When to self-report to the SEC

The Securities and Exchange Commission fined State Street in June for overcharging clients for reimbursable expenses.

So far so normal: “From a general perspective, and this includes the SEC’s regulation of private equity [as well as hedge] funds; there’s been a consistent focus on expense disclosures since Dodd-Frank came through in 2010,” says Michael Minces, founding partner and general counsel of Blue River Partners, a hedge fund and investment advisor. But what’s unusual is that State Street self-reported its conduct.

So when should a firm self-report?

“Self-reporting is often a very difficult question,” says Thomas Gorman, a former SEC attorney and partner in Dorsey & Whitney’s federal law enforcement investigations-enforcements actions department. “On the one hand the SEC promises ‘co-operation credit’ for doing this. In some instances it is clear that the reporting entity or person gets credit; in other instances, not.

“When evaluating the issue, the firm must consider several factors: reporting will likely result in sanctions, adverse publicity and perhaps protracted involvement in a government investigation,” Gorman adds. “If the firm or person does not self-report a whistleblower may file a report or some other person. Not reporting might also be a violation of various covenants in agreements the firm has. And, a failure to report followed by later discovery might result in harsher government sanctions.”

Julie Riewe, litigation partner at Debevoise & Plimpton and member of the firm’s white collar and regulatory defense group: “If it’s not always going to come to the regulator’s attention and you’re handling it appropriately internally, and remediating if you need to, then I think that’s the more prudent approach. There are these extenuating circumstances where you have something that’s just of such a magnitude, that it is going to come to the regulator’s attention regardless.”

The SEC gave State Street’s self-reporting credit in the press release accompanying the fine. “In determining to accept State Street’s offer, the Commission considered that State Street self-reported its conduct to the Commission and its substantial co-operation given to the Commission staff.”

Expanding on this, Gorman adds: “There is always potential merit in reporting. At the same time the rewards from the SEC are very difficult to project.” Gorman notes the firm may end up avoiding a charge, but this is atypical. “More typically the firm will receive either no penalty in the settlement or a reduced penalty.  Self-reporting is also the ‘good citizen,’ ‘right thing to do’ approach. It does have consequences, however, which the person or firm must evaluate on a case-by-case basis.”