U.S. SEC Enforcement Director Grewal Offers Insights on Cooperation With Investigations

On May 23, 2024, Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, delivered a speech at Securities Enforcement Forum West 2024 that described the benefits and best practices of effective cooperation with the SEC during the course of its investigations.¹ As part of the speech, which builds on his prior remarks on the same topic,² Director Grewal summarized the benefits of cooperating with the SEC in its investigations and outlined key principles of effective cooperation — which are instructive for firms that have SEC touchpoints and should be considered in determining when and how to interact with the Commission when dealing with potential violations of federal securities laws.

While cooperation in SEC investigations will not necessarily result in a declination to recommend charges or a zero-penalty settlement, Director Grewal’s remarks demonstrate the SEC’s continuing efforts to encourage organizations to cooperate with SEC investigations and the potential benefits for doing so. Among other things, close monitoring for potential violations of the securities laws, prompt self-reporting of violations (and even potential violations) once discovered, taking proactive remedial action, and collaborating with the SEC throughout the course of its investigation are steps that can help firms to best position themselves to receive cooperation credit from the SEC. When to report potential violations to the SEC and how best to obtain cooperation credit are complex issues, and we encourage clients to discuss their particular situations with their Sidley contacts.

The highlights of Director Grewal’s speech are summarized below.

Benefits of Effective Cooperation

Director Grewal stated that there are “real benefits” to parties that effectively cooperate with SEC investigations, which may include the SEC:

• Charges – recommending reduced charges or declining to recommend any charges altogether.
• Remedies – recommending reduced or even zero civil penalties, and effective remediation efforts may impact whether the SEC recommends any undertakings (and the scope of any such undertakings).
• SEC Finding of Cooperation – stating in the SEC’s order that the party provided meaningful cooperation.

The SEC’s published version of Director Grewal’s speech also cites to a number of recent settlement orders in which the Commission articulated the benefits of cooperation in investigations, which are set forth in Appendix A. Notably, these include examples of the Commission declining to impose any civil penalty in consideration of both substantial cooperation during the investigation — such as “by voluntarily providing relevant documents and testimonial information that was otherwise not required to be produced …; providing briefings to the staff that highlighted critical facts and key documents; and promptly making the company’s officers, directors, and other senior managers available for interviews and testimony”³ — as well as remedial measures taken once violations were discovered — such as “affirmative remedial steps to recover value for its shareholders”⁴ and “implementing new disclosure and warranty liability controls, hiring … accounting staff, and implementing enhanced training for its finance and accounting personnel.”⁵

Director Grewal reiterated that the purpose of rewarding cooperation is to help resolve investigations more efficiently. This, he believes, ultimately benefits all parties involved, as timely investigations and resolutions serve to address misconduct, protect investors, and promote accountability as well as to lift the cloud of investigation from the subject firm.

Director Grewal also cautioned against firms “taking their chances” that the SEC will not find out about a violation. Given the Commission’s recent improvements to its whistleblower program, use of data analytics, and use of risk-based initiatives, Director Grewal said that “it’s really no longer a question of if we’ll find out about a violation, but often when.”⁶

Five Principles of Effective Cooperation

Director Grewal outlined “five principles of effective cooperation.” Four of these principles have already been laid out in the Commission’s Seaboard Report and Policy Statement Concerning Cooperation by Individuals.⁷ Director Grewal also added a fifth principle that he calls “collaboration.”

1. Self-policing

Director Grewal stated that self-policing should begin with the organization’s senior leadership, which should create a culture of compliance and enable firms to learn of issues sooner, allowing for earlier self-reporting. He added that effective self-policing also includes staying current on new rules, developments, and technological advances that may affect areas relevant to the organization’s business, such as around artificial intelligence risks. Similarly, an organization’s compliance policies must keep pace with changes to sufficiently address risks that may arise.

2. Self-reporting without delay

With respect to self-reporting, Director Grewal emphasized that organizations should take immediate steps to report any violation (and even a potential violation) as soon as possible. This includes reporting to the SEC even before a firm may know all of the relevant facts or has completed an internal investigation, and even where there may only possibly be a violation of securities law. He added that such self-reporting signals to the SEC that a firm effectively self-polices and promotes a culture of proactive compliance, which helps build credibility with the SEC staff when issues arise in the future.

