When is self reporting compliance violations and proactively cooperating with Securities and Exchange Commission enforcement investigations a good idea?

It is always a good idea if a firm wants credit against any possible enforcement action, Gurbir S. Grewal, director of the SEC Division of Enforcement, told compliance attorneys at the Securities Enforcement Forum West 2024 last week.

“As numerous recent enforcement matters have shown, there are real benefits to parties that cooperate with commission investigations. These benefits can affect both the charges and the remedies the division may recommend, and that the commission may ultimately impose,” Grewal said.

When market participants don’t self-report, not only are they likely to lose out on very significant benefits, but it may also raise questions about their supervisory systems and compliance function, he said.

added the enforcement director, who laid out the regulators five principles of cooperation.

He said the SEC has five principles of cooperation: self-policing, self-reporting, remediation, cooperation and collaboration, which Grewal said has been critical in many of the recent matters where the SEC has rewarded cooperation.

Compliance attorneys should be using the principles as a roadmap to guide conversations with clients and make the case for cooperation credit and waived or reduced penalties with SEC enforcement staff, he said

“On the charging side, we may recommend bringing reduced charges or we may decline to recommend charges altogether. On the remedies side, we may recommend reduced or even zero civil penalties. And where there’s been real remediation that addresses the misconduct, that may impact whether we recommend undertakings and, if we do, their scope,” Grewal said.

Orders in a number of recent settled actions also highlight another benefit: a finding by the SEC that a party provided meaningful cooperation. This lets parties publicly demonstrate their positive conduct in what may otherwise be an unfavorable context, he added.

The SEC rewards cooperation “because it helps us move investigations more efficiently,” Grewal said. ”That benefits all parties to an enforcement investigation. For one, timely investigations and resolutions address misconduct, protect investors, and promote accountability. ... All of that helps to enhance public trust and confidence in our markets. And timely investigations that don’t result in enforcement recommendations also mean that the cloud of investigation doesn’t hang over an entity or an individual for longer than necessary.”

Coordination doesn’t always ensure that firms and executives will receive a no-penalty resolution or a declinaton, he said. That’s because each case “is highly fact dependent and there’ll always be situations where some charges and remedies are necessary no matter the level of cooperation. But the bottom line is this: You’re likely to experience better outcomes with cooperation than without it,” he noted.

Not all compliance attorneys are fans of self-reporting, but the odds of getting caught are increasing all the time, Grewal warned.

“I’m sure there are those lawyers and clients, perhaps not in this room, that say, ‘Hey, we’ll just take our chances that the SEC doesn’t learn of a violation or, if they do, we’ll cooperate then.’ While you may have run the probabilities in your heads, I think that’s a very risky gamble, with the odds increasing in our favor every day. That’s because, given the success of the Commission’s whistleblower program, our improved use of data analytics, and our increased use of risk-based initiatives, it’s really no longer a question of if we’ll find out about a violation, but often when,” he added.

The best cooperation starts with early self-policing, before the SEC gets involved, Grewal said.

Firms’ should then seek to remediate whatever is going wrong, which will help them build the case for cooperation credit, he added.

“The type of cooperation that earns credit requires going above and beyond what’s legally required—more than simply complying with subpoenas without undue delay or gamesmanship,” Grewal said.