August 08, 2016 Articles

Cooperation Credit in Enforcement Proceedings: The Importance of Independence

Use of an outside investigator may curry greater credit from regulators

by Jonathan C. Schwartz and David G. Buffa

Securities regulators and enforcement agencies, including the Securities and Exchange Commission (SEC) and U.S. Department of Justice (DOJ), have programs in place to encourage greater cooperation from individuals and companies that uncover reportable conduct. These programs encourage individuals and companies to voluntarily provide information and assistance to regulators by providing them with “cooperation credit,” which typically consists of reduced fines in civil or administrative cases or potential shorter sentences in a criminal case. For many small and mid-sized firms, cooperation credit can mean the difference between surviving an investigation or a penalty that closes its doors. 

Traditionally, regulators have valued cooperation based on a firm’s timeliness, thoroughness, diligence, and proactive nature. In addition, it has long been understood that firms must provide “extraordinary” assistance to a regulator’s investigation in order to receive cooperation credit. Because regulators do not, however, explicitly define “extraordinary” assistance or—as a matter of policy—delineate the potential quid pro quo in enforcement documents, it can be difficult to ascertain the value that can flow from the often cumbersome tasks associated with uncovering and self-reporting misconduct. Nevertheless, an article that examined the monetary benefits of firm cooperation with regulators revealed that cooperation really does count, and recent comments from regulators suggest that those seeking credit for their cooperation should strongly consider using an independent third party to conduct their internal investigations. 

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