Over the last several years, the U.S. Securities and Exchange Commission has flexed its regulatory muscle like never before. In fiscal 2016, it filed 548 independent enforcement actions and, for the third consecutive year, obtained more than $4 billion in civil penalties and disgorgement through judgments and orders. Among these actions, SEC enforcement brought a record-setting 98 stand-alone cases against investment companies or investment advisers. It also filed 92 actions involving public company-related defendants, doubling the amount brought three years earlier. While changes in policy and focus under the Donald Trump administration are expected, one thing is certain: the SEC’s Division of Enforcement will continue to conduct investigations and bring cases aggressively.

Regardless of how each of these SEC enforcement actions unfolded, the vast majority of them began in a similar fashion. The SEC staff contacted the company in order to obtain specifically requested information. These requests customarily arrive either in the form of a subpoena or a letter that seeks voluntary assistance, depending on whether the investigation is in the formal or informal stage. The company’s internal response upon receiving an initial request from the SEC staff may run the gamut of uncertainty. How did this investigation start? Why does the SEC want this particular information? Who has the SEC already contacted? What do we do now?

There is much that is unknown and unknowable when a company first discovers that an SEC investigation is ongoing. The entire process can be especially frustrating and intimidating for companies that are confronted with this challenge for the first time. An SEC investigation can span from several months to multiple years and feature both periods of heightened activity and extended silence that are largely beyond the company’s control. Nonetheless, it is essential for companies to control what they can as quickly as possible. This article spotlights eight essential steps that a company should undertake to best position itself once contacted by SEC enforcement.

1. Retain Experienced SEC Counsel

Companies may be inclined to rely on their inside counsel or existing outside litigation counsel when faced with an SEC investigation. This decision is typically driven by cost or comfort, but it is almost always preferable to retain counsel with significant prior experience handling SEC investigations. SEC enforcement is a unique practice area that requires not only an advanced understanding of the securities rules and regulations, but an in-depth understanding of the inner workings of the SEC enforcement program and a keen awareness of ongoing policy initiatives and emerging regulatory trends.

Experienced SEC counsel can guide companies through the investigatory process without needless cost or distraction by addressing the SEC staff’s current needs and better anticipating future developments. Further, companies often benefit from the well-established reputation that their SEC defense counsel has forged either while working for the SEC or while defending previous SEC investigations and enforcement actions. These reputations can be especially important in combating any preconceived notions that the SEC staff may have toward the company or its representatives at the outset of an investigation.

2. Contact the SEC Staff Promptly

Contacting the SEC staff in a timely fashion is of utmost importance. The initial conversation affords an invaluable opportunity to learn details about the investigation that may not be evident based solely on a meticulous review of the letter request or subpoena. When the investigation is formal, this conversation also provides an opening to request the formal order of investigation, which offers additional insight about the investigation. Collectively, this information will provide the company with an educated basis to assess whether it is the subject of the investigation, or merely a third party whom the SEC staff believes has material relevant to its investigation of others.

The information sought initially by the SEC staff may be exceptionally broad with production deadlines that are largely unachievable given the amount of information sought. However, unlike in traditional civil litigation, companies are poorly served in nearly all instances by challenging SEC requests on grounds that they are either irrelevant or unduly burdensome. Rather, a subpoena or voluntary request for production offers the company a valuable opportunity to gain early credibility with the SEC staff. A positive, professional relationship with the SEC staff from the outset is crucial, because he or she will be highly instrumental in developing the investigatory record.

Through these communications, a company can often begin negotiating the breadth and timing of its production by demonstrating to the SEC staff the inherent difficulties in producing the volume of information sought within the requested time period. In doing so, a company can propose a more manageable schedule with production installments that prioritize information most readily available or of particular interest to the SEC staff. This process can also provide a good-faith basis for seeking to trim, or even eliminate, particular requests that are redundant or less likely to elicit relevant material.

3. Preserve Potentially Relevant Documents

Once notified of an investigation, a company ordinarily needs to take immediate steps to secure any materials that could be considered relevant. Senior personnel should issue a document preservation notice to all individuals who may have been involved in the actions at issue that instructs them to identify and safeguard any applicable hard copy and electronic documents. These notices should contain a returnable acknowledgment form that confirms each recipient has fulfilled his or her responsibilities. A company should also take immediate possession of any potentially responsive materials held by persons who may have engaged in wrongful conduct.

When preserving documents, record-keeping and information technology staff needs to be contacted concerning data storage and retention practices. They should be authorized to suspend deletion capabilities for any potentially relevant hard copy or electronic files, whether centrally maintained or warehoused by a custodian. The company also needs to preserve less obvious “documents” that the SEC typically requests, including data stored on local drives or portable media, such as CDs, DVDs and flash drives. The company must also consider how to extract information from company-issued smartphones, tablets and other personal electronic devices. An outside e-discovery vendor may be valuable in satisfying the SEC’s exacting data delivery standards.

Companies should review the request letter or subpoena carefully to determine whether it has been asked to keep the existence of the request confidential. While the reason for a confidentiality request varies by matter, it may be made because the SEC staff is focused on specific individuals at the company. The SEC cannot force compliance with such a request but, in almost all circumstances, it is advisable for the company to agree. In these circumstances, counsel will work with the SEC staff to determine what preservation activities may be undertaken without generally revealing the investigation’s existence.

