Great Expectations: When the SEC Wants Directors to Self-Report Wrongdoing

The discovery of internal misconduct at a company can be a testing moment for a company’s directors and officers. One question that always arises: when is the right time to involve the U.S. Securities and Exchange Commission? The answer, according to SEC Chairwoman Mary Jo White, is right away in cases where the misconduct is comprised of “material information that requires public disclosure.”

This was just one of the points Chairwoman White delivered in a keynote address at the 20th Annual Stanford Directors’ College event in late June. In her talk, Chairwoman White drove home the idea of Ds and Os as “gatekeepers” on whom investors and the SEC rely upon to find and prevent misconduct.

The act of self-reporting misconduct is also, per Chairwoman White, a critical factor when it comes to the SEC’s determination of the consequences of enforcement actions.

As many of you know, the Commission in the 2001 Seaboard statement on cooperation, explained how self-reporting, cooperation, self-policing, and remediation factor into our decisions when considering enforcement actions. And, I can tell you from experience that of those four factors, self-reporting is especially important to both the SEC and the Department of Justice.

While careful not to say it should be an incentive for doing what’s right, Chairwoman White cited instances where cooperation either reduced the penalty or eliminated it entirely. Some of those instances include:

Of course, there’s “cooperation,” and then there’s real cooperation. As Ds and Os walk through this minefield, their savvy, experienced and skilled corporate and defense counsels are invaluable resources and allies. But before decisions are made, it’s good to understand the SEC’s view of “full cooperation.” Chairwoman White gave the following insight:

  1. The decision to cooperate should be made early in the investigation.“Holding back information, perhaps out of a desire to keep options open as the investigation develops, can, in fact, foreclose the opportunity for cooperation credit,” Chairwoman White said. “We are looking for companies to be forthcoming and candid partners with the SEC investigative team – and the board has a responsibility to ensure that management and the legal team are providing this kind of cooperation.
  2. Ensure that the company will act promptly and hold employees accountable. Chairwoman White stated that it’s important to “make it clear from the outset that the board’s expectation is that any internal investigation will search for misconduct wherever and however high up it occurred.”
  3. Be sincere and thorough with cooperation.“Cooperation means more than complying with our subpoenas for documents and testimony – the law requires you to do that,” said Chairwoman White. “If you want your company to get credit for cooperation – and you should – then sincere and thorough partnering with the Division of Enforcement to uncover all the facts is required.

There are, of course, scenarios where employees or others with information on misconduct will run to the SEC to blow the whistle so fast that self-reporting is no longer an option. That’s where a company’s whistleblower program is essential for cooperation.

And, given that the SEC has recently expanded whistleblower protection we should fully expect more whistleblowing to occur. Chairwoman White reiterated in her talk that it’s essential to take every claim seriously, no matter the circumstances.

You may well have doubts about the bona fides of a particular whistleblower – perhaps because his or her prior nine tips have not proven to be true or management tells you that the would-be whistleblower is a disgruntled employee. But always think – because it is so – that her tenth tip may be right on target. The bottom line is that it is a mistake not to take all tips from whistleblowers seriously.

Chairwoman White’s discussion at Stanford Directors’ College was consistent with the tone the SEC set for 2014 during the enforcement direction session at the SEC’s annual The SEC Speaks conference. Among the initiatives discussed at this conference were:

Ds and Os of publicly traded companies are always tasked with upholding their fiduciary duties, and it’s helpful to this effort to understand the goals and interests of your various stakeholders. The SEC’s mission is to protect investors, and maintain fair, orderly and efficient markets. The SEC is making no bones about its expectation that public company directors take an active role in helping the SEC fulfill this mission.


The views expressed in this blog are solely those of the author. This blog should not be taken as insurance or legal advice for your particular situation. Questions? Comments? Concerns? Email:



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