In this instance, a whistleblower allegation requires a judgment call by the general counsel and the CCO. First, they must determine what, if anything needs to be confessed. Then they must decide whether its more prudent to self-report immediately or simply include the investigation findings in the report to the board, which is open to SEC review.
In yet another context, having an understanding of the severity of the violation will directly impact the general counsels decision on how quickly to report. In 2010, the SEC approved a FINRA rule that requires a member broker-dealer to self-report within 30 days when it concludes, or should have concluded, that the entity or an associated person of the entity has violated any laws, rules, regulations, or standards of conduct. FINRA has indicated that it expects reports only about serious conduct: involving a widespread impact, material failures, numerous customers, or significant dollar amounts. A judgment call, once again, is required here as to whether the conduct in question is serious enough to warrant a response within the 30-day window, within the 120-day look-back period, or, indeed, whether it merits any response at all.
From a regulatory perspective, one can readily understand the core benefits of swift self-reporting of known violations: quick confessions avoid the need to expend public and private resources. Nonetheless, this expectation places a company in a difficult conundrum when it finds itself in possession of incomplete but suggestive information.
While prudence may dictate further internal inquiry, regulatory expectations demand immediate self-reporting. The pressure will be even greater if an employee has stepped forward to report the problem, and his or her time is running down to decide whether or not to seek compensation as a whistleblower.
Given the brief timeframe for self-reporting, conducting a thorough and definitive internal investigation is all but impossible for an institution that has not laid the appropriate foundation ahead of time. Reporting to the SEC with a partial or inaccurate assessment of violationsa common occurrencecan make matters worse.
In plain terms, if a company initiates its internal criticism at the first sound of a whistle, it is already too late. Legal and compliance professionals should not wait until this situation is upon them. The only way a company can make the subtle and nuanced judgments necessary in the brief time period required is to prepare a system of rapid, thorough assessment well in advance.
John. H. Walsh is a partner at Sutherland Asbill & Brennan. He previously served for 23 years at the Securities and Exchange Commission, where he was instrumental in creating the Office of Compliance Inspections and Examinations.