by David Smyth, President, CadyEducation
The SEC and its senior staff frequently encourage companies to cooperate with SEC investigations. That is not big news, and in its 2001 Seaboard Report, the Commission said out loud how it would like that cooperation to happen: [1]
- Ongoing self-policing, including an effective compliance program and an appropriate tone at the top;
- Self-reporting of misconduct when discovered;
- Remediation, including appropriately dealing with individual wrongdoers, improving internal controls and procedures, and compensating victims; and
- Cooperation with law enforcement authorities, including informing the staff about the underlying violations and the company’s remedial efforts.
Atom Investors LP recently took the fourth cooperation prong to another level, and in doing so wriggled out of an off-channel communications investigation with an October 4 administrative order that featured no penalty at all. [2] In 2021, the Austin, Texas-based investment adviser received a third-party subpoena from the SEC and soon learned that it couldn’t affirm that it had all of the potentially responsive communications. As with many advisers, some of the communications had been sent on its staff’s own devices, and Atom realized it now had its own investigation to deal with.
Here’s what Atom did to escape a penalty, with some commentary following each note:
- They self-reported the record-keeping failure to the SEC staff.
The SEC describes this as a self-report in the administrative order, the press release, and even in its headline. But this is one instance where the self-reporting may actually be a little underwhelming. It’s not that Atom realized it had a problem, did a more comprehensive assessment, and then went to the SEC purely on its own. Atom already had a subpoena in hand and was unable to respond to it fully. What other option did it have but to explain its own recordkeeping issues to the staff? It seems like any other response would have been misleading.
- After discovering the gap, they voluntarily conducted an internal review to identify the scope of its off-channel communications problem, and revamped its compliance program for these communications going forward.
This investigation and review of Atom’s compliance procedures are standard operating procedure and entirely expected under the circumstances.
- They cooperated in the staff’s investigation of the third-party entity. “For example, Atom undertook efforts to retrieve, analyze, and organize trading data to match orders directed by the other entity to execution data.”
Now this is quite remarkable. Atom apparently looked at this situation, realized its self-reporting wasn’t going to be stellar on its own, and then volunteered to do part of the staff’s investigation into this other entity. The order says, “Atom’s cooperation helped conserve resources, enabling Commission staff to focus on other areas of the investigation.” Without seeing the resulting spreadsheets, it’s hard to know if that sentence is understatement. But retrieving, analyzing, and organizing the third party’s trading data can be a lot of work. It can be all of the work that turns mere suspicions of misconduct – a jumble of documents and numbers without meaning – into provable allegations. In the whistleblower context, this sort of “examination and evaluation” that “reveals information that is not generally known or available to the public” can actually qualify for an award under Rule 21F-4(b)(3). I don’t mean to confuse concepts, and Atom is obviously not a whistleblower here, but it provided the same sort of trading analysis that the SEC has explicitly recognized as valuable in another setting.
Given the size of some of the penalties imposed in these off-channel cases, this could be a good trade: do some of the staff’s work for them, and hope for the best on the back end in penalty reduction.
It’s worth noting, though, that just five months ago, then-Enforcement Director Gurbir Grewal spoke extensively about “The Five Principles of Effective Cooperation in SEC Investigations” and did not mention this sort of analysis as required or expected. In fact, he sort of said the opposite: “In the end, we’re always going to conduct our own analyses and draw our own conclusions. We are not asking you to do our work for us . . . .” [3]
But Atom Investors might represent the new standard. In the press release announcing the settled order, Grewal said, “This resolution should serve as a model for other investment advisors that are not currently in compliance with federal recordkeeping requirements.” Does “cooperation” with the SEC staff now extend to turning on and participating in the investigation of one’s business partners and customers? We don’t know who this third party was. Maybe it was abusing Atom’s platform and Atom was all too eager to assist in its downfall. But you can imagine circumstances where the lines are less clear and the subject of an investigation faces a difficult choice between a lower penalty for itself on one hand and loyalty to a customer or client on the other.
Regardless, this level of cooperation lies far beyond anything contemplated in (1) the 2001 Seaboard Report, (2) the Enforcement Division’s current statement on the benefits of cooperation, and (3) the most recent director’s substantive policy speech on the matter delivered just months ago.
It could be a concerning development if the SEC’s regulated entities are now expected to go this far.
[1] Benefits of Cooperation with the Division of Enforcement, available at https://www.sec.gov/enforcement/enforcement-cooperation-program (last visited Oct. 30, 2024) (citing Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions (Oct. 23, 2001) (the “Seaboard Report”).
[2] Advisory Firm Atom Investors, Charged with Recordkeeping Violations, Avoids Civil Penalty Because of Self-Reporting, Substantial Cooperation, and Prompt Remediation, SEC Press Release (Sept. 23, 2024); In re Atom Investors LP, Admin. Proc. File No. 3-22155 (Sept. 23, 2024)
[3] Gurbir S. Grewal, “The Five Principles of Effective Cooperation in SEC Investigations”, Remarks at Securities Enforcement Forum West 2024 (May 23, 2024).