2007 Issue 1 - New York City Bar Association

L A W Y E R ’ S R O L E I N C O R P O R A T E G O V E R N A N C E
3. Self-reporting
Another important issue is whether and when to report the possibility
of unlawful activity to regulatory authorities. Regulators’ published
commentaries and rules on compliance suggest that prompt self-reporting
of unlawful conduct is always in the client’s best interests (see Appendix
H below). The Thompson Memo provides: “In determining whether to
charge a corporation, that corporation’s timely and voluntary disclosure
of wrongdoing and its willingness to cooperate with the government’s
investigation may be relevant factors.” Similarly, the Seaboard Report factors
include whether the company promptly reported to SEC staff the
results of its review: “Did the company voluntarily disclose information
our staff did not directly request and otherwise might not have uncovered”
In the U.S. Sentencing Guidelines for Organizations (Appendix H at H-
5), punishment is mitigated based on a company’s efforts in self-reporting,
cooperation with authorities, and acceptance of responsibility. The
CFTC states that it considers the company’s good faith in uncovering
and investigating misconduct, the company’s cooperation with Division’s
staff in reporting misconduct, and the company’s actions with respect to
Division’s staff. The NASD likewise states that it considers whether, prior
to detection or intervention by the regulator, the company accepted responsibility
to a regulator, voluntarily employed corrective measures, revised
procedures to avoid recurrence of the misconduct, and attempted to
pay restitution or otherwise remedy the misconduct. NYSE Rule 351 and
NASD Conduct Rule 3070 go even further, requiring companies promptly
to report any violation of securities laws or regulations.
In light of these regulatory pronouncements, clients often ask counsel
whether self-reporting a recently discovered problem is legally required
or only a matter of prudence. 205 Ethical considerations and legal requirements
do not always mandate full, real time disclosure of all potential
problems to regulators, although they mandate truthful disclosure when
disclosure is made. In many, if not most, circumstances, reporting evidence
of unlawful activity to regulators will be the proper or even required
course of action. Some entities, particularly those in highly regulated
industries, or with a history of problems, may adopt a policy approaching
zero tolerance, and will determine that virtually any evidence
of wrongful conduct must be reported promptly to regulators.
205. This does not apply to on-going illegal activity, such as the improper destruction of
documents, which constitutes obstruction of justice. Counsel have an affirmative obligation
to try to ensure preservation of documents relevant to the potential wrongdoing.
T H E R E C O R D
194