Should I Self-Report to the SEC?
Self-reporting to the U.S. Securities and Exchange Commission (SEC) is one of the most important law enforcement and compliance issues facing public companies and other businesses today. The SEC strongly encourages self-reporting, and it has used both the carrot and the stick to persuade companies to come forward. The agency has become adept at uncovering securities law violations on its own as well, and companies that don’t self-report risk facing extensive penalties (and other consequences) if they are caught.
But, while self-reporting to the SEC can present an opportunity to mitigate any potential consequences that may result from alleged securities law violations, it isn’t necessarily the right decision in all cases. There are pros and cons to self-reporting, and companies need to carefully weigh these pros and cons before deciding whether to voluntarily disclose a violation to the SEC. They must also carefully plan their approach, as self-reporting can present substantial risks if not handled appropriately.
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Our legal team at Spodek Law Group has extensive experience representing public companies and businesses in SEC matters. We understand the complexities of self-reporting and can help you make informed decisions to protect your interests.
5 Key Considerations for Self-Reporting to the SEC
When considering whether to self-report to the SEC, companies need to consider many different factors. Here are five key examples:
1. What Caused the Violation to Occur?
Understanding the cause of the violation is critical for multiple reasons. First, it will help inform the decision of whether to self-report. The SEC places a strong emphasis on compliance, and it is more likely to view companies favorably when their violations are the result of compliance failures rather than intentional acts of wrongdoing. If the violation is the result of an intentional act—and especially if it reflects a systemic practice or an issue that has not been corrected—the company could face a much greater risk of facing charges even if it self-reports.
Second, understanding the cause of the violation will help inform the company’s response. If the violation is the result of a compliance failure, then the company will need to address the failure. If the violation is the result of an employee’s intentional misconduct, then the company may need to take disciplinary and other remedial action. Third, understanding the cause of the violation will help inform the company’s communications with the SEC. The company should not disclose the violation until it is fully prepared to do so, and this means working closely with the company’s SEC defense counsel to determine: (i) what the company will say; (ii) who will communicate with the SEC; and, (iii) when the company will disclose the violation.
2. How Much Damage Has Been Done?
The scale of a securities law violation (or violations) will also play a critical role in determining whether to self-report. If the violation has had significant impacts on investors, the financial markets, or the public at large, then self-reporting is likely to be the better option—if not the only option. At the same time, however, companies should not assume that the SEC will overlook relatively minor violations. If a violation has no widespread or substantive impacts, the SEC may see the upside in going after a company that it can hold up as an example.
4. What Defenses Does the Company Have Available?
Another key question to answer before making the decision to self-report is: What defenses does the company have available? Companies that have effective defenses available may not feel as compelled to self-report—particularly if they have strong reason to believe that the SEC will not uncover the violation on its own. On the other hand, if there is a significant risk that the SEC will uncover a company’s securities law violation, it may be prudent to self-report even if the company has strong defenses available. This is because self-reporting can lead to a much more favorable resolution than defending against allegations of which the SEC has become aware through its own means.
5. How Likely Is It that the SEC Will Uncover the Violation?
While this is certainly not the only factor to consider when deciding whether to self-report to the SEC, it is among the most important. If the SEC is likely to uncover a company’s securities law violation, then it makes sense for the company to attempt to seize the first-mover advantage. Generally, the SEC will view companies that self-report much more favorably than companies that do not. As we discuss below, this can lead to reduced penalties (if not complete immunity from prosecution).
Companies may be less likely to self-report if the SEC is unlikely to uncover a violation. But, again, this is not the only factor to consider, and companies should not make this decision based solely on the likelihood of discovery. While the SEC conducts its own audits and investigations, in many cases it uncovers evidence of securities law violations through whistleblower complaints. Through its whistleblower program, the SEC offers significant financial incentives to individuals who come forward with information about securities law violations committed by their employers.
SEC Self-Reporting: Potential Benefits
With these considerations in mind, what are the potential benefits of self-reporting to the SEC? Here are some of the most important ways that self-reporting can help a company that is facing potential allegations of a securities law violation:
- Controlling the Conversation – When a company self-reports to the SEC, it can control the conversation to a certain extent. Instead of being on the defensive from day one, the company can disclose the facts and circumstances at hand on its own terms. This can lead to a much more favorable outcome in many circumstances.
- Framing the Issues – Part of controlling the conversation involves framing the issues. The SEC might view a violation as isolated, systemic, or catastrophic depending on its initial understanding of the facts. By self-reporting, a company can ensure that the SEC has the information it needs to reach the appropriate conclusion.
- Asserting Defenses – When self-reporting, companies have the opportunity to disclose the affirmative defenses they have available. This also helps control the conversation and frame the issues in a way that is likely to be favorable to the company.
- Reducing Penalties – In an SEC enforcement action arising out of a self-disclosed violation, the SEC will typically seek reduced penalties (if it seeks penalties at all). This can often lead to a significant reduction in the company’s liability exposure.
- Avoiding Criminal Prosecution – In some cases, self-reporting can also allow companies to avoid criminal prosecution. While the SEC is limited to civil enforcement, in some cases it works with the U.S. Department of Justice (DOJ) to pursue criminal charges.
For more information about the potential benefits of self-reporting to the SEC, we encourage you to contact us for a complimentary initial consultation. We represent public companies and other businesses in matters involving the SEC and DOJ nationwide.
FAQs: Self-Reporting to the SEC
What Is the SEC’s Self-Reporting Policy?
The SEC’s self-reporting policy calls for companies that have committed securities law violations to come forward. In exchange, the SEC promises leniency. While this leniency can take many different forms depending on the specific circumstances of a company’s violation, it often includes reduced penalties—if not immunity from prosecution.
How Does Self-Reporting to the SEC Work?
Companies that choose to self-report to the SEC should be prepared to share all of the relevant information the SEC will need to fully understand the nature of the violation at issue. These submissions should be prepared by the company’s outside SEC defense counsel, and they should be submitted to the SEC in a manner that is calculated to achieve a specific outcome given the circumstances at hand.
Does Self-Reporting to the SEC Guarantee Immunity from Prosecution?
Self-reporting to the SEC does not guarantee immunity from prosecution. While self-reporting can help companies avoid prosecution in many cases, it is still up to the SEC to decide how it will proceed. Companies that self-report can still face significant penalties in many cases as well, and companies that disclose criminal violations may still face prosecution by the DOJ.
Is There a Deadline to Self-Report to the SEC?
There isn’t a strict deadline to self-report to the SEC, but companies that are considering making a voluntary disclosure should not delay. If the SEC uncovers a violation on its own, the company will forfeit its opportunity to seek leniency by self-reporting. As a result, companies that are behind on their filings and other companies that are at risk of facing SEC scrutiny should be prepared to self-report at a moment’s notice.
Should I Talk to a Lawyer Before Self-Reporting to the SEC?
Yes, if you are considering self-reporting to the SEC, you should speak with experienced outside SEC defense counsel immediately. At Spodek Law Group, we represent public companies and other businesses in SEC audits, investigations, and enforcement proceedings, and we can use our experience to help you make informed decisions.
