Hiring Outside Counsel for SEC-Related Internal Investigations.

Last Updated on: 4th August 2026, 01:33 am

In enforcement matters involving the SEC, outside counsel can investigate suspected securities violations, manage the government’s request for information, defend the company and its officers in administrative proceedings and federal court, and guide companies and board committees on remediation and self-reporting. Counsel can also provide advice regarding the potential for parallel investigations involving the Department of Justice (DOJ).

When is the right time to engage outside counsel for SEC enforcement matters?

The right time to engage outside counsel for SEC enforcement matters depends on the circumstances at hand. If your company or a board committee is aware of a potential securities violation or the risk of SEC scrutiny, engaging outside counsel sooner rather than later can help with identifying remediation efforts and self-reporting before the government contacts the company.

However, a company can also engage outside counsel after an SEC investigation has already begun. This is common. In these cases, outside counsel can handle all aspects of the SEC’s investigation and provide assistance with parallel DOJ proceedings and any other related matters as well.

What does representing a company in an SEC investigation entail?

An SEC investigation can start with an informal inquiry, but this can quickly lead to a formal enforcement investigation. When representing companies in enforcement investigations, our securities defense attorneys assist with the process, including coordinating interviews, proffers, and testimony, preparing and reviewing the SEC’s subpoena-related production requests, preparing and submitting Wells submissions, and structuring and negotiating settlement agreements. In cases in which settlement is not on the table or desirable, defense counsel’s representation continues through the company’s administrative proceeding, federal trial, and (if necessary) appeal.

Does a company have to have outside counsel from the beginning of an SEC enforcement investigation?

No. Outside counsel can enter an SEC enforcement matter at any time, including after the SEC has already begun its investigation. Often, SEC examinations uncover violations or issues that will reach the SEC Enforcement Division; and it will be critical that the company have outside counsel available to provide defense and advice going forward.

When is independent outside counsel better than company counsel?

For one, independent outside counsel can offer more objectivity than company counsel. Outside counsel who was not involved in the disputed transactions will be able to independently scrutinize the company’s prior legal work, and that scrutiny is essential when deciding whether to self-report and/or pursue remediation efforts.

Whose lawyer is company counsel?

With respect to company counsel (whether in-house or outside), ABA Model Rule 1.13, the rule that establishes company counsel’s client, makes clear that “a lawyer employed or retained by an organization represents the organization.” This means that company counsel’s client is not an individual constituent of the organization; rather, it is the organization itself. But, as discussed below, this means that company counsel often cannot represent the organization’s constituents when their interests diverge.

What happens when an internal investigation implicates senior management?

If an internal investigation implicates senior management, company counsel may not be able to advise senior management. In this case, an independent board committee can take over directing the investigation. If the independent board committee decides that outside counsel is needed, company counsel should be able to advise the independent board committee regarding the investigation as well, provided that no conflict of interest exists.

When does a company need to hire independent outside counsel rather than relying on company counsel?

Although there are many situations in which company counsel can represent the company during internal investigations, there are also many situations in which outside counsel is necessary. Here are four examples:

1. When Company Counsel Needs to Evaluate Its Own Prior Work

One area in which engaging company counsel is often not appropriate is when an internal investigation involves evaluating the company’s prior legal work. In these cases, company counsel (whether the in-house counsel or the law firm that has represented the company in the past) will have to evaluate its own advice. This presents an inherent conflict of interest, and it would be far better for the company to hire outside counsel who is independent of the underlying issue.

2. When the Company’s Constituents’ Interests Diverge

As ABA Model Rule 1.13 (discussed above) makes clear, company counsel’s client is the company. This is important to remember because the company is distinct from its constituents. The company, the company’s directors, officers, employees, and anyone else involved in the dispute could all be potential clients. If company counsel is to represent one or more of these constituents as well, then a conflict of interest may arise.

