Companies will be treated favorably if they report violations first, SEC enforcer tells lawyers

Photographer: REUTERS/Brian Snyder

Companies who come forward and self-report on the findings of an internal investigation stand a better chance of receiving lenient treatment from enforcement agencies than those who don’t, a top Securities and Exchange Commission enforcement official told securities and defense attorneys.
“Self-reporting is one of the most critical things that we look at. Nothing sets the tone differently than self-reporting versus a phone call from us..,” said Stephen L Cohen, associate director of the SEC’s Enforcement Division, during a panel discussion at the Securities Enforcement Forum in Washington last week. The forum was sponsored by law firm Morrison & Foerster.

Self-reporting and cooperation make a big difference to the size of the penalty the firm eventually receives when it reaches a settlement with the SEC, Cohen said.

The pressure for companies to self-report has intensified with the passage of the Dodd-Frank Act in 2010. The law gave the SEC the power to build a whistleblower program that encourages company employees to report suspected misconduct such as fraud to the company’s internal process.

Employees who file a complaint with the company’s internal process but feel that it has not been taken seriously enough can report the violation to the SEC. If they report the violation to the SEC’s whistleblower program within 120 days, they will have the right to receive up to 30 percent of a monetary penalty if the SEC secures a successful sanction and a fine of $1 million or more.

An important consideration in how a firm is treated is the steps it took to fix the violation when it first discovered the violation, Cohen said. He said that companies who fail to show that that they have taken active steps to fix a violation are unlikely to receive favorable treatment from an SEC investigation.

The SEC’s response to a company that comes forward with information can depend on the nature of the misconduct and the steps the firm took after it discovered the violation, said Bradley J Bondi, a partner at Cadwalader, Wickersham & Taft. He said companies who fail to take wrongdoing seriously should not expect to receive lenient treatment from the SEC.

“In my experience the SEC will not penalize you if you suspend someone instead of actually terminate them.”

One advantage of self-reporting is the firm gets a chance to pick which enforcement agency it reports the violation to, said William R. Baker III, partner at Latham & Watkins. If a firm’s legal counsel has experience with dealing with officials from one agency, this should work in the firm’s favor.

“Its not necessarily the most popular thing to say but it really does matter who you’re talking to from across the table. If you know your audience and have experience with them, it makes a huge difference in the conduct of an investigation,” he said.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus ( . Compliance Complete ( provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges. Follow Accelus compliance news on Twitter at: )