2024 saw no change in the government's campaign to encourage self-reporting and cooperation. In the second installment of Season's Readings, we take a quick look at how the SEC treats self-reporting and how that differs considerably from counterparts in federal criminal law enforcement.
Last year, the U.S. Department of Justice (DOJ or Department) announced significant changes to its Corporate Enforcement Policy (CEP), which we've written about previously. A key takeaway of 2023 was that the Department and U.S. Attorney's Offices were encouraging voluntary self-disclosure of corporate misconduct by offering companies nonprosecution deals or significant reductions from criminal fines in exchange for timely and voluntary self-disclosure, full cooperation and remediation.
This year, DOJ bolstered its corporate crime toolbox in a number of ways, including by introducing a Pilot Program on Voluntary Self-Disclosures for Individuals. With the possibility of securing a nonprosecution agreement, DOJ's new pilot program (announced in April 2024) offers the strongest incentive to voluntarily disclose original information not already known to the Department in one of a number of key areas of interest to the Department, namely, violations relating to:
- financial institutions (or their insiders or agents)
- the integrity of financial markets
- foreign corruption or bribery (including the Foreign Corrupt Practices Act)
- healthcare fraud
- companies with 40 or more employees related to fraud on the government
- companies involved in the payment of bribes or kickbacks to domestic public officials
DOJ's new policy requires a person's disclosure to be truly voluntary, meaning that it must be made before any inquiry, request or demand from DOJ or threat of any government investigation or imminent disclosure to the government or the public. In addition, persons seeking nonprosecution agreements are required to cooperate fully with DOJ and forfeit or disgorge any profit from criminal wrongdoing and pay restitution or victim compensation. In announcing this policy, DOJ made clear its message that companies should "create compliance programs that encourage robust internal reporting of complaints, that help prevent, detect, and remediate misconduct before it begins or expands, and that allow companies to report misconduct when it occurs."
DOJ's ongoing efforts to encourage greater voluntary self-disclosure by companies and individuals did not end there. Both DOJ's National Security Division and Consumer Protection Branch also issued voluntary self-disclosure policies in 2024. And as we will cover in a separate post, the Department and various U.S. Attorney's Offices also rolled out new whistleblower programs that offered financial incentives to individuals who blow the whistle on corporate crime. As relevant here, DOJ's whistleblower program permits whistleblowers to report internally first and still obtain the benefits of the whistleblower program if they timely report to DOJ; likewise, the policy allows companies to remain eligible for DOJ's Voluntary Self-Disclosure (VSD) program if they disclose the misconduct to the Criminal Division within 120 days (and before DOJ reaches out to the company), even if the whistleblower has already reported the information to DOJ.
Finally, the Department continued to expand its efforts to get companies to self-disclose as recently as just a few weeks ago. On Nov. 22, 2024, Principal Deputy Attorney General Nicole Argentieri announced that the Department was amending the CEP to credit companies that "come forward and fulfill many of [DOJ's] requirements" but technically not qualify under the VSD. Per the announcement, companies who do not meet all the requirements of the VSD, but come close, i.e., they demonstrate that they acted in good faith to self-report misconduct – and fully cooperated and timely and appropriately remediated – can still "receive substantial benefits" from self-reporting, which could involve consideration as to the appropriate form of resolution, the appropriate monetary penalty, and the length of the term of any agreement with the Department. According to PDAG Argentieri, DOJ's message should remain clear: "there are real and concrete benefits to calling us before we call you."
The takeaway here is that DOJ and U.S. States Attorney's Offices around the country continue to 1) clearly and effectively message the importance of well-designed and effective corporate compliance programs and the benefits associated with promptly, voluntarily and fully self-reporting criminal (or possibly criminal) violations and other issues by 2) providing detailed guidance on how the Department defines self-reporting and cooperation and – critically – the ways it will credit such conduct.
The SEC also continued to underscore the importance of self-reporting and cooperation in 2024, but unlike DOJ has not issued new and documented frameworks detailing its expectations or specifying available outcomes.
As we covered earlier this year, in 2024 the SEC also continued to address the expectation that companies design and carry out effective compliance programs and leaned into the values of self-reporting and cooperation with its Division of Enforcement. However, unlike DOJ, the SEC does not publish detailed guidance on the particulars of its internal methodology for crediting such conduct. Rather, the SEC continues to harken back to the so-called Seaboard Factors, which consider the extent to which a company proactively self-polices, self-reports, remediates and cooperates. Recent increased disclosure in the SEC's press releases and public statements about when and what sort of self-reporting and cooperation it has received and credited provide better road-mapping than in prior years. However, the lack of defined guidance continues to pose some challenges to those considering self-reporting – even in the midst of an ongoing internal investigation where conclusions have not yet been reached – where it is reasonable to wonder what "credit" may or may not be available or ultimately provided. It is generally accepted that in 2024 SEC – like DOJ – continued to encourage prompt, timely and fulsome self-reporting and, in terms of cooperation, tended to highlight the value of providing readouts of internal investigations, making witnesses available, preparing and providing binders of key documents, and similar conduct.
According to Cornerstone Research, the SEC's 2024 fiscal year end enforcement results reveal that the Commission credited cooperation in 75 percent of public company investigations. Of course, self-reporting and cooperation "credit" are not limited to public companies, and we have seen these themes play out in a number of cases involving regulated entities and individuals and in the many sweeps carried out by the staff in 2024. For instance, in the most recent slate of cases flowing from the SEC's off-channel communications sweep, the agency announced that because one defendant took significant measures to comply with applicable rules and later self-reported and remediated violations, it received no civil penalty. And though this "no penalty" outcome is significant and valuable, a key takeaway about self-reporting to – and cooperating with – the SEC is that such conduct is very rarely is credited through entry into a deferred prosecution or nonprosecution agreement, but rather the agency's decision not to impose a civil penalty or to greatly reduce the amount of penalty (from what "original" amount is often a mystery).
The increasing benefits of cooperation and self-reporting remained on an upward swing in 2024, and we will wait to see if or how they continue into 2025 and beyond. For the SEC's part, corporate penalties may be less favored under new agency leadership (as they are seen by some has further harming shareholders), leading us to query how the SEC will continue to incentivize and reward corporate self-reporting and cooperation if the carrot-and-stick approach of recent years is no longer in play. Regardless, respondents in SEC investigations might appreciate more transparency on the SEC's part to bring it closer to the well-documented and visible policies of DOJ. In any event, both agencies have made clear that cooperation is likely to be appreciated, if not outright rewarded, well into the future.