3. Remediation

Director Grewal stated that for remedial efforts to be considered effective in the context of an investigation, they should be proactive, timely, and must effectively address the violative conduct at issue (rather than taken solely as a result of a final order entered as part of an enforcement action).

He further added that while effective remediation can appear in many forms, certain remedial measures are applicable to a variety of different situations — including (i) disciplining or dismissing responsible actors; (ii) strengthening relevant internal controls and procedures; (iii) conducting training (or retraining) on the relevant conduct; (iv) hiring new personnel with relevant expertise; (v) recovering certain executive compensation; and (vi) repaying investors harmed by the conduct.

Importantly, Director Grewal also noted that parties who failed to initially self-report may still earn cooperation credit with the Commission by implementing effective remedial measures in the context of an investigation.

4. Going beyond what is legally required

Director Grewal stated that the fourth principle of effective cooperation involves taking additional steps — beyond what a firm is legally required to do — to assist the SEC with moving along an investigation.

Director Grewal stated that these steps may include (i) connecting with SEC staff to discuss what materials may be helpful to their investigation; (ii) for document requests, flagging where the SEC’s requests may not capture all relevant materials or where other relevant materials may exist; (iii) when producing documents, flagging or offering to explain or contextualize any “hot” documents; (iv) identifying relevant witnesses; and (v) where there has been an internal investigation, presenting the finding of such investigation and/or summarizing interviews conducted as part of such investigation.

5. Collaboration

Lastly, Director Grewal introduced a fifth principle of effective cooperation — collaboration — which he described as effective communication with the SEC. He explained that this can be achieved through early, clear, frequent, and high-quality communication with SEC staff, starting with the early self-reporting of potential violations and continuing throughout the course of the SEC’s investigation.

While the principles discussed by Director Grewal are not entirely new, recent examples of the SEC rewarding cooperation by parties during the course of investigations — especially where violations were initially self-reported — demonstrate the Division’s continuing desire to encourage such cooperation during its investigations and are important to consider in determining when and how firms should interact with the Commission when dealing with potential violations of the federal securities laws.

The foregoing summary of Director Grewal’s remarks do not reflect the advice or views of Sidley Austin LLP. The specific circumstances with respect to potential violations of securities laws may vary widely, so clients seeking to better understand the potential benefits of cooperation and self-reporting should consult with Sidley Austin LLP.

APPENDIX A

Excerpts of SEC Settlement Orders Cited as Examples of Consideration of Effective Cooperation

• In the Matter of Perella Weinberg Partners LP; Tudor, Pickering, Holt & Co. Securities LLC; and Perella Weinberg Partners Capital Management LP, Admin. Proc. File No. 3-21769 (Sept. 29, 2023) (settled order), available at https://www.sec.gov/files/litigation/admin/2023/34-98632.pdf, ¶¶ 34-36.
  
  “In determining to accept the Offers, the Commission considered [Respondent’s] self-report, cooperation afforded to Commission staff, and remediation. After identifying off-channel communications, Respondents conducted an internal investigation and self-reported the facts to Commission staff. Prior to approaching Commission staff, … [Respondents] had begun a program of remediation, which included issuing firm-issued devices to all employees; strengthening its self-policing procedures by making investments in new technologies to improve surveillance efforts; and conducting trainings and sending firm-wide reminders that emphasized the importance of complying with recordkeeping obligations. [Respondents] also took proactive steps to onboard and preserve off-channel communications. Prior to this action, [Respondents] enhanced its policies and procedures, and increased training concerning the use of approved communications methods, including on personal devices …. In addition, Respondents have undertaken to: retain … the services of an independent compliance consultant … that is not unacceptable to the Commission staff.”
  
  
• In the Matter of View, Inc., Admin. Proc. File No. 3-21505 (July 3, 2023) (settled order), available at www.sec.gov/files/litigation/admin/2023/33-11208.pdf, ¶¶ 33-35 (emphasis added).
  
