Internal Investigations

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The SEC, in conjunction with the Colorado Bar Association and Colorado Society of Certified Public Accountants, recently sponsored the 51st Annual Rocky Mountain Securities Conference featuring SEC officials and corporate experts from across the nation.  Sam Waldon, partner at Proskauer and former Assistant Chief Counsel in the SEC’s Division of Enforcement, moderated a panel of expert practitioners on developments in securities enforcement and white collar defense.  The following topics were discussed:

1. Current Commission and Division of Enforcement

The Panel generally agreed that commentators have largely overstated the extent to which the current Enforcement program has changed under the current administration.  However, they agreed that the types of cases being brought today, and the current case mix, is somewhat different than the immediately preceding Enforcement program, with a greater emphasis on cases involving retail investor harm.  And the Panel agreed that the single biggest factor impacting the Enforcement program today has been the prolonged hiring freeze.

2. Sharing results of internal investigations

The Panel discussed recent experiences with having to decide whether and how to share the results of an internal investigation with staff, highlighting the challenge of balancing the desire to gain meaningful cooperation credit, against the value of preserving privilege.  The speakers also discussed how it can often be prudent to share with staff the findings of an investigation generally, but not share memoranda memorializing witness interviews.  Such an approach reduces the risk of waiver of the attorney-client privilege and/or attorney work product immunity covering the internal investigation as a result of disclosure to the SEC.

As we have previously observed, private fund advisers face a difficult challenge when SEC guidance (in the form of a speech or a public enforcement order) indicates that certain long-standing practices may be contrary to the securities laws. What does an adviser do when its past practices appear, in hindsight, to have fallen short?

While there are a number of potential “fixes”, including rebating fees, amending the fund documents, amending the Form ADV, and changing prospective practices, doing nothing is a particularly bad strategy. These situations are potential whistleblower events, even if the adviser is not yet aware of any whistleblower.  Advisers must recognize that their personnel might be motivated (economically and otherwise) to bypass internal reporting and report directly to the SEC.  Similarly, investors and others may go directly to the SEC.  When management becomes aware of a potential violation, there is usually a short time window to address the issue before it becomes a bigger problem.  Over the past two months, the SEC has issued over $26 million in whistleblower awards, including a $17 million award. And the SEC is actively pursuing cases against investment advisers relating to improper fees and inadequate disclosures, including a number of cases filed in the past month (see here, here, here, and here).

Letting an issue linger is not an option, because—chances are—the regulators will eventually examine the issue. Below are some key mistakes to avoid when addressing issues relating to the SEC’s whistleblower program.