Dos and don’ts on handling a regulatory investigation

December 21, 2012

By Stuart Gittleman, Compliance Complete

NEW YORK, Dec. 21 (Thomson Reuters Accelus) – A “highly polarized (and) politicized environment” had made the job of defending against a regulatory investigation particularly challenging, Lawrence Zweifach, a Gibson Dunn law partner, told attendees at a New York City Bar Association program last week. But there are steps a firm can to take to face the challenges.

The high-pressured atmosphere is affecting judges, regulators and legislators, and leading to cases “that will not stand up in the long run” to be brought, said Andrew Levander, a Dechert law partner.

There are fewer financial-statement fraud cases as a result of the Sarbanes-Oxley Act, but the Securities and Exchange Commission is increasingly focusing on individuals, particularly lawyers and other gatekeepers, Fried Frank law partner Dixie Johnson said.

The SEC is less hesitant than before to charge individuals, Walter Ricciardi, a Paul Weiss law partner, said, adding that the SEC has been delegating investigative responsibility to lower-level officials over the past four years.

Moreover, registrants are starting to see multidisciplinary inquiries, with officials from the SEC divisions of Corporation Finance and Trading & Markets joining examiners from the Office of Compliance Inspections and Examinations, said Davis Polk law partner Linda Thomsen. The resulting staff “curiosity” can create different standards, a diffused focus and less oversight over starting investigations, added Thomsen, a former SEC enforcement director.

Dos and don’ts

The first thing a chief compliance officer of an investment or fund adviser should do on learning of an SEC investigation is to not panic, Chris Lewis, general counsel of Alaric Compliance Services, said at a briefing hosted by Herbert L. Jamison & Co., a commercial insurance broker.

Noting that the SEC has additional powers under the Dodd-Frank Act through its administrative proceedings, Lewis said the chief compliance officer and the firm should:

  • stop the potentially violative conduct unless the firm truly intends to defend the investigation;
  • notify counsel immediately after notifying senior management, especially if a whistleblower may have been involved;
  • form an internal group including the firm’s general counsel and senior managers;
  • initiate a document hold and communicate warnings against destruction throughout the firm;
  • bring people into the inquiry on an as-needed basis, without making it the “water-cooler topic of the day”;
  • gather the facts;
  • notify the firm’s insurance carrier to provide potential coverage of investigative and defense costs, but not any disgorgement and penalties;
  • identify everyone who was involved in the focus of the investigation;
  • determine who could be adversely impacted if the allegations have merit, such as clients or investors, and whether anyone would benefit if the alleged conduct occurred, such as the firm, its affiliates or third parties;
  • assess the culpability factors, without necessarily documenting the considerations;
  • identify how the conduct was detected;
  • decide how to proceed legally, including determining what other resources may be needed, such as forensic accountants, and whether to conduct an internal or external investigation;
  • determine whether to self-report the matter to the SEC or other relevant regulators;
  • determine whether, when and how to disclose the existence of an ongoing investigation to clients, investors and the board;
  • determine whether to discipline culpable employees;
  • determine whether to remediate the alleged harm;
  • generally document the steps taken;
  • reassess the firm’s disclosure practices;
  • put the topic in a high-risk area in internal assessment, and develop policies and procedures for overseeing it; and
  • determine whether the firm needs better public relations and investor relations.

Lewis said it is critical that the CCO or the firm does not:

  • destroy, alter or fabricate documents;
  • make intemperate remarks that could become public;
  • conduct an incomplete fact-finding inquiry, or cover up findings; or
  • avoid public relations missteps, such as “front-running” the investigation before it officially starts, which may be considered obstruction or a lack of cooperation. An investigation is not necessarily a business killer, Gary Stein, a Schulte Roth & Zabel law partner, told the attendees, but in certain areas such as insider trading, the SEC and the Department of Justice’s “successes only whet their appetites more.”

Other priorities include the Foreign Corrupt Practices Act, especially involving relationships and transactions between the firm and sovereign wealth fund investors, valuation, manipulation such as marking the close, and misrepresenting the extent of the firm’s “skin in the game” of client investments, Stein said.

Stein also urged firms to have policies and procedures in advance to limit disclosures to “material” matters that the firm has determined before the inquiry was started.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus ( Compliance Complete ( provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges. Follow Accelus compliance news on Twitter at:

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