Four years ago, the Securities and Exchange Commission announced an initiative that offered incentives for assisting with SEC investigations and enforcement. The goal was to help investigators gain first-hand evidence to build strong cases, and to act quickly on them. The initiative included “cooperation tools” including non-persecution agreements (NPA) under which the SEC would not pursue enforcement actions against those that report violations and provide assistance to the agency.
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The SEC has entered NPAs with corporations since the initiative was enacted, but it took much longer for the agency to go the same route with people: At the end of April, the SEC entered its first NPA with an individual when a trader provided what the SEC called “extraordinary cooperation” during an insider trading investigation. Others that provided information during the SEC investigation received reduced penalties.
“The reduction in penalties for those tippees who assisted us, together with the non-prosecution agreement for one of the traders, demonstrate the benefits of cooperating with our investigations,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement, in a statement. “The increased penalties for others highlight the risks of impeding our work.”
Whether or not individuals or companies cooperate with investigations has become a much bigger part of SEC enforcement efforts since the 2008 financial crisis. By pushing transparency and a willingness to cooperate with investigations, the SEC focuses not only on what a company does to stay regulatory compliant, but also how they do it.
As a result, corporate culture has become part of the traits the SEC examines during investigations and enforcement. A company that shows good faith with proactive compliance processes and policies distributed to all employees is less likely to receive harsh punishments than one that blatantly circumvented compliance rules.
SEC Chairwoman Mary Jo White reiterated this standpoint during a speech this week at the New York City Bar Association’s White Collar Crime Institute. Assessing whether a corporation acted negligently involves comparing the corporation’s conduct — as carried out through its employees — to the actions of a more “reasonable” corporation in similar circumstances, White said.
“Holding the entity responsible for the misstatements is the right thing to do if the evidence demonstrates that the entity’s conduct fell below the standard of reasonable care,” White said during her speech.
In other words, corporate culture plays a huge role during SEC investigations. “Transparency” and “ethics” are other traits high on the SEC’s list when looking at infractions. This is not always easy, however, especially for companies with a corporate culture built around sales and financial gain rather than an emphasis on business ethics.
“The SEC is focusing on ‘did you do enough?'” said Tony Jordan, a partner in Fraud Investigation & Dispute Services at Ernst & Young, during an April Directors Roundtable Institute discussion in Boston on SEC enforcement.
“Doing enough” to stay compliant is particularly difficult in the global economy, where businesses operating in different cultures often have much different views on corruption and risk. There’s also no question that nefarious business activity is more common in some areas of the world than it is in others. This raises difficult questions during joint ventures and acquisitions about who should be in charge of ethical behaviors at international outposts.
When starting an investigation for potential compliance violations, Roundtable panelists encouraged attendees to seek maximum internal oversight and control. By getting a jump on disclosure and reporting, companies provide material to stakeholders to assist compliance with federal securities laws. Cooperating with regulators also could help avoid SEC enforcement actions — or at least mitigate penalties, Roundtable presenters said.
Public disclosure does have risks: Roundtable panelists cautioned that jumping the gun on disclosure could cause the organization to lose control of the investigative process, create delays when trying to close the investigation and initiate business disruptions. Disclosure could also result in parallel litigation that invites class action complaints and stakeholder derivative demand.
Despite these risks, the outcome from proactive compliance stance is likely much better than the alternative: huge fines and regulatory fallout stemming from SEC enforcement.
“You have to make sure you have a very clear audit trail so that when the government investigates the investigation, they don’t see that as a lost process,” said R. Todd Cronan, a partner at Goodwin Procter LLP, during the Roundtable. “You don’t want to pay twice: Once for the misconduct and again for the inadequate investigation.”