3. When It Is Not Clear Which Individuals Are at Risk for Liability

In any internal investigation, determining who, if anyone, is at risk for liability is among the top concerns for the company and the individuals involved. Once the identity of the at-risk individuals is known, the company can take action, if necessary, to limit exposure, and involved individuals can seek outside counsel to represent them. In these cases, engaging outside counsel to handle the investigation can be important for helping those affected preserve the attorney-client privilege by engaging independent counsel.

4. When the Company’s Constitutional Concerns Trump Other Concerns

If the internal investigation involves concerns about potential claims of breach of fiduciary duty, fraud, or other types of violations, the company’s constitutional concerns must be at the forefront. If a violation of the securities law is possible, it may be necessary to engage independent counsel to conduct the investigation.

What other conflict-of-interest rules apply?

In addition to ABA Model Rule 1.13, the primary rule that governs conflicts of interest involving current clients is ABA Model Rule 1.7. This rule explains that “a lawyer shall not represent a client if the representation involves a concurrent conflict of interest,” and it defines “current conflict of interest” as follows: “A concurrent conflict of interest exists if: (i) The representation of one client will be directly adverse to another client; or (ii) There is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.” As ABA Model Rule 1.7 also explains, these conflicts can sometimes be cured through informed client consent, but that is not always possible.

What should the company do when engaging outside counsel for an internal investigation?

When engaging outside counsel for an internal investigation, the company should make sure that its engagement letter is comprehensive and explicitly details the following: - Which entities and individuals are the outside counsel’s clients;

• The scope of the outside counsel’s representation; and,
• Who outside counsel should report back to regarding the investigation.

How can counsel preserve privilege and other investigation evidence?

When conducting internal investigations, outside counsel must ensure that the privilege is preserved for the client. In this regard, there are several practical and legal considerations, such as:

1. Protecting Company Communications with Employees and Others

Under Upjohn Co. V. United States (1981), companies generally control the attorney-client privilege over employee interview communications. In order to ensure that employees understand that the communications are covered by the company’s attorney-client privilege, and that the employee does not have any control over disclosure, counsel should consider giving an appropriate Upjohn warning. In other words, counsel must let the employee (and anyone else involved) know that: (i) the company (not the employee) is counsel’s client; (ii) the communication is potentially subject to the company’s attorney-client privilege; and, (iii) the company is entitled to waive privilege and disclose the communication to the government (or any third party) at its sole discretion.

2. Protecting Communications Between Company Counsel and Company Officers, Directors, and Other Constituents

In addition to protecting company communications with employees, outside counsel must also protect communications between company counsel and company officers, directors, and other constituents. These communications are protected under the attorney-client privilege to the extent that the communication meets the following qualifications: (i) the communication is between a lawyer and a client; (ii) the communication is made confidentially; (iii) the communication is for the purpose of seeking or providing legal advice; and, (iv) the privilege has not been waived. If counsel is also representing company officers, directors, or other individuals as well, then counsel must ensure that the individuals’ attorney-client privileges are also protected. This presents unique considerations, especially in circumstances where the individuals’ interests diverge from the company’s interests.

3. Protecting Written Evidence and Work Product

In addition to oral communications, companies and their constituents must protect written evidence and work product as well. Documents and electronic data that are subject to the attorney-client privilege are protected if they meet the qualifications that apply to communications between lawyers and clients. However, under federal law, the privilege protects only the communications themselves; the underlying facts and transactions remain discoverable and are not protected by the attorney-client privilege. When it comes to work product, written evidence and other materials are protected if they are prepared by or at the direction of counsel in anticipation of litigation. While ABA Model Rule 1.6 and federal law (including Rule 26(b)(3) of the Federal Rules of Civil Procedure) provide some protection for these materials, they are subject to waiver if the client or counsel discloses the materials to the government. This creates another unique issue with voluntary self-reporting: while it can make sense to voluntarily disclose a company’s involvement in a violation to the SEC or DOJ, companies must be careful not to inadvertently disclose privileged materials that are subject to waiver.