  “In determining to accept the Offer, the Commission considered remedial acts promptly undertaken by Respondent and cooperation afforded the Commission staff. Following its self-report, Respondent provided assistance to Commission staff, including: providing staff with detailed explanations and summaries of specific factual issues at all stages of the staff’s investigation; providing staff with detailed financial analyses from an outside consulting firm about the recorded warranty liabilities and other related issues; identifying key documents and witnesses that staff had not yet identified; making witnesses available quickly, including coordinating with one traveling overseas, for both informal interviews and subpoenaed testimony; and promptly following up on several requests from staff without requiring subpoenas, including obtaining information from various employees, providing additional documents, and explaining accounting and finance issues. Respondent also undertook prompt remedial measures, including implementing new disclosure and warranty liability controls, hiring a new Chief Financial Officer and other senior accounting staff, and implementing enhanced training for its finance and accounting personnel. In consideration of the foregoing, the Commission has determined not to impose a civil penalty on Respondent.”
  
  
• In the Matter of Stephen J. Easterbrook and McDonald’s Corporation, Admin. Proc. File No. 3-21269 (Jan. 9, 2023) (settled order), available at www.sec.gov/files/litigation/admin/2023/33-11144.pdf, ¶¶ 36-38 (emphasis added).
  
  “In determining to accept [Respondent’s] Offer, the Commission considered the cooperation it provided during the Commission’s investigation, as well as remedial measures undertaken by [Respondent]. [Respondent] provided substantial cooperation to the Commission’s staff throughout its investigation, including by voluntarily providing relevant documents and testimonial information that was otherwise not required to be produced in response to the staff’s requests; providing briefings to the staff that highlighted critical facts and key documents; and promptly making the company’s officers, directors, and other senior managers available for interviews and testimony. This cooperation substantially advanced the quality and efficiency of the staff’s investigation and conserved Commission resources. [Respondent] also took affirmative remedial steps to recover value for its shareholders by suing Easterbrook in the Delaware Court of Chancery, seeking and ultimately recovering the compensation Easterbrook received …. [Respondent] acknowledges that the Commission is not imposing a civil penalty based upon its cooperation in a Commission investigation or related enforcement action.”
  
  
• In the Matter of Cloopen Group Holding Limited, Admin. Proc. File No. 3-21844 (Feb. 6, 2024) (settled order), available at www.sec.gov/files/litigation/admin/2024/34-99483.pdf, ¶¶ 17-20.
  
  “[T]he Commission considered [that Respondents] … self-reported to the Commission’s staff the accounting errors uncovered … within a few days of retaining outside counsel to conduct an internal investigation and before any significant steps had been taken as part of that investigation … provided substantial cooperation …, including by providing detailed explanations of the customer transactions at issue and their financial impact …. [Respondents] also undertook prompt remedial measures, including: (1) forming an independent special committee of its Board of Directors to investigate the issues …; (2) terminating the Senior Managers who orchestrated the early revenue recognition misconduct …; (3) reorganizing or removing the departments involved …; (4) strengthening its internal accounting controls …; (5) retraining … on [Respondent’s] internal accounting controls and company policies …; (6) recruiting finance and accounting personnel with expertise in U.S. GAAP; and (7) clawing back … bonus compensation ….”
  
  
• In the Matter of GTT Communications, Inc., Admin. Proc. File No. 3-21708 (Sept. 25, 2023) (settled order), available at www.sec.gov/files/litigation/admin/2023/33-11241.pdf, ¶¶ 41-43.
  
  “[Respondents] … promptly self-reported to the Commission and provided substantial cooperation, including by, among other things, providing multiple presentations concerning the findings from its internal investigation…; identifying key documents and witnesses; promptly making documents and witnesses available; and facilitating testimony from former employees. Further, [Respondents] voluntarily undertook affirmative remedial measures …, which included attempting to rebuild its COR accounts, replacing certain members of management, its board of directors, and its auditor, and overhauling its accounting function….”
  
  
• In the Matter of CBRE, Inc., Admin. Proc. File No. 3-21675 (Sept. 19, 2023) (settled order), available at https://www.sec.gov/files/litigation/admin/2023/34-98429.pdf, ¶¶ 10-11.
  
