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Self-Reporting SEC Violations: Weighing Pros, Cons and Strategies

March 21, 2024 Uncategorized

Self-Reporting SEC Violation: Weighing Pros, Cons and Strategies

Making a mistake is human, but how a company responds to errors can reveal its true character. When an internal investigation uncovers potential wrongdoing within a publicly traded company, executives may face the difficult decision of whether to self-report the matter to the Securities and Exchange Commission (SEC). While tempting to sweep transgressions under the rug, experience shows that voluntary disclosure often serves a company’s best interests in the long run.

This article examines the pros and cons of self-reporting to the SEC and provides tips on doing it right. With the stakes so high, wise leaders engage experienced counsel to navigate these murky waters. Transparency, humility and integrity during the self-reporting process can reap rewards for companies and help them emerge stronger.

Why Self-Report to the SEC?

Given the SEC’s broad powers to investigate and sanction companies, it may seem counterintuitive to self-report wrongdoing. However, research shows that around 80-90% of SEC enforcement actions originate from voluntary disclosures[1]. Companies decide to self-report for several reasons:

  • Self-reporting can result in lesser charges, reduced penalties and more favorable settlement terms compared to cases initiated by the SEC.
  • It gives companies greater control over the narrative and timing of the disclosure process.
  • The SEC may find out anyway through an internal whistleblower, so it is better to get ahead of the issue.
  • Self-reporting reflects a culture of integrity and transparency that regulators consider favorably.
  • It helps preserve a company’s reputation and investor confidence.

While the decision to self-report is rarely easy, it is often the wisest path. As SEC Chair Mary Jo White said, “Nothing discourages corporate wrongdoing like the prospect of an SEC enforcement action.”

When to Self-Report to the SEC

Companies should self-report to the SEC if internal investigation reveals:

  • Accounting fraud or financial misstatements
  • Insider trading
  • FCPA violations like bribery of foreign officials
  • Misconduct by executives, directors or other insiders
  • Cybersecurity breaches compromising customer data

While technical regulatory violations may not require disclosure, anything that could impact financial statements, investor decisions or market integrity should be reported. Don’t wait until problems grow – address issues proactively.

How to Self-Report to the SEC

When handling SEC self-disclosure, it is wise to engage experienced securities counsel to interface with regulators. Key steps include:

  1. Conduct thorough internal investigation using outside experts like forensic accountants.
  2. Uncover root causes, identify wrongdoers and quantify financial impact.
  3. Develop robust remedial plan to fix control weaknesses.
  4. Draft comprehensive voluntary disclosure document with input from legal, compliance and business leaders.
  5. Make an oral presentation to SEC staff explaining the issue and company response.
  6. Provide regulators access to information and cooperate fully with additional inquiries.
  7. Negotiate settlement terms like civil penalties, disgorgement and corporate monitor.
  8. Implement enhanced policies, procedures and training to prevent recurrence.

While the process is intensive, companies that voluntarily report and cooperate with SEC investigations generally achieve better outcomes than those who resist oversight.

Potential Benefits of Self-Reporting

Though costly, self-reporting SEC violations can yield multiple benefits for companies:

  • Avoids formal SEC charges through negotiated settlement
  • Reduces civil penalties and sanctions based on cooperation
  • Enables “no admit, no deny” settlement without admission of wrongdoing
  • Allows company to control public narrative by getting ahead of the news
  • Builds credibility with regulators as a company that takes responsibility
  • Boosts investor confidence by showing commitment to compliance
  • Promotes culture of integrity and ethics from the top down
  • Earns cooperation credit to lessen charges against individuals
  • Strengthens internal controls and policies to prevent future issues

While costly in the short-term, self-reporting often pays dividends through reduced sanctions and reputational benefits.

Risks of Self-Reporting to the SEC

Of course, self-reporting also carries significant risks that must be carefully weighed:

  • Triggers an SEC investigation that could expand in scope
  • Forces disclosure of potentially embarrassing facts and misconduct
  • Results in public relations damage, impacting stock price and sales
  • Requires paying penalties, fines, disgorgement of ill-gotten gains
  • Involves restating financial statements to correct errors
  • Causes increased legal and professional fees for investigation
  • Demands management time and attention away from operations
  • Exposes company to shareholder lawsuits based on losses

While daunting, these potential consequences must be weighed against the likely costs of an SEC-initiated probe.

Strategies for Mitigating Risks

There are several strategies companies can use to mitigate risks from SEC self-disclosure:

    • Hire experienced securities counsel to interface with SEC staff.
    • Conduct thorough internal investigation to uncover all relevant facts.

Disclose improper conduct fully and transparently to regulators. Do not attempt to minimize issues or hide anything that could be relevant.

  • Take responsibility for wrongdoing without making excuses. Demonstrate this accountability publicly.
  • Cooperate extensively with the SEC by providing requested documents, data, and access to personnel.
  • Implement robust remedial measures to fix control weaknesses and prevent recurrences.
  • Consider self-reporting and cooperating with DOJ or other authorities if conduct violated other laws.
  • Discipline wrongdoers through terminations, clawbacks, and other means commensurate with roles.
  • Communicate transparently with investors, media, and other stakeholders throughout the process.
  • Express commitment to integrity, compliance, and continuous improvement of policies and procedures.
  • Learn from mistakes and emerge as a better, stronger company worthy of trust.


Self-Reporting Process and Timeline

While each case differs, the SEC self-reporting process generally follows this timeline once misconduct is uncovered:

  1. Commence internal investigation using outside counsel and forensic experts (within days).
  2. Brief audit committee and board on initial findings (within weeks).
  3. Quantify financial impact and determine restatements needed (within 1-2 months).
  4. Make initial oral presentation to SEC staff explaining key facts (within 3-6 months).
  5. Provide detailed voluntary disclosure document and access to evidence (within 6-12 months).
  6. Negotiate settlement terms on civil penalties and remedies (within 12-18 months).
  7. Coordinate disclosure of settlement terms with SEC and issue press release.
  8. Implement remedial measures under agreed timeline (over 1-3 years).

While grueling, navigating the self-reporting process with integrity can benefit companies in the long-run.

Key Takeaways

  • Self-report to get ahead of issues, show integrity, and secure SEC cooperation credit.
  • Experienced counsel helps to interface with regulators and negotiate settlements.
  • Conduct swift and thorough internal probes to uncover all relevant facts.
  • Strive for full transparency with regulators versus concealment.
  • Implement robust remedial measures to fix control issues.
  • Disclose wrongdoing publicly and take responsibility for failures.
  • Learn from mistakes and build a culture of ethics and compliance.

While never easy, self-reporting and cooperating with SEC investigations is often the wisest path forward for companies and their stakeholders.

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