Companies Heed SEC Call for Self-Reporting, but Want Clear Perks

When a company realizes it messed up, it has a choice: hide the misstep—or cooperate with regulators.

For violations of securities law, companies are increasingly choosing the latter, cooperating with Securities and Exchange Commission investigations for violations like failing to disclose executive perks, or employees’ use of unmonitored communication channels.

Nearly 30% of the SEC’s settled enforcement actions with companies in fiscal 2023 credited the entities for cooperating with the agency’s investigation—up from a recent average of about 20%, a Bloomberg Law analysis found. Cooperation includes self-reporting the violation and taking remedial measures.

The SEC under the Biden administration has been aggressive in going after violations, which attorneys said can lead to additional cooperation. Companies—and their attorneys—have also taken note of recent SEC orders highlighting conduct the agency will reward, and how it was rewarded.

Several businesses, including McDonald’s Corp. and Stanley Black & Decker Inc., escaped fines in fiscal 2023 because of their cooperation.

“The SEC is getting really serious about explicitly rewarding those who cooperate, and sending a message that those who cooperate will get credit for this cooperation,” New York University law professor Stephen Choi said.

Despite the trend of cooperation, the SEC could benefit from providing more clarity about how fines and other punishments are determined, particularly when companies self-report violations that otherwise likely would go undetected, attorneys said. It’s still difficult to tell from SEC orders why some businesses must pay millions of dollars in penalties after reporting their own wrongdoing, while others face no fine.

“An effective cooperation program for a regulator requires a certain degree of consistency, predictability, and clear guidance to the public in terms of the type of behavior that will get credited,” said Anita Bandy, a Skadden, Arps, Slate, Meagher & Flom LLP partner and former SEC attorney.

Bandy said recent self-reporting cases lack a degree of consistency about what merits full, partial, or no credit to the companies.

Proactive Compliance

The SEC has long encouraged companies to self-report violations of securities laws and to cooperate in the agency’s investigations. The message has been particularly front and center in recent months, emphasized in speeches and public appearances.

Chair Gary Gensler in the SEC’s annual enforcement report, announced Nov. 14, highlighted several actions in which the SEC ordered zero or reduced penalties based on cooperation. The director of the agency’s enforcement division, Gurbir Grewal, said at a recent New York City Bar Association event that cooperators were frequently rewarded in fiscal 2023.

Grewal noted a case that investment banking firm Perella Weinberg Partners LP settled in September as part of a probe into Wall Street companies’ use of outside messaging services like WhatsApp to conduct official business. Perella, which self-reported, paid a $2.5 million penalty. Other firms charged alongside Perella paid amounts ranging from $8 million to $35 million.

Orders like that “should aid each of you who are counseling companies and individuals deciding between coming forward, or sitting back and taking the chance—gamble, really—that we do not discover the violation or that a whistleblower does not report it,” Grewal said at the bar event.

To be sure, when companies self-report and cooperate with investigations, it can make life easier for the SEC’s enforcement division.

But the SEC may also be trying to shape companies’ culture. Choi noted a trend “towards getting companies to internalize compliance.” Grewal has spoken repeatedly about the need for a culture of “proactive compliance,” which includes self-reporting.

At the NYC Bar event, Grewal cited a Gallup poll showing Americans’ confidence in various institutions, including government and big businesses, was at or near historic lows.

“It is clear that we cannot reverse those trends and enhance Americans’ trust in our financial institutions through our efforts alone,” said Grewal, who joined the SEC in July 2021. “We need your help to do so.”

Rewarding Cooperation

More companies appear to be heeding that message.

From fiscal 2017 through 2019, about 19% of the SEC’s settled enforcement actions noted cooperation, remediation, or self-reporting by the respondent company, a previous study by attorneys at King & Spalding LLP found. That number was relatively consistent over the next few years, averaging about 22%.