  “[Respondents] initiated a remediation program concerning compliance … revised all versions of its domestic GRAs for Rule 21F-17 compliance … commenced an audit of similar agreements worldwide … standardized and updated its global policy documents for compliance … trained more than 50 members of the compliance teams globally on the Rule 21F-17 language added to all relevant templates … launched a mandatory SOBC re-certification process … [and] communicated with the more than 800 employees who had signed the GRA between 2021 and 2022, advising them of the protections afforded them by Rule 21F-17 …. The Commission also notes [Respondent’s] cooperation in the underlying investigation.”
  
  
• In the Matter of Monolith Resources, Admin. Proc. File No. 3-21629 (Sept. 8, 2023) (settled order), available at https://www.sec.gov/files/litigation/admin/2023/34-98322.pdf, ¶ 11.
  
  “In determining to accept [Respondent’s] Offer, the Commission considered its remedial actions. For example, [Respondent] revised it (sic) separation agreements to make clear that the agreement does not in any way limit a separated employee’s ability to obtain an incentive award in connection with providing information to governmental agencies. In addition, [Respondent] notified, or used reasonable efforts to notify, employees who had signed the prior separation agreement that the agreement does not in any way limit their ability to obtain such an incentive award.”
  
  
• In the Matter of Stanley Black & Decker, Inc., Admin. Proc. File No. 3-21497 (June 20, 2023) (settled order), available at https://www.sec.gov/files/litigation/admin/2023/34-97761.pdf, ¶ 14.
  
  “In determining to accept the Offer, the Commission considered the following: a. After learning of potential misconduct, [Respondent] promptly acted to ensure that outside counsel conducted an internal investigation under the direction and oversight of a Special Committee of independent directors. Prior to completing its internal investigation, [Respondent] self-reported to the Commission staff the failure to disclose perquisites referred to herein and other conduct potentially implicating the federal securities laws. b. [Respondent] cooperated with the Commission’s investigation, including by providing to Commission staff facts developed through the internal investigation and compilations of relevant documents, information, and data. c. [Respondent] implemented remedial measures designed to ensure compliance with Item 402 of Regulation S-K and Commission guidance. [Respondent] also made disclosures in the Form 10-K for its fiscal year ended January 1, 2022 concerning expenses it had identified that constituted undisclosed perquisites, and made additional disclosures thereafter.”
  
  
• In the Matter of Cronos Group Inc., Admin. Proc. File No. 3-21215 (Oct. 24, 2022) (settled order), available at https://www.sec.gov/files/litigation/admin/2022/33-11123.pdf, ¶¶ 38-39 (emphasis added).
  
  “[Respondents] had procedures in place designed to identify potential material accounting errors and possible misconduct … promptly took steps to evaluate tips and complaints submitted by employees … promptly self-reported to Commission staff, information related to potential violations of the federal securities laws … provided timely updates to Commission staff and voluntarily produced documents, reports, and other materials, including factual information learned … facilitated interviews of current and former officers and … undertook remedial measures upon learning of the material accounting errors …. In consideration of the foregoing, the Commission has determined not to impose a civil penalty on [Respondents].”
  
  
• In the Matter of Surgalign Holdings, Inc., and Robert P. Jordheim, Admin. Proc. File No. 3-20945 (Aug. 3, 2022) (settled order), available at https://www.sec.gov/files/litigation/admin/2022/33-11088.pdf, ¶ 34.
  
  “In determining to accept [Respondent's] Offer, the Commission considered the cooperation it provided during the Commission’s investigation. [Respondents] provided substantial cooperation to the Commission’s staff throughout the investigation, including by disclosing information about conduct that the staff had not yet uncovered through its own investigation, conducting an internal investigation regarding this conduct, and providing the staff regular and detailed updates on the internal investigation and key documents identified through that investigation. This cooperation substantially advanced the quality and efficiency of the staff’s investigation and conserved Commission resources.”
  
  
• In the Matter of Bloom Protocol, LLC, Admin. Proc. File No. 3-20952 (Aug. 9, 2022) (settled order), available at https://www.sec.gov/files/litigation/admin/2022/33-11089.pdf, ¶ 31.
  