4. Examine Pertinent Insurance Policies

Directors and officers liability policies or errors and omissions liability policies may provide coverage for investigative and defense costs involving public companies. Investment advisers and broker-dealers are also likely to have insurance policies that cover SEC investigations under certain conditions. Such coverage can differ greatly depending on the insurance carrier and policy involved. For instance, certain policies cover costs for the individuals, but not the company. Some policies delay coverage until a formal investigation is commenced, or until at least one employee has been subpoenaed to testify. Still others trigger coverage only when the SEC investigation results in a charging decision against an insured.

Given the significant costs a company and its indemnified representatives may incur collectively during an SEC investigation, it is advisable that a company seek prompt assistance from its insurance counsel to review its standard policy along with any special endorsements that may apply. It is also important for the company to provide its insurance carrier with timely notice of any potential claims under an applicable professional liability policy in order to preserve any available coverage rights.

5. Assess External Disclosure Obligations

Upon learning of an SEC investigation, corporate executives and inside counsel customarily devote considerable thought to deciding which individuals within the company need to be made aware of the investigation’s existence. Initially, this group may consist mainly of the persons responsible for its corporate governance, such as the board of directors and senior management, and then expand quickly to include those required to preserve the potentially responsive information. A concurrent assessment should also be performed to determine whether the SEC investigation needs to be disclosed externally.

Corporate counsel can advise the company as to whether the particular facts and circumstances of the investigation potentially create any SEC reporting requirements. Absent an obligation, a company should measure whether a voluntary disclosure is preferable, as it may present an opportunity to better control the timing of the disclosure and affirmatively underscore that it is complying with its obligations. Serious consideration must also be given to placing the company’s outside auditor on immediate notice, particularly when the company’s financial statements are impacted. Further, companies must factor whether contracts with third parties, such as strategic business partners and creditors, impose other disclosure obligations.

6. Conduct an Internal Inquiry

Companies regularly find themselves at a significant informational disadvantage when they learn of an SEC investigation. There is simply no way to know with any reasonable certainty what documents the SEC staff has reviewed, with whom they have spoken, or what preliminary theories are being developed. It is critical for a company that is confronted with these circumstances to attempt to close this informational gap as quickly as possible by acquiring a strong understanding of the potentially relevant facts and potential legal claims. This process promotes not only the development of a sound defense strategy, but also the ability to uncover any wrongful conduct, which could extend beyond the SEC’s areas of focus.

An internal fact-finding inquiry can be conducted through an independent internal investigation or via a less formal internal review. An investigation is typically favored when the alleged conduct may be regarded as pervasive or egregious, and especially when it could involve members of senior management. In these instances, the company should designate quickly those persons within the organization who are best suited to oversee the internal investigation. Candidates include inside counsel, the board, or a special board committee comprised of independent directors. Those tasked with the investigation regularly retain outside counsel and, if necessary, subject-matter experts to assist them in ensuring the investigation’s thoroughness.

7. Identify Probable Conflicts of Interest

Whether the company’s SEC counsel can also represent the company’s current or former representatives during the SEC investigation is another subject that demands early attention. While some conflicts of interests are easily discernible, others may be more latent and emerge only as the investigation or an internal inquiry unfolds. The SEC staff occasionally will be forthcoming in response to questions about potential conflicts; however, as a general rule, the burden to decide whether to retain separate counsel for directors, officers and other employees rests squarely with the company and its counsel.

Frequently, these individuals will appeal to the company to pay their legal costs when separate counsel is warranted. Employment contracts and indemnification provisions under the company’s bylaws or state law may provide the controlling language. When no obligation exists, a company still should consider whether there are practical reasons to do so voluntarily. This can present a delicate balancing test. The preference to forge a cooperative working relationship with the individual and his or her counsel during the investigation is often a factor favoring payment. Conversely, the company may prefer to avoid any appearance that it is assisting someone whom the SEC staff might view negatively.

8. Weigh the Benefits of Cooperation

Companies who choose to cooperate with the SEC during an investigation may receive cooperation credit through reduced charges and penalties, along with more favorable factual findings in a settlement order. When credit is granted, the order usually recites the numerous, proactive steps the company took to assist the SEC in completing its investigation more efficiently. These steps include conducting internal investigations, providing complete and timely disclosures of internal findings, identifying key documents quickly, and making corporate representatives readily available for interview. The SEC also factors any remedial efforts the company has taken to prevent a recurrence of the conduct at issue.

While the incentives undoubtedly are attractive to any company, the decision whether to pursue cooperation credit ultimately may extend beyond the investigation itself. The voluntary disclosure of information (and any waiver of the attorney-client privilege associated with the disclosure) could have significant adverse consequences in collateral legal matters. Notably, the SEC possesses the authority to provide its investigatory files to other government or regulatory agencies on a confidential basis to conduct their own investigations. Further, settlement orders are publicly available and could provide an invaluable road map to private litigants who are pursuing legally or factually related claims.


Each SEC investigation presents its own, unique challenges and no “one-size-fits-all” strategy can address all of the possibilities that may arise. Nevertheless, a company that promptly and prudently considers and implements each of these initial measures is well-positioned to handle these challenges. In doing so, the company systematically begins laying the foundation necessary to achieve an optimal outcome.

Source: Law360