A team sits around a desk, mid-discussion. They are all wearing business attire. A woman on the far left of the image is working on a laptop. Closest to us, a man is reading from notes on a sheet of paper.

Stop, cooperate, and listen – The five principles of cooperating with SEC investigations

Gurbir Grewal, the Director of the SEC’s Division of Enforcement, has laid out five principles firms should adhere to in order to effectively work with investigations – and secure better outcomes.

10 June 2024 7 mins read
By Jay Hampshire

In brief:

  • The SEC’s Director, Division of Enforcement has explained the ‘five principles’ that firms should follow to effectively cooperate with investigations
  • These recommendations include self-policing, prompt self-reporting, and consistent, open communication with enforcement teams
  • By following these principles, firms may secure better outcomes from investigations, such as reduced – or even zero – penalties

The Securities and Exchange Commission (SEC) has continued its recent trend towards greater transparency, with Gurbir Grewal, Director, Division of Enforcement, setting out the “Five principles of effective cooperation in SEC investigations.” Grewal’s speech lays out how the Commission defines cooperation – and makes it clear why firms should work with investigations rather than against them.

Seeing the benefits

Grewal makes the “very real benefits of cooperating with Commission investigations” clear, explaining that these benefits extend across “both the charges and remedies the Division may recommend”:

“On the charging side, we may recommend bringing reduced charges or we may decline to recommend charges altogether. On the remedies side, we may recommend reduced or even zero civil penalties.”

1) The best cooperation starts early with self-policing

Grewal urges firms to begin their efforts “early and well before the SEC gets involved,” as by doing so they are “more likely to learn of issues earlier, which allows for earlier self-reporting.” Effective self-policing begins with “tone at the top” – a phrase that will be all too familiar among compliance professionals. Grewal believes firms need to ask themselves questions including “are the leaders in an organization supporting a culture of compliance?” and “are they supporting the compliance function through their words, actions, and with resources?” – effectively, “are they walking the walk?”

2) Once you discover a possible violation, self-report without delay

Speed seems to be key in terms of when firms report potential violations, with Grewal outlining firms should ‘report first, ask questions later’ when there’s even the possibility of non-compliance:

“You can even self-report when you think there is a possible securities law violation. You don’t have to be certain there is one … you also don’t need to conduct a complete internal investigation before coming in and speaking with us.”

This approach may be surprising for larger firms that are often counseled to only flag violations where unavoidable, but Grewal summarizes that it “signals a number of things”:

“It signals … effective self-policing … a culture of proactive compliance … and it helps build credibility with the staff for when issues may arise in the future.”

3) Don’t stop with the self-report. Remediate.

Grewal lays out that there are “certain remedial measures that are applicable to any number of situations,” which include:

“Disciplining or dismissing the actors responsible for the violations, strengthening relevant internal controls and policies and procedures, conducting training – or re-training – on the conduct at issue … [and] clawing back or recovering certain executive compensation and repaying harmed investors.”

It is also vital that “remediation has to be proactive and not undertaken solely because it’s been ordered as part of an enforcement action,” and must “be meaningful enough to both address the misconduct and prevent it from happening again.” Firms need to be forthcoming with remediation actions and not act solely because they’ve been told to.

4) The type of cooperation that earns ‘credit’ requires going above and beyond

Grewal’s most substantive point focuses on firms being able to quickly and efficiently share relevant records and documentation with the SEC’s enforcement teams. Firms and their legal and compliance functions have better oversight of how documents are maintained and what evidence may be relevant, and Grewal urges them to “connect with the Enforcement team to discuss what kinds of documents may contain responsive material.”

Where the SEC’s requests don’t capture relevant materials, firms can flag this, and suggest further evidence that might be outside their scope. Other suggested steps include explaining documents, providing translations if those documents aren’t in English, and identifying relevant individuals who the regulator may need to speak to during investigations.

5) Collaborate early, often, and substantively

For Grewal, the “best way to collaborate with us is by communicating with us,” and consistent proactivity and transparency when speaking with the Commission is vital to better outcomes:

“Starting from your first contact with the SEC, whether that follows a self-report or the SEC reaching out to you, establishing good communication is crucial … the quality of the communications is also important … communications that provide relevant, fact-based context about an investigation can help simplify issues and move things forward.”

This not only enables firms to help streamline the investigation process – something Grewal highlights as a priority throughout his speech – but also gives “parties an opportunity to establish credibility” with the regulator.

Principles in practice

Throughout, Grewal referenced recent examples of firms that cooperated with the regulator to secure better outcomes:

  • Cloopen Group Holding LimitedThe firm’s ‘prompt self-report’ of accounting errors and cooperation throughout the SEC’s investigation resulted in no civil penalty being imposed
  • GTT Communications – Again, the firm’s actions of “promptly self-reporting, undertaking affirmative remedial measures, and providing substantial cooperation” to the regulator resulted in no civil penalties
  • Perella Weinberg Partners LPsCharged alongside nine other firms as part of SEC enforcements for recordkeeping failures, Perella Weinberg agreed to pay a $2.5 million penalty – substantially less than the $35 million penalty at the top end of the enforcements. Gurbir Grewal summarized that “One of the orders included in today’s announced actions is not like the others … there are real benefits to self-reporting, remediating and cooperating”

This sounds familiar …

Grewal’s remarks may sound familiar to those paying attention to the SEC’s messaging over the last few years. Back in 2022, Grewal explained that he believes cooperation is “an affirmative behavior,” and has previously discussed how firms that self-report, cooperate, and remediate will “have a better outcome than if you wait for us to come calling.” Grewal reminds us that even if firms follow these principles, it is not a guarantee of a more positive outcome:

“This doesn’t mean that if you do all of the things highlighted in recent orders discussing cooperation or what I discuss today, you’ll always get to a no penalty resolution or a declination.”

However, he summarizes the importance of the five principles as a reflection of the nature of shared responsibility within compliance:

“Cooperation doesn’t mean that parties have to agree with our ultimate conclusions. But what it does mean is that the end goal of all enforcement investigations – to determine whether or not violations have occurred and, if they have, to punish violative conduct and improve compliance – must be a shared one.”

Grewal’s view is that compliance is a ‘team sport’ and is not a case of pitting firms against the SEC. By firms proactively working together with regulators in a spirit of open collaboration, and showcasing they have the right compliance culture, they can rest assured that cooperation is the best route to mitigation.

Cooperation with regulatory investigations is dependent on one thing – data. Having access to complete, clear records – fast – can make all the difference when working with regulators like the SEC to secure better outcomes. Ensuring all of your business communications data is comprehensively captured, with no risk of data loss, and stored securely in a compliant, highly searchable archive is essential to better cooperation – and better outcomes .