Board oversight of SEC investigations.

• Author: FERRARA, RALPH C.
• Position: Securities and Exchange Commission - Brief Article

Don't underestimate the threat: Here are a few critical 'first response' steps.

YOUR CFO ANNOUNCES that he has received a letter from the Division of Enforcement of the Securities and Exchange Commission, which wants to review the company's accounting records in two weeks. Do you know how best to proceed?

Dealing with the SEC and its enforcement staff is often a complicated affair, requiring the consideration of numerous procedural, substantive, and tactical issues. Board members, however, may be better served by focusing initially on broader oversight issues, such as those that follow, rather than on details better left to the company's senior managers and general counsel.

Hire Experienced Outside Counsel. Selecting competent outside counsel is critical. Representing the company will require a profound understanding of applicable laws and regulations as well as SEC enforcement policies and practices. The most common mistakes made by those unfamiliar with SEC matters are underestimating the threats posed by informal inquiries and striking too aggressive a stance in dealing with formal ones, acting as if the company were in litigation. An SEC inquiry represents only a fact-finding mission, not a lawsuit. Counsel must be able to differentiate properly between serious and routine inquiries and advise the company accordingly. Counsel must also be adept at handling potential conflict of interest and privilege waiver issues should it be engaged to jointly represent the company and associated parties for the purposes of the SEC investigation.

Be the First to Investigate and Take Corrective Action. Staying ahead of the enforcement staff will almost invariably require the company, through outside counsel, to perform ifs own assessment of the facts under review as well as any associated civil, regulatory, and criminal liability risks. Conducting an internal investigation may be essential as the company deliberates the merits of cooperating with the SEC and disclosing any wrongdoing or the existence of the inquiry to the public. Conducting an internal investigation may also allow the company to detect and stop ongoing misconduct and implement additional internal controls well in advance of any SEC or other proceeding. Taking effective remedial action should also help the company avoid forward-looking sanctions, such as injunctions, often sought by the SEC.

Cooperate Whenever Possible. Determining whether to cooperate with the SEC requires the...