4. Preserving Evidence

Preservation efforts should also begin as soon as litigation is reasonably anticipated. To this end, companies and their counsel must identify all custodians, devices, apps, messaging apps, email folders, electronic systems, documents, and other forms of evidence that are subject to preservation. Companies must take all reasonable steps to prevent any deletion or destruction of relevant evidence, including the disablement of any automatic-deletion settings in any software, applications, and devices, and the issuance of a preservation notice.

What are the benefits of hiring outside counsel when facing the risk of SEC scrutiny?

If your company is facing the risk of SEC scrutiny, there are clear benefits to hiring outside counsel to conduct an internal investigation, including: - Managing internal and external conflicts, ensuring that the investigation is conducted with impartiality;

• Assisting the company in determining its risk of exposure and making informed decisions regarding self-reporting;
• Preserving the company’s and its constituents’ attorney-client privileges, and work product privileges;
• Preventing waivers of attorney-client and work product privileges;
• Advising the company on remediation steps; and,
• Preserving potentially important evidence and coordinating a defense with regard to potential SEC or DOJ enforcement proceedings. If any of this describes your situation, it is worth talking it through with counsel. Spodek Law Group can be reached at 212-300-5196.

How do we choose counsel, and how do we ensure that any costs generated during the investigation can be managed effectively?

We address both of these considerations in your engagement letter. When selecting counsel, our approach is to ensure that we both understand the conflict issues involved and that we are the best counsel for the job. We will begin by running a conflict check against all current, prospective, and former clients. This check will include not only your company but also your affiliates, directors, officers, key personnel, and key witnesses as well. We will ask you for the names, addresses, and job titles of any individuals who may need to be protected and will review the names of any individuals that may be involved. The conflict check will also determine if we have previously represented opposing parties to any prospective claims in the matter at hand. Once the conflict check is completed, we will set up an introductory meeting in which you will be able to gauge our team’s approach and availability to handle the investigation. During this meeting, we will also discuss potential staffing for the case as well as our hourly rates, and any other questions that you have. As we just mentioned, managing costs is also a key consideration. We do this by including budget information in the engagement letter, which we will discuss in detail with you. In addition to establishing an hourly fee, capped fee, blended hourly fee, or flat fee, we will set up our budget in phases so that it reflects the investigation’s anticipated progress and costs. The anticipated phases of your internal investigation would include:

1. Preservation and Custodial Data Collection

2. Document and Data Collection and Review

3. Interviews

4. Remediation and Reporting

The anticipated costs of each phase may then be allocated based on their complexity and resources needed.

What are some of the other legal and practical considerations that companies need to keep in mind when engaging outside counsel?

Along with engaging outside counsel for an internal investigation, companies also need to consider their obligation to preserve relevant evidence, protect the attorney-client privilege and work-product privilege, and assist their constituents with appropriate legal and practical next steps. In addition to assisting with these matters, we also assist our clients with identifying the relevant insurers for the matter at hand, determining their policy requirements, and assisting with their insured-covered expenses. We can assist our clients with these matters as well.

What are the company’s obligations to indemnify its constituent(s)?

Companies’ obligations to indemnify its constituents, if any, depend on the company’s bylaws and applicable state law. In corporate law, there is a distinction between (i) advancement of expenses and, (ii) indemnification. Companies can provide an advancement of expenses (i.e., paying costs in addition to third-party expenses) before the final disposition of the legal matter. Under Delaware General Corporation Law Section 145(e), companies are not obligated to provide indemnification, although they can elect to do so. Delaware law generally permits indemnification provided that the indemnified individual provides an undertaking to repay the advancement if they are ultimately found liable for their acts or omissions.

Indemnification is different in that it is only available after a final disposition of the legal matter in which the company will reimburse the company’s constituent for any and all legal costs and fees. Indemnification is mandatory under Delaware General Corporation Law Section 145(g) in the event that a corporate director, officer, or other individual is found to have acted in good faith.