  “In determining to accept the Offer, the Commission considered remedial acts promptly undertaken by Respondent and cooperation afforded the Commission staff. The financial audit of [Respondent] necessary for filing a Form 10 is complex, as it requires the auditor to look at three separate corporate entities, multiple government currencies, and crypto assets, including Ethereum and BLT, and there are a number of intercompany reconciliations. [Respondent] has already voluntarily taken steps to prepare for registration, including retaining an auditor to perform the audit, commencing the audit, and hiring 2.5 full-time employees to support the completion of the audited financials and the compliance work necessary to prepare for registration.”
  
  
• In the Matter of Voxeljet AG and Rudolf Franz, Admin. Proc. File No. 3-20923 (July 1, 2022) (settled order), available at https://www.sec.gov/files/litigation/admin/2022/34-95193.pdf, ¶¶ 30-33.
  
  “[Respondent] self-reported and shared facts developed in its internal investigation, including providing regular updates and analyses and identifying key documents, and also facilitated the Commission staff’s interviews and testimony with witnesses. [Respondent] also has taken certain remedial measures, including expanding its accounting and internal controls personnel … has implemented new controls over the documentation, review, and reporting of the Company’s compliance … prepared and began implementing a remediation plan … [and] hired an outside accounting expert to review the [remediation] [p]lan ….”
  
  
• SEC Press Release, “Remediation Helps Tech Company Avoid Penalties” (Jan. 28, 2022), available at https://www.sec.gov/news/press-release/2022-14.
  
  “[R]emediation and cooperation included not just its internal investigation and revised valuation, but also repaying harmed investors and improving its governance—all of which were factors that counseled against the imposition of a penalty in this case. … [R]emedial actions also included hiring new senior management, expanding its board, and instituting processes and procedures designed to ensure transparency and accuracy of deal reporting and associated revenues.”
  
  
• In the Matter of ProPetro Holding Corp. and Dale Redman, Admin. Proc. File No. 3-20661 (Nov. 22, 2021) (settled order), available at https://www.sec.gov/files/litigation/admin/2021/33-11008.pdf.
  
  “[Respondent] (i) hired a new management team and additional finance department personnel, all with significant public company experience; (ii) installed several new directors, including new Audit Committee members, and created a new Disclosure Committee with its own disclosure counsel; (iii) developed several new internal controls regarding internal auditing matters, credit card and expense reimbursement, and travel; (iv) created and implemented new training requirements for employees; (v) enhanced the D&O Questionnaire process; and (vi) retained an investigative firm to do background checks on all senior executives and executive disclosures.” 

¹ See Statement of SEC Director Gurbir S. Grewal, U.S. Sec. & Exch. Comm’n, “ ‘The Five Principles of Effective Cooperation in SEC Investigations,’ Remarks at Securities Enforcement Forum West 2024” (May 23, 2024), available at https://www.sec.gov/news/speech/grewal-remarks-securities-enforcement-forum-west-052324.
² See, e.g., Statement of SEC Director Gurbir S. Grewal, U.S. Sec. & Exch. Comm’n, “Remarks at Securities Enforcement Forum West 2022” (May 12, 2022), available at https://www.sec.gov/news/speech/grewal-remarks-securities-enforcement-forum-west-051222.
³ In the Matter of Stephen J. Easterbrook and McDonald’s Corporation, Admin. Proc. File No. 3-21269 (Jan. 9, 2023) (settled order), available at www.sec.gov/files/litigation/admin/2023/33-11144.pdf, ¶¶ 36-37.
⁴ Id.
⁵ In the Matter of View, Inc., Admin. Proc. File No. 3-21505 (July 3, 2023) (settled order), available at www.sec.gov/files/litigation/admin/2023/33-11208.pdf, ¶¶ 33-35.
⁶ Statement of SEC Director Gurbir S. Grewal, “ ‘The Five Principles of Effective Cooperation in SEC Investigations,’ Remarks at Securities Enforcement Forum West 2024.”
⁷ See Seaboard Report, “Policy Statement of the Securities and Exchange Commission Concerning Cooperation by Individuals in its Investigations and Related Enforcement Actions,” Securities Exchange Act Release No. 61340 (Jan. 13, 2010), available at http://www.sec.gov/rules/policy/2010/34-61340.pdf; see also Sec. & Exch. Comm’n, Division of Enforcement, Enforcement Manual, § 6 (Nov. 28, 2017), available at https://www.sec.gov/divisions/enforce/enforcementmanual.pdf.