Key Takeaways:

• SEC continues to strongly encourage voluntary self-reporting for firms that uncover misconduct.
• These statements and recent settlements giving credit for self-reporting, including in some instances, the imposition of zero penalties, need to be taken into account in the often-difficult decision as to whether self-report.

In a recent interview with Law360[1], Securities and Exchange Commission (SEC) Enforcement Director Gurbir Grewal reiterated the agency’s commitment to the encouragement of voluntary self-reporting, going as far as to say that it is the most important factor in determining both cooperation credit and 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 of the agency ordering zero or reduced penalties based on firms’ self-reporting and cooperation. Discussing that report, Grewal warned that those results “should aid each of you who are counseling companies and individual 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, “[t]hat’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 also raised the SEC’s highly successful whistleblower program, which as of November had paid out more than $1.9 billion to nearly 400 individual whistleblowers since the program’s inception in 2011. Noting that the success of this program (in addition to the cooperation credit the SEC gives) may factor into a firm’s decision of whether to self-report misconduct that the firm uncovers themselves. “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 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 a party’s cooperation. Moreover, in determining whether a firm’s cooperation has earned them a declination, as opposed to a zero-penalty settlement, the division takes into the account the ability to publicize a zero-penalty settlement as a deterrent factor for other firms.

Acknowledging the inability of some firms to be able to weather the SEC’s penalties, the SEC has implemented what are called “springing penalties” whereby firms acknowledge violations and agree to remediation plans going forward—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 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.

Building upon the success of the SEC’s whistleblower program, the DOJ Criminal Division has recently announced a pilot whistleblower program. Under the program, individuals with potential criminal liability who fully cooperate and voluntarily provide the Criminal Division with information on certain white-collar offenses may receive a non-prosecution agreement in exchange for that cooperation.[5] Companies and individuals now need to be concerned with referrals coming in through both whistleblower programs, with the understanding that the agencies are almost certain to share this information with each other.

A company 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. This recent trend in cases and the SEC’s statements concerning self-reporting and cooperation should be evaluated in light of each company and individual’s unique circumstances.

Best practices to prevent misconduct from occurring and avoid this decision altogether and to respond in the best way possible if it does occur include:

• Staying educated on Commission rulemaking, public orders, recent cases and settlements, and statements from any SEC representatives 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.

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, branch chiefs and 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://www.bakerlaw.com/insights/dojs-criminal-division-announces-new-pilot-program-onvoluntary-self-disclosure-for-individuals/.

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