Key Takeaways:
- The SEC continues to strongly encourage voluntary self-reporting for firms that uncover misconduct involving potential securities violations.
- Recent SEC statements and settlements that give credit for self-reporting, including in some instances, zero penalty resolutions, need to be taken into account in the often difficult decision as to whether to self-report.
In a recent interview with Law360,[1] Securities and Exchange Commission (SEC or Commission) Enforcement Director Gurbir Grewal reiterated the agency’s commitment to encouraging voluntary self-reporting, going as far as to say that it is the most important factor in determining both cooperation credit and, ultimately, whether a firm should face a penalty. The SEC has long encouraged companies to self-report violations of the securities laws and to cooperate in subsequent agency investigations of those violations. In particular, this past November, the SEC’s annual report[2] highlighted several instances where the agency did not impose a penalty or imposed reduced penalties based on firms’ self-reporting and cooperation. Grewal warned that those results “should aid each of you who are counseling companies and individuals deciding between coming forward, or sitting back and taking the chance – gamble, really—that we do not discover the violation or that a whistleblower doesn’t report it.”[3]
Grewal even noted that it would be incredibly unlikely for the agency to recommend a non-penalty resolution without self-reporting, stating, “That’s probably the through line that you see through these public orders where there have been zero penalties – there has [usually] been an element of self-reporting.” This has been a position long taken by Grewal and the SEC. In October 2023, Grewal emphasized self-reporting and cooperation because “even as [the SEC] emphasize[s] robust penalties, [they] have also aggressively rewarded meaningful cooperation, most notably by recommending that the Commission impose substantially reduced penalties – or even no penalties at all.”[4]
Grewal identified the SEC’s highly successful whistleblower program, which as of November, had paid out more than $1.9 billion to nearly 400 whistleblowers since its inception in 2011, as one of the factors firms might weigh in deciding whether to self-report violations to the SEC. Grewal noted, “You always run that risk that if somebody’s going to blow the whistle on you and report that misconduct to us … you’re not going to get that benefit of the self-report, you’re not going to get the full benefit of the cooperation that you can get.”
In addition to self-reporting, Grewal said that the SEC Enforcement Division’s guiding principles dictate that a party’s cooperation during an investigation, including the tone at the top of the company, will also be considered in deciding whether the Commission should credit that cooperation. Moreover, in determining whether a firm’s cooperation has earned it a declination, as opposed to a zero-penalty settlement, the Division takes into account the ability to publicize a zero-penalty settlement as a deterrent factor for other firms.
Finally, in an effort to encourage voluntary reporting by companies that cannot pay large SEC penalties and fully remediate right away, the SEC has implemented what are called “springing penalties,” whereby firms acknowledge violations and agree to remediation plans going forward – and if those remediation plans are not sufficiently implemented, penalties will kick in. These springing penalties were utilized as part of the SEC’s August 2023 settlement with Plug Power Inc., a fuel cell company, over alleged accounting and internal control weaknesses. Plug Power was issued a $1.25 million penalty, with a $5 million springing penalty. The $5 million penalty would kick in if the company didn’t undertake certain remediation measures.
Encouraging voluntary self-disclosure and cooperation in government investigations and enforcement proceedings has been a big focus for regulators over the past several years. For example, the Department of Justice (DOJ), which has maintained a corporate voluntary disclosure policy since at least 2018, has boosted its efforts in recent months by announcing a pilot program for individuals who voluntarily self-disclose potential violations, along with a whistleblower reward program. Launched on April 15, the DOJ Criminal Division’s individual self-disclosure program provides certain individuals who fully cooperate and voluntarily provide the Criminal Division with information on certain white-collar offenses with the opportunity to receive a non-prosecution agreement in exchange for that cooperation.[5] Last March, Deputy Attorney General Lisa Monaco previewed the eventual implementation of a separate whistleblower rewards program, under which whistleblowers who meet certain criteria may qualify to receive a portion of forfeitures resulting from DOJ enforcement actions.[6] Companies and individuals now need to consider that whistleblowers can approach the DOJ as well as the SEC seeking credit for their disclosures and expecting financial reward or other benefits for the information they provide.
A company’s or individual’s decision whether to self-report has always been difficult and requires careful weighing of the risks and potential benefits with competent counsel. These recent trends to incentivize self-disclosure should be evaluated in light of each company’s and individual’s unique circumstances. The very real threat that the government is likely to find out from a whistleblower, before a company can self-disclose, may deny that company the ability to avoid an SEC enforcement action or the imposition of civil penalties.
It is always better to fortify ethics and compliance programs designed to prevent misconduct, but it is also important to be able to respond appropriately when it does occur. Best practices include:
- Staying educated on Commission, DOJ and other relevant regulator rulemaking, public orders, recent cases and settlements, and official statements and guidance and consider how they impact your firm and how your firm’s compliance program should be adjusted to best reflect those developments.
- Engaging with your different business units and corporate functions to learn about their risk areas and design meaningful and practical policies and procedures that are tailored to those risks.
- Executing your compliance program by ensuring your firm’s policies and procedures are implemented and followed, including by training, oversight and setting the right tone at the top.
- Ensuring that your company is encouraging internal reporting by maintaining reporting mechanisms that are robust, accessible, and designed to facilitate prompt and thorough investigation of complaints, with appropriate remediation and protection for those who report internally.
- Creating a process for the self-disclosure of violations to the appropriate regulator.
The BakerHostetler White Collar, Investigations, and Securities Enforcement and Litigation team is composed of dozens of experienced individuals, including attorneys who have served in the DOJ and at the SEC. Our attorneys include a former U.S. attorney, former assistant U.S. attorneys, unit chiefs as well as partners who have served in the SEC’s Division of Enforcement and the SEC’s Office of the General Counsel, and attorneys with extensive experience in regulatory investigations, litigation and enterprise compliance counseling. Please feel free to contact any of our experienced professionals if you have questions about this alert.
[1] Sarah Jarvis, SEC’s Grewal Says Self-Reporting Best Bet for No Penalties, Law 360, May 6, 2024, https://www.law360.com/corporate/articles/1831026/sec-s-grewal-says-self-reporting-best-bet-for-no-penalties.
[2] Press Release, SEC Announces Enforcement Results for Fiscal Year 2023, Nov. 14, 2023, https://www.sec.gov/news/press-release/2023-234.
[3] Matthew Bultman, Companies Heed SEC Call for Self-Reporting, but Want Clear Perks, Nov. 29, 2023, https://news.bloomberglaw.com/securities-law/companies-heed-sec-call-for-self-reporting-but-want-clear-perks.
[4] SEC, Remarks at New York City Bar Compliance Institute, Oct. 24, 2023, https://www.sec.gov/news/speech/grewal-remarks-nyc-bar-association-compliance-institute-102423.
[5] BakerHostetler, DOJ’s Criminal Division Announces New Pilot Program on Voluntary Self-Disclosure for Individuals, Apr. 17, 2024, https://bakerlawstaging.contentpilot.net/insights/dojs-criminal-division-announces-new-pilot-program-onvoluntary-self-disclosure-for-individuals/.