SEC stresses value of self-reporting violations

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A Securities and Exchange Commission official at a conference Thursday offered bond lawyers some tips on self-reporting of securities law violations.

At a National Association of Bond Lawyers conference in Chicago this Thursday, Steve Varholik, a senior counsel in the SEC's Public Finance Abuse Unit, noted that just because issuers comply with the SEC it does not bode as well for them as full-fledged cooperation. Bond lawyers said issuers are increasingly interested in self-reporting of violations.

“At least from my perspective, I think it’s valuable; I think there’s a lot of value in it,” Varholik told The Bond Buyer.


Varholik responded to a question during a panel discussion on SEC enforcement, asking what counsel has done well or poorly following the release of the Seaboard Report in 2001.

The Seaboard Report explained the SEC’s decisions to not take enforcement action against a public company for financial statement irregularities. It gave an analytical framework for evaluating cooperation including measures such as remediation attempts and cooperation with law enforcement.

Attorneys will often call him, Varholik said, and say their clients want to cooperate.

“But sometimes the words don’t match the actions,” Varholik said. “Compliance is not the same as cooperation.”

Some may want to divulge only the information that’s required of them, but not volunteer any more information past that. Varholik said it helps for issuers to be more proactive than reactive when the SEC is conducting investigations.

If issuers decide to conduct an internal investigation in anticipation of self-reporting, Varholik stressed they should fully investigate, instead of just halfway.

Not much credit may be due if the SEC finds the information first, Varholik said.

“In general, just the awareness of enforcement is bringing out more conversations and as a result you have the ability to speak to folks about the option of self-reporting, whereas that might not have previously even come to my office,” said Kathleen Marcus, attorney at Stradling Yocca Carlson & Rauth.

Marcus focuses on government and regulatory enforcement defense, internal investigations and compliance counseling. She also was an SEC enforcement officer.

When she hears “self-report,” Deanna Gregory, partner at Pacific Law Group LLP, thinks back to the SEC’s Municipalities Continuing Disclosure Cooperation Initiative.

The SEC started its MCDC initiative in 2014, and it promised underwriters and issuers that they would receive lenient settlement terms if they self-reported instances over the previous five years of issuers falsely saying in official statements that they were in compliance with their continuing disclosure documents.

MCDC led to SEC settlements with 72 underwriters and 72 issuers. It led to hand-wringing over whether so-called foot fault violations, such as filing annual financial statements a day or two late, needed to be disclosed in an official statement.

Post-MCDC, Marcus has seen an uptick in people coming into her office to discuss self-reporting.

“I don’t know if there’s necessarily a nexus between MCDC and self-reporting, but it goes back to just that general awareness that there is more of an atmosphere, that cops are on the beat,” Marcus said.

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