before the SEC gets involved." It consists of good organizational hygiene and a culture of compliance from the top down, including keeping up with regulatory and technological advances – like artificial intelligence (AI) – to ensure a company remains compliant. Here, Director Grewal cited criteria from the Seaboard Report that provided more granular guidance such as whether a company is pressuring employees toward certain results, what tone leadership sets, whether a company has compliance procedures in place and why those procedures failed to prevent or uncover the violation. This advice reinforces remarks Director Grewal gave on Oct. 24, 2023, to the New York City Bar Association, in which he advocated for "proactive compliance," which, according to Director Grewal, requires education, engagement and execution.
Self-Reporting
Thorough self-policing allows for prompt self-reporting – the second principle Director Grewal examined. He advocated for reporting so prompt a company might merely suspect a violation, citing three instances of companies self-reporting before completing internal investigations. In each of these three cases, the SEC imposed no penalty. Recent SEC guidance underscoring the benefits cooperation can bring also emphasized the speed and openness of instances of self-reporting. Each entity cited received reduced penalties or none at all. Self-reporting communicates more than a potential violation to the SEC, Director Grewal explained. It also signals that the reporting entity effectively self-polices and maintains a "culture of proactive compliance."
Remediation
Next, Director Grewal counseled that true cooperation involves parties putting a culture of compliance into action with remediation. Director Grewal provided some guidance for remedial measures: They should be proactive rather than responsive to an SEC order, timely to prevent repeat violations and sufficiently serious to both address and deter misconduct. The prime example of remediation that Director Grewal lauded in his speech was a company that removed its CEO, revised valuations, restated financials, repaid investors, hired new management, conducted employee training, clawed back executive compensation, revised policies and procedures, and redesigned internal governance systems.
Cooperation
The final two principles concern parties' dealings with the SEC directly. The first, cooperation, is somewhat intuitive. In describing "the type of cooperation that earns credit," Director Grewal underscored the SEC's consistent drumbeat that it requires "more than simply complying with subpoenas without undue delay or gamesmanship." It requires a level of transparency and proactivity – orienting the SEC's investigation, not just staying out of the way. Director Grewal suggested parties can help the SEC investigate efficiently by helping narrow its document requests and contextualizing hot documents, translating materials into English when needed, identifying key witnesses and facilitating interviews, and providing summaries and findings of any internal investigations. He cited recent cases in which parties cooperated by voluntarily producing relevant documents and materials, presenting internal findings on the nature and scope of the violation, summarizing interviews with employees in another country and providing information from various employees and an outside consulting firm.
Collaboration
Finally, Director Grewal's new fifth principle, collaboration, encapsulates the Seaboard principles, painting the big-picture element of open communication as one that facilitates the longstanding four. Director Grewal stressed that "the best way to collaborate ... is by communicating" and noted that open communication also allows parties to establish their credibility, since the SEC receives information from other sources as well.
Of course, a potential hitch in all of this cooperation is that it can often be a one-way street. Unlike other instances where collaboration means all parties jointly working together on an issue with an equal exchange of information, the SEC staff often is unable or unwilling to share as much about the investigation as respondents may need to make better decisions as to the potential risks and rewards of a mutually agreeable resolution. But this does not mean the staff is without tools to complete the circle of collaboration. For instance, reverse proffers can be an extremely helpful exercise. Also, sharing the investigative file before or during the Wells process gives the staff an opportunity to at least put some cards on the table, and it is authorized in the Enforcement Manual.
The throughline of both Director Grewal's remarks and the spate of recent cases he cited is this: When done right, self-policing, self-reporting, remediation, and cooperation are collaborative in nature, allowing a party under investigation and the SEC to simplify and expedite resolution by working together. However, true collaboration in the regular sense may be more aspirational than actual.
The Question Remains: Is Cooperation Really Worth It?
There are no doubt numerous instances when cooperation makes sense, i.e., when the violation(s) is clear or the litigation risks are great. But there are other instances when cooperation may not be as clear a strategy. For example, companies often consider what cooperation really entails – and if it will be credited – when the SEC has approached them, identifying an issue the company may not believe constitutes a violation. In that situation, the self-policing element has been lost, though companies are well advised to engage as cooperatively as possible, notwithstanding a likely more defensive mindset. And when a possible violation is identified or seems likely after internal investigation, companies often grapple with whether self-reporting (versus the risk of agency detection) is worthwhile and, if so, when is the best time to come forward. In his remarks, Director Grewal encouraged companies that cannot check the box on self-reporting to embrace cooperation nevertheless and, to be sure, has a growing list of real-world case results to lean on.
Determining whether a company is in full compliance and is sufficiently buttoned-up to withstand inviting the SEC in to look around can be an expensive and complex endeavor – to say nothing of the risk of a broadened investigation. Where appropriate, some companies have enjoyed the benefits of cooperation credit through the lowering or forbearance of assessing civil penalties, and others have avoided enforcement action altogether, though the agency does not publicly report data on the number of investigations it closes without charges. And while remediation is a powerful tool to demonstrate a company's seriousness, what if the company does not concede that an alleged wrong needs to be righted or cannot afford or does not agree that it needs the sort of remediation the agency expects to see (e.g., independent compliance consultants)? What if litigating might result in reduced or dismissed charges or lesser remedies? Published statements extolling the virtues of cooperation – which are real and worth seriously considering – rarely address instances in which the SEC closes an investigation altogether, loses a case on a dispositive motion or at trial or reaches a settlement for less than it initially charged, yet these outcomes do happen.
On the whole, cooperation (including Director Grewal's envisioned collaboration) can be and often is worthwhile and, on the whole, can achieve longer-term goals of driving more proactive corporate compliance cultures. Nevertheless, embedded concepts of self-reporting and when, whether and how to remediate a possible violation require careful and often complex considerations and the need to analyze matter-specific risks and opportunities.
Key Takeaways
- Director Grewal suggested that the SEC considers a party's cooperation when deciding whether and what charges and penalties to dole out. And in determining a party's level of cooperation, it still looks to the Seaboard principles, including self-policing, self-reporting, remediation and cooperation. Seaboard contains more than these four factors – 13 in fact, with multiple subparts – that the SEC considers in determining whether and how much to credit the main four factors.
- Among the four Seaboard factors he highlighted, Director Grewal seemed to emphasize self-reporting and remediation. However, he made a point to note that all is not lost if a company fails to self-report, as evidenced by recent cases in which parties received cooperation credit without reporting their respective violations.
- Director Grewal's fifth principle of collaboration provides a theme for the preceding four: The SEC wants open communication and a level of transparency with the entities it investigates. Through the four established routes, parties can, in Director Grewal's view, partner with the SEC toward a shared goal "to punish violative conduct and improve compliance." Director Grewal noted that this doesn't mean parties can't argue about the merits of a case or result, but he posited that working with the SEC, rather than against it, is beneficial for everyone involved.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.