Cooperation Versus Confrontation: Working to Resolve Inquiries
Welcome to the November 2017 edition of our newsletter! In this issue, we’ll examine the recent enforcement trend of emphasizing cooperation versus prosecution, and how this trend could affect your preparation efforts.
The Push Toward Cooperation: Working Together, With Caution
As a more pro-business regulatory regime takes the reins in the nation’s capital, many industries and executives who felt burdened by the Obama administration’s regulatory pursuits have breathed a little easier. While some public comments have indicated a new, more business-friendly approach by regulators, preparation and a thorough approach to understanding your own company’s potential misdeeds remains essential, and may pay greater dividends than in years past.
At a speech delivered in late September to an audience at New York University, James McDonald, the enforcement director of the U.S. Commodities and Futures Commission – which regulates some of the most complex financial instruments available in markets today – emphasized the need for cooperation with regulated entities, comparing the effort to community policing. “[W]e recognize that enforcement actions alone aren’t enough to prevent misconduct in our markets,” McDonald said in part. “It’s not enough for us to wait for violations to occur, detect as many as we can, and then prosecute as many of those as we’re able. That’s like playing a game of whack-a-mole—as soon as we bat down one violation, others just keep popping up. Instead, to achieve optimal deterrence, we in law enforcement need the buy-in from the communities we police. This is a reality that isn’t limited to the financial arena. It’s a fact that applies across the board—from white collar crime in a company to violent crime on the street. And law enforcement officials across the spectrum have to be thoughtful about how to meet their goals while keeping this reality in mind. This is part of what our cooperation and self-reporting program is designed to achieve.”
The Right Kinds of Cooperation: Preparing to Aid an Inquiry Into Your Company
In his speech, McDonald noted that many corporate cultures emphasize a need to “get along,” which can be an impediment to investigating one (or more) of your own. Yet the reward to a company for best efforts in cooperation can be substantial: in later remarks, McDonald and his colleagues said penalties for wrongdoing could be “significantly reduced”, although he stepped back from earlier remarks, reportedly included in a draft copy of his speech, that said the penalty reduction could be as much as 75 percent.
An essential part of cooperation is internal, particularly concerning retaining documents and answering regulator inquiries. Yet companies answer to another audience, the markets and their public, and this is where an outside investigator can be of assistance. Do relevant parties have any conflicts of interest that management may not have known about? Are there any other facts which, if made public, could harm the company’s reputation as the inquiry is proceeding, even if it hasn’t been made public? Once made aware of the area of inquiry, a good practice is to do your own investigation including, where relevant, background checks on relevant parties to develop financial profiles and identify where conflicts of interest or other areas of concern may exist. It is best to work under the direction of counsel, who will also be likely to understand how best to cooperate with regulators and, hopefully, produce the best outcome for your company.