The SEC Is at the Front Desk. Cooperate or Resist?

Picture this: You are the chief compliance officer at a manufacturer that went public a few months ago after raising $800 million through an initial public offering (IPO). Not long after, a compliance audit finds a major issue: Several key salespeople bribed government officials to win tenders in one of your overseas markets. The internal investigation is expedited, the head of sales and several salespeople are placed on leave until the investigation runs its course and you frantically debate the next steps. 

What’s your next move? Do you rush to put remediation measures in place? Or do you first make a call to the SEC to self-report?

This example scenario is just one of the very real dilemmas that organizations can face, particularly when dealing with enforcement authorities that, like the SEC, have very real teeth.

The SEC carries a big stick but also uses carrots

The SEC certainly believes that the faster and more smoothly it can advance a financial probe, the better. That is one reason why the commission emphasizes the benefits of cooperation. It’s one thing if they find you first; it’s another if you raise your hand and beckon them over. 

“A key reason we recommend that the commission reward cooperation is because it helps us move investigations more efficiently,” SEC Enforcement Director Gurbir Grewal said in May.

But efficiency at the SEC isn’t the only benefit; companies themselves can benefit — in the form of reduced penalties.

“We have also aggressively rewarded meaningful cooperation, most notably by recommending that the commission impose substantially reduced penalties — or even no penalties at all,” Grewal said in October 2023.

What cooperation looks like

The benefits of cooperation seem clear; but what, exactly, does “cooperation” mean? Grewal has shared examples of cooperation with the commission: “When your clients are involved in an investigation, you can make documents or witnesses available to us on an expedited basis,” he said, “highlighting ‘hot’ documents or providing translations of key documents where applicable.”

Doing so helps facilitate the SEC’s work. 

“You can flag documents that you know we’re interested in,” he continued, “even if they might arguably, under a certain reading, fall outside the scope of a subpoena.” 

Another tactic is to present information to SEC investigators that isn’t necessarily an advocacy publication but a meaningful explanation of the context or sequence of events that led to the violation. Sometimes, simply admitting to violations shows a willingness to accept accountability.

An analysis of cases involving companies the SEC has given cooperation credit — Cloopen Group Holding, GTT Communications, Stanley Black & Decker, View, Cronos Group, Surgalign Holdings and voxeljet — suggests a number of important lessons.

1. Self-reporting and transparency

One of the most significant steps a company can take is promptly self-reporting a problem to the SEC. This initial act of transparency can set the tone for the resulting SEC investigation and reflects the company’s commitment to ethical practices and regulatory compliance.

Six of the seven companies referenced by the SEC — Cloopen, GTT, View, Stanley Black & Decker, Cronos and voxeljet — exhibited their commitment to transparency by notifying the SEC of potential accounting errors or misconduct when they first emerged. Such proactive disclosure could lead to more favorable outcomes because the company demonstrates its willingness to directly address issues rather than conceal them.

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2. Internal investigations

When a problem arises, many companies launch their own inquiries. Internal investigations, particularly those overseen by independent directors or audit committees, play a crucial role in uncovering significant information that could potentially aid SEC investigations. These investigations can reveal detailed insights into the company’s operations and help pinpoint areas of concern to be addressed. Cloopen, GTT, Stanley Black & Decker, Cronos, Surgalign and voxeljet conducted thorough internal probes to identify and rectify issues internally before they escalated further.

3. Detailed information and documentation

Beyond self-reporting, cooperating companies often provide detailed explanations, financial analyses and summaries of key issues to the SEC. From high-level overviews to robust reports, these details can help the regulators develop an understanding of events faster than they would if they had to “unwrap the past” themselves. Consider the alternative approach. “If you’re delaying our investigation by slow-walking document productions,” Grewal said in 2022, “trying to put off witness testimony for an excessive time or being obstructive during testimony, you’re not cooperating, no matter what your client’s 8-K may say.” For example, both Cloopen and View gave the SEC’s investigators extensive insights into specific transactions and factual matters, and Surgalign disclosed previously unidentified information and provided regular updates.

3. Access to witnesses and documents

Efficient cooperation with the SEC also involves making key documents and witnesses readily available. Companies like GTT and Cronos promptly identified and facilitated interviews and testimonies with current and former employees. Similarly, voxeljet ensured the availability of witnesses for interviews and testimony. This proactive facilitation likely reduced delays and enabled the investigation team to gather necessary evidence swiftly, thereby advancing the investigation more effectively.

4. Enhanced internal controls and governance

In response to SEC concerns, some companies undertook significant remedial actions to strengthen their internal controls and governance frameworks. Cloopen, for example, implemented several measures in response to early revenue recognition misconduct, including forming an independent special committee, dismissing responsible managers, reorganizing relevant departments, enhancing internal accounting controls, providing additional training to employees, hiring finance and accounting personnel with expertise in U.S. GAAP and recouping bonus compensation paid to the CEO and CFO.

5. External expertise

Several companies employed external consultants to assist with financial analyses and investigations, underscoring the importance of external expertise in reinforcing the credibility and depth of the investigation. For example, View engaged an outside consulting firm to provide financial analyses. By involving third-party experts, companies can add an additional layer of credibility to their findings.

6. Remedial actions

In addition to cooperating with the SEC’s investigation, several companies took remedial actions to address identified issues and prevent future violations. This included forming independent committees, dismissing responsible managers, reorganizing departments, enhancing internal controls, providing additional employee training, hiring personnel with relevant expertise and recouping bonuses. 

Cloopen dismissed managers and hired GAAP experts. GTT overhauled its accounting function and replaced management, and View implemented new disclosure and warranty liability controls, hired a new CFO and other senior accounting staff and enhanced training for its finance and accounting personnel. These actions demonstrated a commitment to improving internal controls and ensuring long-term compliance with regulatory standards.

And what was the net result of such cooperation? In all of these examples, the commission either elected not to impose civil penalties or otherwise reduced punitive measures.

Ultimately, the strategies employed by Cloopen, GTT, View, Stanley Black & Decker, Cronos, Surgalign and voxeljet provide a blueprint for other companies facing similar challenges. By prioritizing transparency, thoroughness and proactive engagement, companies can navigate SEC investigations more effectively, minimize potential penalties and establish a solid foundation for future compliance and ethical business practices.