When will insurance cover expenses?

Whether or not insurance will cover expenses will depend on the insurance coverage that is available. Insurance coverage for officers and directors, usually referred to as “directors and officers insurance,” may or may not be available. Again, determining coverage will require careful review of the company’s insurance policy. In many cases, coverage can be obtained if the individual is an “Insured Person,” and the incident in question is a “Claim” that was filed or is likely to result in litigation. The definitions of these terms can vary, and companies need to ensure that their insurance policies contain suitable coverage provisions.

How should counsel coordinate SEC reporting and any parallel risks?

If companies are under the threat of potential SEC scrutiny, then they also need to consider whether they might be at risk for enforcement or scrutiny from other agencies as well. If that is the case, they need to select outside counsel that is capable of representing the company and its officers, directors, and employees in any parallel investigations. Parallel investigations, if any, may also carry licensing, insurance, commercial, and other consequences, including reputational damage. These issues need to be addressed as well.

How can counsel get SEC cooperation credit for the company?

If the company is considering self-reporting, outside counsel will need to be prepared to help the company obtain SEC cooperation credit. While companies’ efforts to obtain SEC cooperation credit are largely guided by the SEC’s 2001 Seaboard Report, the U.S. Department of Justice’s 2015 “Corporate Enforcement Policy” provides several similar guidelines for self-disclosure. As stated in the SEC’s corporate compliance, enforcement, and remedial initiatives, SEC cooperation credit does not require the waiver of attorney-client privilege. When evaluating a company’s efforts to obtain SEC cooperation credit, the SEC looks at:

• “Self-Policing”, The company’s ability to address issues when they arise and, as needed, the extent to which the company uses internal investigation mechanisms to address its risk of exposure.
• “Self-Reporting”, The extent to which a company proactively discloses its conduct to the SEC before coming under scrutiny.
• “Remediation”, The extent to which the company takes corrective measures, such as updating policies and procedures or taking personnel action, to reduce its risk of future exposure.
• “Cooperation”, The extent to which the company cooperates with the SEC during the investigative process.

Do self-reporting and remediation guarantee an SEC declination?

No. While a company’s efforts to self-report and remediation can potentially lead to an SEC declination, they do not guarantee the company an SEC declination. If the SEC declines to take action, this may be due to the evidence, the legal issues involved, the extent of a company’s cooperation and remediation efforts, the SEC’s enforcement priorities, or a variety of other considerations.

When does internal investigation counsel turn into enforcement defense counsel?

If the internal investigation leads to an SEC enforcement matter, internal investigation counsel should be able to take on the role of enforcement defense counsel. This is important for many reasons, including the fact that internal investigation counsel’s knowledge of the matter’s facts and the company’s efforts to self-police and self-report should give it a significant advantage.

What is the difference between internal investigation counsel and enforcement defense counsel?

The primary difference between internal investigation counsel and enforcement defense counsel is that internal investigation counsel determines the facts of a matter on behalf of the client (or client’s), whereas enforcement defense counsel advocates for the client in the face of government charges (whether threatened or filed). While these two roles require different skill sets, there are many overlaps between the two, and a high-caliber outside counsel for internal investigations will also be a high-caliber outside counsel for SEC investigations.

When will a company need outside counsel for an internal investigation?

Companies may need outside counsel when they are at risk for SEC scrutiny. With the potential for parallel investigations, the risk of civil and criminal penalties, and the risk of loss of confidence or reputation among shareholders, customers, and competitors, companies may need to make informed and strategic decisions. Outside counsel is critical to assisting with these important decisions and taking all necessary steps to limit the company’s exposure to the fullest extent possible.

Contact a Federal Criminal Defense Attorney

Nothing here is legal advice, and the details of your case matter. Todd Spodek and Spodek Law Group take federal criminal and white collar cases nationwide, from offices in New York, Brooklyn, Queens and Los Angeles. You can reach the firm at 212-300-5196.