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As anyone who has confronted the discovery of SEC violations at a client knows, one of the hardest things to tackle is whether to self-report the matter to the SEC and what level of cooperation with the SEC Enforcement staff is appropriate if an investigation commences. Much has been said over the years about the topic of cooperation, but that certainly does not mean the topic is not ripe for further discussion. Recently, at the Securities Enforcement Forum West 2024 program, SEC Enforcement Director Gurbir Grewal addressed the topic again in a speech titled “The Five Principles of Effective Cooperation with the SEC.” Grewal began his speech with this explanation of how cooperation in an Enforcement investigation is taken into account:

As numerous recent enforcement matters have shown, there are real benefits to parties that cooperate with Commission investigations. These benefits can affect both the charges and the remedies the Division may recommend, and that the Commission may ultimately impose.

On the charging side, we may recommend bringing reduced charges or we may decline to recommend charges altogether. On the remedies side, we may recommend reduced or even zero civil penalties. And where there’s been real remediation that addresses the misconduct, that may impact whether we recommend undertakings and, if we do, their scope.

Orders in a number of recent settled actions also highlight another benefit: a finding by the Commission that a party provided meaningful cooperation. This lets parties publicly demonstrate their positive conduct in what may otherwise be an unfavorable context.

A key reason we recommend that the Commission reward cooperation is because it helps us move investigations more efficiently. That benefits all parties to an enforcement investigation. For one, timely investigations and resolutions address misconduct, protect investors, and promote accountability. As I’ve spoken about before, all of that helps to enhance public trust and confidence in our markets. And timely investigations that don’t result in enforcement recommendations also mean that the cloud of investigation doesn’t hang over an entity or an individual for longer than necessary.

Now, this doesn’t mean that if you do all of the things highlighted in recent orders discussing cooperation or what I discuss today, you’ll always get to a no penalty resolution or a declination. That’s because, as you know, all of this is highly fact dependent and there’ll always be situations where some charges and remedies are necessary no matter the level of cooperation. But the bottom line is this: you’re likely to experience better outcomes with cooperation than without it.

I’m sure there are those lawyers and clients, perhaps not in this room, that say, “hey, we’ll just take our chances that the SEC doesn’t learn of a violation or, if they do, we’ll cooperate then.” While you may have run the probabilities in your heads, I think that’s a very risky gamble, with the odds increasing in our favor every day. That’s because, given the success of the Commission’s whistleblower program, our improved use of data analytics, and our increased use of risk-based initiatives, it’s really no longer a question of if we’ll find out about a violation, but often when.

The speech goes on to highlight the five principles for effective cooperation, which are as follows:

– Principle one: the best cooperation starts early and well before the SEC gets involved, with self-policing.

– Principle two: once you discover a possible violation, self-report without delay.

– Principle three: don’t stop with the self-report. Remediate.

– Principle four: the type of cooperation that earns credit requires going above and beyond what’s legally required — more than simply complying with subpoenas without undue delay or gamesmanship.

– Principle five: collaborate with Enforcement Staff early, often, and substantively.

In wrapping up, Grewal notes: “while an enforcement investigation has the potential to feel like an adversarial process, it doesn’t have to be.”

– Dave Lynn