It rose in fiscal 2023, topping 29%, the Bloomberg Law analysis showed. The numbers include all stand-alone, settled enforcement actions with companies the SEC announced that fiscal year, but don’t account for cases in which the SEC never charged a company.

A new report from Cornerstone Research and the New York University Pollack Center for Law & Business similarly found an increase in fiscal 2023 in settlements that credited public companies for cooperating with the agency.

The SEC noted cooperation by almost 70% of the public companies that settled, the report found, up from about 61% in recent years—and a significant jump from fiscal 2010, when about one-third of those companies cooperated with SEC investigations, said Choi, who was one of the report’s authors.

“What we’re seeing here is a continuation of this longer-term trend toward the SEC both encouraging and rewarding cooperation,” Choi said.

Notably, 13% of the public companies that cooperated before settling with the SEC ended up avoiding any fines, according to the Cornerstone and NYU report. That’s the highest rate since fiscal 2013, and more than triple the average from fiscal 2014 to 2022, the report said.

‘A Big Deal’

McDonald’s was among the companies that escaped without financial penalties, after the SEC said the fast food giant didn’t disclose enough information when it fired its former CEO, Steve Easterbrook.

The agency didn’t impose financial penalties on McDonald’s “in light of the substantial cooperation it provided to SEC staff,” the SEC said in a news release. That included giving the agency documents the company wasn’t required to produce and making key employees available for interviews, the SEC said. McDonald’s also sued Easterbrook.

Stanley Black & Decker also escaped fines for failing to disclose executive perks worth over $1 million, in part because of its cooperation, the SEC said.

Settlements like that are significant because the regulator had been moving away from no-penalty deals in recent years, Choi said. In fiscal 2022, just 3% of public company defendants settled without a monetary component, the Cornerstone and NYU data show.

“The fact that anyone is getting no monetary penalties is a big deal,” Choi said.

McDonald’s, in response to a request for comment, referred to a statement issued at the time of the settlement in January, which stated that the SEC’s order “reinforces what we have previously said: McDonald’s held Steve Easterbrook accountable for his misconduct. We fired him, and then sued him upon learning that he lied about his behavior.”

Stanley Black & Decker said it appreciated “the SEC’s acknowledgement of our voluntary disclosure, cooperation, and remediation.” The company said it was “committed to upholding the highest standards of corporate governance and maintaining best-in-class policies, procedures, and controls.”

Questioning the Credit

Responding to a question about the benefits of cooperation and self-reporting at a recent event, Grewal said the commission in recent orders has been clear, “more so than ever before,” about the kinds of behaviors that result in zero, or reduced, penalties.

But while attorneys believe orders like the McDonald’s case can be useful, they say there is still confusion about where the SEC draws lines in deciding how to impose penalties, particularly when companies report their own violations. The fines in some cases have been significant, despite self-reporting.

Merrill Lynch in July agreed to pay $12 million after reporting to regulators that it failed to file hundreds of suspicious activity reports. US units of HSBC Holdings Plc and Bank of Nova Scotia paid $15 million and $7.5 million, respectively, in the off-channel communications probe. Both companies self-reported.

And Perella, while it paid a lower fine, still had to retain a compliance consultant, which can be costly. That could cause other companies to ask, “‘If we’re still going to have to do that, why am I walking in and disclosing it?’” said Celia Cohen, a Ballard Spahr LLP partner and former federal prosecutor.

Other agencies have faced similar questions about the benefits of self-reporting. Attorneys say it’s difficult, for instance, to quantify the benefits of reporting violations to the Commodity Futures Trading Commission.

The Justice Department, for its part, recently took steps to standardize how self-disclosure is credited in corporate criminal cases.

“The SEC is improving in terms of providing some greater insight into the benefits, but there’s still a good deal of uncertainty regarding the benefits obtained from self-reporting,” said Ted Kornobis, a partner in K&L Gates LLP’s white collar defense and investigations group.

While some guidance can be gleaned from recent orders, “other cases continue to impose significant penalties notwithstanding self-reporting,” Kornobis said.