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Senior officials at the SEC’s Division of Enforcement have long touted the potential benefits that companies may derive by cooperating with its investigations, but it’s not always clear what companies have to do to move the needle. This K&L Gates memo looks at the terms of recent settlements and identifies some of the cooperation factors that are likely to contribute to reduced penalties – or even a decision not to impose penalties. Here’s an excerpt:

First, an important driver in whether a penalty is imposed is whether the entity promptly self-reports potential misconduct upon learning it or not. In each of the actions described above that did not impose a penalty, the entity self-reported the conduct to the SEC.

A second factor cited in the orders is the extent to which the entity provides information to the staff as it investigates the matter. Among the actions cited favorably are hiring outside counsel to conduct an independent internal investigation, providing the SEC with facts developed in that internal investigation (including presentations of interim findings and highlighting key documents and witnesses), promptly making witnesses available, providing detailed explanations of factual issues, facilitating testimony of former employees, providing relevant documents without requiring subpoenas, and providing translations of foreign-language materials.

Third, the SEC has highlighted that the entities voluntarily took remedial measures in response to the issues discovered. Such measures have included replacing management and board members, commencing an audit of compliance programs, revising procedures, holding compliance trainings with employees, creating employee guides or toolkits with commonly asked questions regarding the federal securities laws, and voluntarily ceasing the at-issue conduct.

If this sounds familiar, it probably should, because the memo points out that these are the same type of actions that the DOJ looks for when it assesses whether cooperation credit is appropriate.

Despite the SEC’s statements and the evidence provided by recent settlements, many companies are still skeptical about whether there’s much upside in going above and beyond in cooperating with the SEC. The memo acknowledges that this isn’t an irrational concern. That’s because the SEC isn’t exactly a model of consistency, and sometimes imposes significant penalties notwithstanding a high degree of cooperation by the company involved in the enforcement action.

– John Jenkins