One common misconception about responding to the U.S. Securities and Exchange Commission’s (“SEC’s”) initial request for documents as part of an examination or routine sweep is that the document production phase has ended. On occasion, it has basically just begun.
Once the SEC has had sufficient time to review the material, the Commission may submit a secondary request, but this could happen days, weeks, or even months after the initial submission.
Whether or not the initial document request from the SEC warrants involvement Division of Enforcement, it’s important to adhere to the following best practices to protect against a worst-case scenario.
Provide Only What is Requested
A frequent mistake made by senior management is oversharing. Once the SEC makes a second document request, it is in a firm’s best interest to only provide the necessary information. Often, we see that firms share more than needed, with the intent to remedy further inquiry, but this approach has the potential to backfire and subject your firm to further questioning, which can make the matter worse.
It’s important to remember the essentials of the question. We recommend the first step is to read the SEC’s request carefully (at least twice) to ensure you’re providing the Staff exactly what was requested and nothing more. For example, if they request employee birthdates, you’d only give them the birthdates. You would not provide additional details, such as time and where they were born. Be very, very specific with what you provide.
Tip: Do Not Assume What Staff is Looking For
On occasion, a secondary document request may be routine. In fact, it may or may not reflect what was provided/submitted in your first request. Regulators use this opportunity to unturn additional rocks or check a few unsuspecting corners of the business. An example, they may just want to see/verify that your contracts and/or agreements are signed. Or on the other hand, a secondary request may be because they suspect some impropriety and want to perform a deeper dive.
Recently, a client encountered a similar situation where SEC examiners wanted to confirm and verify that specific language was present in an agreement, but they did not explicitly ask for a copy of an agreement. Unsuspectingly our client wanted to provide the entire document, but under our counsel, we provided the guidance not to do so.
But had the firm provided the entire agreement, it could’ve potentially opened a much stickier scenario. As the SEC would have been able to review all the provisions within the agreement and potentially leave the firm with further scrutiny.
It’s a Marathon, Not a Sprint
The speed of your response won’t deter an examination, but insufficient response or a lacking compliance program may. As stated before, we encourage firms to take their time and plan how they will respond within the given deadline. It is imperative to understand the purpose and details of an additional request, acknowledging that what was initially provided may have not provided regulators enough information.
TIP: Ask for an Extension, If Needed
The SEC is understanding to limitations of business and the environment. So, if your firm needs more time, for a legitimate reason and not simply to stall, ask the SEC for an extension. Again, a hasty response to document production can result in sending the SEC the wrong document and leave your firm up for additional investigation.
For example, let’s say the SEC requests to see your business continuity plan, which is a common request. In your desire to move things along, you decide to mistakenly provide examiners with your entire policy and procedures manual which contains your business continuity plan. While this may seem like a harmless detail you may have overlooked, it has provided additional collateral for examiners to evaluate for deficiencies or program weaknesses.
Preventative Measures You Can Take
If your firm hasn’t already, we recommend that you ensure your team has developed a habit of properly documenting things to keep adequate books and records. So, when an initial and/or supplementary request by the SEC is made, your firm will be better prepared for a response.
Having adequate documentation simplifies the process for firms during this phase of an SEC document request, as it is an active and up-to-date record of activities within your firm. Companies often struggle to produce records due to their lack of documenting efforts of client accounts, events, and procedural reviews.
Engage Outside Counsel
If you opted to treat the SEC’s first request for document production as a do-it-yourself project and regulators have come back a second time, involving experienced outside counsel at this stage is critical. All too often, counsel is engaged only after significant interactions with the SEC have already occurred and the initial document request has been mishandled.
At Jacko Law Group, PC (“JLG”), our team of specialists can advise and facilitate the appropriate response process to ensure the protection of companies and individuals responding to SEC requests. Our experience in these matters can help us learn more about an examination or potential investigation and how it may impact your firm or individuals.
Regardless of where you are in the process, we can help. Contact us for a consultation to discuss your firm’s regulatory response.
