In February 2024, we published an alert discussing the significant benefits of prompt self-reporting and cooperation during a US Securities and Exchange Commission ("SEC") investigation. This past week, during his keynote address at the Securities Enforcement Forum West 2024 conference, the Director of the Division of Enforcement ("Enforcement Director"), Gurbir S. Grewal, elaborated on this by highlighting his five principles of effective cooperation with the SEC: self-policing, self-reporting, remediation, cooperation, and collaboration.¹

Guidance from the SEC's Enforcement Division on what matters most in their decisions about whether and what credit to recommend when companies cooperate is helpful. But it remains important to evaluate on a case-by-case basis what are the reasonably achievable benefits in cooperating. That evaluation is most effective if done before cooperation begins in earnest, as there are no easy ways to retread steps once heading down that path.

Benefits of Cooperation

In this speech, the Enforcement Director emphasized that there are real benefits to parties who cooperate with SEC investigations. The SEC's Enforcement Division can recommend bringing reduced charges or may decline to recommend charges altogether. The Enforcement Division may also recommend reduced or even zero civil penalties. Meaningful cooperation may also allow companies to control the narrative by "publicly demonstrat[ing] their positive conduct in what may otherwise be an unfavorable context." The Enforcement Director clarified that cooperation does not mean that a company will always get to a no penalty resolution or a declination, however, companies are more likely to experience better outcomes with cooperation than without it.

The Enforcement Director's Five Principles of Effective Cooperation

The specific facts and circumstances of each case will shape a company's decision about whether to cooperate, and the extent of such cooperation. If a party decides to cooperate with the SEC, the principles enumerated by the Enforcement Director can serve as a roadmap in making the case for cooperation credit.²

• Self-policing. The Enforcement Director emphasized the importance of identifying issues as early as possible through compliance monitoring. To achieve this, companies should stay up-to-date on developments and risk areas relevant to their businesses. Corporate compliance policies should be updated to keep pace with technological advances that affect the company's business, such as AI risks. 

• Self-reporting. If a company identifies an issue, the Enforcement Director underscored the benefits of reporting misconduct to the SEC without delay. Companies should self-report violations, or suspected violations, before they know all of the key facts or finish an internal investigation. Here, the SEC referenced its recent decision to not impose civil penalties against Cloopen Group Holding Limited ("Cloopen") for accounting fraud violations, partially because Cloopen self-reported the violations to the SEC shortly after it retained outside counsel to conduct an internal investigation and before any significant steps had been taken as part of that investigation.³ Self-reporting potential violations signals effective self-policing, a culture of proactive compliance, and helps build credibility with the SEC for when issues arise in the future. In contrast, failing to self-report violations can raise questions about the firm's supervisory system and compliance functions.

  Importantly, the Enforcement Director emphasized that companies can still earn cooperation credit if they receive an SEC document request before they self-report by conducting a thorough internal investigation, remediating any potential violations, repaying harmed investors, and improving their compliance program. The Enforcement Director provided an example of a company that received such benefits after receipt of a document request. That company conducted an internal investigation, identified additional violations, and self-reported those additional violations.

• Remediation. Effective remediation includes proactively disciplining or terminating the responsible actors, strengthening internal controls and policies, providing training on the conduct at issue and best practices, hiring staff with relevant expertise, clawing back or recovering executive compensation, and repaying investors for any losses they suffered.
• Cooperation. Companies hoping to earn cooperation credit should go "above and beyond what is legally required." Companies can earn cooperation credit by explaining to the SEC its internal process, how it maintains documents, and who has relevant evidence. Companies should flag relevant materials that are not captured in the SEC's document requests and flag and offer to explain hot documents and how they fit into the larger picture. Companies can also offer to translate responsive documents that are in foreign languages, present the findings of any internal investigation, and summarize interviews with key individuals.
• Collaboration. The Enforcement Director highlighted that the best way to collaborate with the Enforcement staff is through transparent communication. The Enforcement Division will look favorably on communications that provide context around the work done to collect information. These conversations give parties an opportunity to establish credibility with the SEC.

Elisha Mvundura (Law Clerk, White & Case, New York) co-authored this publication

1 See Gurbir S. Grewal, Dir., Div. of Enforcement, U.S. Sec. & Exch. Comm'n, Remarks at Securities Enforcement Forum West 2024 (May 23, 2024).
2 The Enforcement Director added "collaboration" to the four criteria set forth in the Commission’s long-standing statement on cooperation—the "Seaboard Report." Seaboard Report; Policy Statement of the Securities and Exchange Commission Concerning Cooperation by Individuals in its Investigations and Related Enforcement Actions, Securities Exchange Act Release No. 61340 (Jan. 13, 2010).
3 White & Case LLP represented Cloopen's independent special committee of the Board of Directors in connection with its independent internal investigation. See Press Release, Cloopen Grp. Holding Ltd., Cloopen Announces the Substantial Completion of the Independent Internal Investigation (Sept. 6, 2022).