The Securities and Exchange Commission (SEC) has enhanced its enforcement against financial wrongdoings by creating a cooperation program. This program, officially launched in 2010, can offer “cooperation credit” to firms and individuals who voluntarily provide valuable information that helps the SEC better investigate and ultimately resolve financial misconduct, errors and other wrongdoings.
For asset management firms that discover internal misconduct and other financial issues that may lead to SEC enforcement, participating in the cooperation program may—depending on the SEC’s assessment of the value of that cooperation—reduce fines, industry suspensions and even formal legal charges. The program determines how much credit to give based on several factors, including
- the nature and level of the cooperation,
- how quickly cooperation was provided,
- the severity of the misconduct and the cooperator’s level of culpability in the alleged wrongdoing.
In some cases, the SEC may levy harsher penalties on companies that fail to self-report potential problems or that do not accept a cooperation offer from the SEC.
The Benefits of Cooperation
The SEC has signed more than 90 cooperation agreements over the past five years. For example, some asset managers have had their monetary penalties significantly reduced or avoided formal charges altogether because they provided valuable information, evidence and assistance to the SEC, says Marc Berner, Manager of the Financial Services Group for The Hartford, citing a recent speech by Andrew Ceresney, Director, SEC Division of Enforcement where examples of leniency were noted.
Asset management firms that identify instances of internal misconduct or other wrongdoings have the opportunity to resolve and self-report those issues to the SEC and potentially avoid severe enforcement actions. In other cases, the SEC will approach a company or individual and seek cooperation—offering to reduce penalties against them in exchange for that cooperation.
However, firms and individuals must weigh the potential benefits of providing information to the SEC versus the potential risks involved with participation—such as the costs of participation and the potential risks of harsher penalties and other enforcement actions than if they had decided not to participate.
Protection for Cooperation
Insurance is available to help asset managers cover the potentially very high costs associated with an SEC investigation, including the costs of participating in the cooperation program. These costs include legal fees and documentation requests.
However, each policy is different. Many insurers do not provide coverage if the SEC ultimately takes no enforcement action against the cooperator. Therefore, it is important for companies to compare policy terms and find coverage that meets their specific needs and will benefit them if they cooperate and ultimately face no enforcement action.
Given that the SEC seems to be rewarding asset managers who participate in the cooperation program, it makes sense for companies to consider cooperation a potentially valuable way to report problems to the SEC and avoid more severe and costly enforcement actions.
To learn more about The Hartford’s comprehensive insurance offering for asset managers, visit www.thehartford.com/AMC.
This document outlines in general terms the coverages that may be afforded under a policy from The Hartford. All policies must be examined carefully to determine suitability for your needs and to identify any exclusions, limitations or any other terms and conditions that may specifically affect coverage. In the event of a conflict, the terms and conditions of the policy prevail. All coverages described in this document may be offered by one or more of the property and casualty insurance company subsidiaries of The Hartford Financial Services Group, Inc. Coverage may not be available in all states or to all businesses. Possession of these materials by a licensed insurance producer does not mean that such producer is an authorized agent of The Hartford. To ascertain such information, please contact your state Department of Insurance or The Hartford at 1-888-203-3823. All information and representations herein are as of November 2015. The Hartford® is The Hartford Financial Services Group, Inc. and its subsidiaries, including Hartford Fire Insurance Company. Its headquarters is in Hartford, CT.
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