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For years attorneys have advised clients that corporate interests are best served by investing the time and energy necessary to build effective internal compliance programs that can detect and deter wrongdoing. To encourage such procedures, various government agencies, including the Antitrust Division of the Department of Justice, have established amnesty programs designed to reward companies that self-report with relief from corporate liability for reported violations. With respect to violations of the federal securities law, however, there has been some uncertainty over whether the U.S. Securities and Exchange Commission would consider such self-policing efforts in determining whether or not to take enforcement action. On Oct. 23, 2001, the SEC took an important step towards removing that uncertainty. In a Report of Investigation, Exchange Act Release No. 44969 (Oct. 23, 2001), the SEC reported that, while it was bringing a cease-and-desist proceeding against the former controller of a public company’s subsidiary for causing the parent’s periodic reports to be misstated, it had determined not to take any enforcement action against the parent company. The SEC expressly grounded its decision in recognition of the parent’s exemplary efforts in detecting the wrongdoing, reporting the misconduct to its Board of Directors, authorizing an internal investigation, sharing the results of that investigation with the SEC Staff, disciplining the employees involved, cooperating with the Staff and taking steps to strengthen its financial reporting processes. In reporting its decision, the SEC set forth thirteen specific criteria it will consider “in determining whether, and how much, to credit self-policing, self-reporting, remediation and cooperation — from the extraordinary step of taking no enforcement action to bringing reduced charges, seeking lighter sanctions, or including mitigating language in documents we use to announce and resolve enforcement actions.” While the SEC warned that its decision confers no “rights” on even the most cooperative corporation, the decision does send the loudest and clearest signal the SEC has ever sent that effective self-policing will be rewarded. This decision is thus a powerful reminder of the critical importance of conducting periodic, in-depth reviews of all compliance systems, audit mechanisms and controls to make sure a company’s internal compliance program is state-of-the-art. John F. Savarese is a partner in the litigation department at the law firm Wachtell, Lipton, Rosen & Katz. David A. Katz is a partner in the corporate department at the firm.

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