Securities Regulation Daily Attorneys explore how to handle a regulatory investigation in SIFMA webinar
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Wednesday, May 27, 2020

Attorneys explore how to handle a regulatory investigation in SIFMA webinar

By Amanda Maine, J.D.

SIFMA’s latest virtual event featured perspectives from in house and outside counsel as well as the SEC on the practical and legal issues of conducting investigations.

Marc Berger, director of the SEC’s New York Regional Office, was joined by in house and outside counsel in a virtual discussion on how to approach a regulatory investigation. The webinar, which was hosted by the SIFMA C&L Society, examined a number of issues related to conducting an internal investigation and dealing with regulators, and included discussion of document preservation, privilege, joint defense agreements, and cooperating with regulators. The participants also discussed the challenges of conducting investigations in a virtual environment in the midst of the COVID-19 crisis.

Working during a pandemic. Berger noted that due to COVID-19 precautions, the SEC has been on mandatory telework since mid-March. However, he assured the virtual attendees that the Commission’s work has been proceeding in all divisions and offices. Berger explained that the Enforcement Division’s coronavirus steering committee has been working to proactively identify and monitor areas of potential misconduct in addition to coordinating responses with other regulators on making decisions for how to allocate resources.

According to Berger, since February, the SEC has issued more than 30 trading suspensions of securities of issuers who have made coronavirus-related claims in their public statements. These suspensions have been instituted quickly thanks to proactive monitoring of the steering committee, which hopefully sends a message to the market that the SEC is acting to thwart these kinds of frauds, Berger said.

In addition to trading suspensions, the Enforcement Division has commenced COVID-19-related enforcement actions, such as its complaint against Applied BioSciences Corp., which had claimed in a press release that it had begun offering and shipping supposed finger-prick COVID-19 tests for home and school use, even though such tests are not intended for home use by the general public. Berger also noted that the SEC has also seen a spike in tips, complaints, and referrals (TCRs) compared to the same period last year, many of which are related to COVID-19. Berger emphasized, however, that the Division is continuing to pursue cases unrelated to the coronavirus. The staff is using videoconferencing to take testimony and conduct meetings with counsel, including Wells meetings. The Office of Compliance Inspections and Examinations (OCIE) is also conducting exams, including through correspondence. Berger said that OCIE staff is also committed to outreach to firms on operational resiliency related to COVID-19.

Defense attorneys on the panel described the challenges of conducting virtual meetings, lamenting the loss of face-to-face interaction in investigations and interviews. Trying to recreate those connections can be very challenging, said panel moderator Andrew Stemmer, head of Litigation & Regulatory Enforcement for the Americas at Deutsche Bank. It is important to keep in mind that counsel is dealing with human beings who are under stress, which may be more difficult to do in a virtual environment, he said.

Katherine Goldstein, partner at Milbank LLP agreed that performing functions that normally take place in person presents special challenges for situations like witness preparation sessions, internal investigation interviews, and just being able to "read the room." It is necessary to learn new technology and be willing to be adapt to the new circumstances, she said. In losing some interpersonal connections, you have to make the technology your friend, she advised.

Handling investigations. The discussion then turned to the nuts-and-bolts of handling investigations, both internally and interacting with regulators. Asked about how to avoid expanding the scope of an investigation, Victoria Earls, chief counsel at Interactive Brokers, said that when scoping an investigation, it is important to consider how the regulators learned about the issue at hand, such as whether it was through an examination, a whistleblower, or self-reporting. For example, she said, it is more difficult to control the scope of an investigation if the information came from a whistleblower instead of from an enforcement-referred examination.

Berger recommended that counsel not be too rigid on scoping investigations. He said that if during an investigation of "issues A, B, C, and D," you learn about new issue E, let the staff know about it. It is important to notify the staff if new issues arise, he stressed.

Chris Williams, senior legal counsel at Fidelity Investments, responded to a question on document preservation and legal holds on preserving data, by outlining factors that should be considered. Counsel should, for example, evaluate if the relevant data is already required to be retained under specific regulations and if it is more efficient to collect the totality of data and not just the data related to the issue under the legal hold. Counsel should also consider if there is a credible threat of litigation; if not, a legal hold seems less necessary. Also relevant to the discussion is whether the client is facing a credible threat of being named as a defendant in the litigation or whether the client is a third party or a witness, according to Williams.

The panel also discussed issues surrounding joint defense agreements (JDAs), which may present conflicts of interest, especially when the parties to the agreement are the company and its employee. According to Goldstein, one risk of entering into a JDA is how much information a client may want or need to share with regulators. Sharing information with the government may result in butting up against the confines of the JDA, she explained. Entities need to be cognizant about not tying their hands on sharing relevant information with the government when cooperating with a government inquiry, Goldstein added.

Berger said that the Enforcement Division tends not to get involved in JDAs in its investigations. However, it might become an issue if a person or entity entering into a JDA is prevented by the agreement from sharing facts with the staff. The staff may also be wary of sharing a document with a party to a JDA when the staff would prefer not to disclose the contents of that document to another party to the JDA, he explained.

Whether or not to enter into tolling agreements also presents challenges, according to Fraser L. Hunter, partner and securities department vice chair at WilmerHale LLP. If the government authority requests a tolling agreement, it is difficult to push back, he said. If such a request is submitted, Hunter suggested using it as a basis to inquire where the litigation stands; for example, if the investigation has already been going on for three years, ask why the agency needs another six months. Stemmer asked if pushing back on a tolling agreement request might jeopardize potential cooperation credit. Hunter responded that it might be a risk if the response is simply "no." However, the staff may respond more favorably with good-faith arguments against a tolling agreement, Hunter added.

Stemmer asked if there are situations where counsel should consider waiving privilege during an investigation. Earls said that an advice of counsel defense may be one reason to waive privilege as a way to neutralize a scienter argument, by claiming the client was acting in good faith on the attorney’s advice. She added that some states, such as Utah, allow waiving privilege for an advice of counsel defense pertaining to advice from outside counsel, while shielding in house counsel communications.

Regarding global settlements that involve several jurisdictions, Stemmer inquired if there are any reasons where a client might not want to enter into a global settlement. Williams said that global settlements are generally preferred to handling litigation in a piecemeal manner, but several factors should still be considered. These include whether the global settlement will deter future civil or criminal claims, whether it would help avoid adverse press coverage and reputational harm, how it may minimize ongoing disruption to business operations, and whether it would be more efficient to enter into a global settlement or try to settle with one regulator.

Hunter said that while he thinks that it would be better to knock all the litigation out at the same time in a global settlement, he added that if a company settles with the SEC and pays disgorgement, it can argue that it should not have to settle twice once the money has already been paid back.

Companies: Securities Industry and Financial Markets Association

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