Earlier this month at the Securities Enforcement Forum West, SEC Director of Enforcement Gurbir Grewal offered some plainspoken advice to the defense bar: Stop delaying investigations and help build the public's trust in the investigatory process and the agency. Grewal also offered thoughts on the nebulous aspects of cooperation. In today's post, we feature highlights from Grewal's speech and provide some helpful takeaways to consider.
Warning Against Delay Tactics and Obstructionist Conduct
The foundation of Grewal's speech was that delayed accountability for wrongdoers undermines public trust in our nation's institutions and markets. In that context, Grewal lamented lawyers who purposely cause delay in responding to subpoenas for documents or testimony. These tactics, which include missing production deadlines, producing too few or too many documents, interrupting testimony with inapplicable evidentiary objections, overly coaching witnesses, representing multiple clients despite conflicts of interest and asserting frivolous privilege claims, serve no purpose and can erode the public's trust. Grewal decried the practice of intentional delay, which he believes "undermines both our process and trust between counsel and investigative staff."
Grewal believes that these types of delays and evasive techniques impose unnecessary costs on the individuals and firms involved, such as reputational harm, economic costs on shareholders and inflated legal bills. He remarked that delays may enable a bad actor to dissipate assets or prevent shareholders and advisers from obtaining current information to make informed decisions.
He also bemoaned the practice of asserting attorney-client privilege over documents that do not, on their face, appear privileged. Although Grewal acknowledged that the privilege is a "bedrock element of our legal system" and that the agency has "tremendous respect" for the privilege and work product doctrine, he warned about the monetary and reputational risk of the staff bringing a subpoena enforcement action in federal court related to questionable privilege claims.
Finally, Grewal emphasized that trust between staff and defense counsel is "one of the most valuable qualities an effective defense lawyer can have" and often it is counsel's credibility on a "close call" that will "drive[] a fair and timely resolution." His message was clear that counsel utilizing such dilatory tactics detailed above could have spillover effects on the staff's views of their clients.
More Clarity on Cooperation?
Grewal pivoted from outlining his concerns about obstructionist behavior to highlighting the potential benefits of "good behavior by lawyers," which he claimed "can yield tangible benefits for clients." According to the Director, proactive cooperative steps include:
- making documents and witnesses available on an expedited basis
- flagging key documents (even though they may be outside the scope of the subpoena) and offering translations where necessary
- providing informed explanations to staff that aren't mere advocacy pieces
- helping clients who may have violated the law to "own that violation and work in good faith to remedy it"
Utilizing some or all of these steps may provide practitioners opportunities to demonstrate "affirmative behavior" that matches Grewal's interpretation of cooperation as being "more than the absence of obstruction." We close with some important takeaways to consider.
- Increased Pace of Investigations: Grewal was clear that he has asked enforcement staff "to look for ways in which to push the pace of our investigations." One aspect of his speech where practitioners can expect to see decreased flexibility from staff could be on extensions to complying with document subpoenas. Typically, SEC Enforcement staff provide for two weeks to respond to a subpoena and negotiate extensions and rolling productions on an individual basis. Given Grewal's comments that "compliance with document production obligations is one of defense counsel's most effective means of ensuring that we timely reach the underlying facts," it should come as no surprise when SEC Enforcement staff are not as flexible on production timeline adjustments. Of course, it remains to be seen whether the staff will follow through on pursuing subpoena enforcement actions when deadlines are missed.
More broadly, the data shows that the Division has recently concluded investigations and filed actions faster than in recent years. In its 2020 Annual Report, the most recent year for which such data is available, the Division noted that the median time for it to file an investigation was at a five-year best of 21.6 months and that it had reduced the average time it takes to complete investigations from 37 months to 34 months. Grewal's speech is the latest data point reaffirming that accelerating the pace of investigations is a continuing priority for Enforcement.
- Attorney Conduct Increasingly Under the Microscope: Grewal's comments about attorney conduct bring to mind SEC Commissioner Allison Herren Lee's recent comments about the Up-the-Ladder Rule and Corporate Attorney Regulation. The crux of Commissioner Lee's comments involved Section 307 of the Sarbanes-Oxley Act, which called for the SEC to "adopt minimum standards of professional conduct for attorneys appearing and practicing before the Commission in the representation of issuers." Appreciating that the up-the-ladder requirements are focused on conduct of in-house counsel and their reporting obligations for material violations of federal securities laws as opposed to outside counsel dealing with SEC Enforcement staff, both messages have a unifying theme: SEC Enforcement is keenly focused on attorney conduct – both in-house and outside counsel – in connection with potential securities law violations and interactions with SEC staff.
- Expectations from SEC Staff: Grewal acknowledged that it is not just defense counsel who need to work toward more efficiency and cooperation, but that the staff cannot, and does not, "play games" by issuing frivolous Wells Notices or settlement demands, needlessly requiring admissions or threatening unsupportable charges. Such statements are a welcome acknowledgement on expectations for staff within the Division of Enforcement. That said, although Grewal stated that SEC Enforcement staff "routinely" negotiate with defense counsel on requests and production schedules, this is not always the case. Depending on the SEC staff attorney handling the investigation, defense counsel efforts to "find[ ] alternative ways" to provide information can be met with resistance. We encourage practitioners and entities to be mindful of his statements and ensure that staff are complying with the standards set forth.
Additionally, although Grewal emphasized that one way counsel can "alleviate" issues is by "asking clarifying questions, or directing the witness to provide information that the counsel believes will assist the staff's understanding," such efforts can sometimes be met with skepticism or outright contempt from SEC enforcement staff as attempts to interrupt testimony. Given Grewal's statement that he fully "appreciate[s] and welcome[s] zealous advocacy," the hope is that Enforcement staff are not misconstruing such activities as obstructionist.
- Anything New on Cooperation? Not Really: As the SECond Opinions Blog has detailed, a comprehensive assessment of cooperation is a riddle wrapped in a mystery. Although Grewal did highlight four specific points, these points are largely reframed themes referenced in the Commission's 2001 Seaboard Report. Although the Commission and practitioners typically reduce the Seaboard factors to four primary buckets – self-policing, self-reporting, cooperation and remediation – the report itself includes many additional considerations. For example, here is Factor 11:
Did the company promptly make available to our staff the results of its review and provide sufficient documentation reflecting its response to the situation? Did the company identify possible violative conduct and evidence with sufficient precision to facilitate prompt enforcement actions against those who violated the law? Did the company produce a thorough and probing written report detailing the findings of its review? Did the company voluntarily disclose information our staff did not directly request and otherwise might not have uncovered? Did the company ask its employees to cooperate with our staff and make all reasonable efforts to secure such cooperation?
Comparing Factor 11 to the Director's comments above shows significant overlap. Although it is helpful to have specific statements from the SEC Enforcement Director on cooperation, Grewal's statements don't provide much additional color, and cooperation still remains a vague area for industry participants and practitioners alike. For a deeper dive into what the SEC has considered "cooperative" and "remedial," please see our prior post where we attempt to solve the riddle.
The SECond Opinions Blog keeps abreast of important speeches by the Commissioners and Division Directors and will continue to provide insight into remarks of note.
