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What if One of my Service Providers is Under SEC Investigation?


It eventually happens to all of us in the securities business, particularly those of us who provide services to public companies. One of the other service providers to the company comes under investigation by the SEC, or FINRA, or a state regulatory agency. It might be the company’s lawyer, auditor, public relations firm, investment banker, or a consultant. What should the company do? When one of our clients finds themselves in this position, we recommend that they take the following steps:

1. Investigate the Facts.

The first thing a company should do is conduct their own investigation. Don’t rely on the regulatory agency or the media to give you all the facts. Depending on the circumstances, there maybe a wealth of information publicly available, or there may be very little. But the company, and more specifically its Board of Directors, has an obligation to gather all of the information it reasonably can and use that information in making its decision. The Internet provides a wealth of information, but other service providers should be contacted, as well as other customers of the investigated party. If a government agency is involved, often the individual responsible for the investigation is more than willing to discuss it with third parties. Remember that the government is trying to protect victims, and you may be a victim.

A good investigation includes not only gathering information from third party resources, but also talking directly to the party involved. Sometimes our clients don’t want to do this because it is uncomfortable, or they are concerned about damaging the relationship. However, in most cases, they affected party is expecting to have a conversation about their situation.

2. Discuss the Facts in a Group.

Once the facts have been gathered, we recommend that a small group be formed to discuss the facts in detail and make a recommendation to the company. A group provides a safe environment for people to express their thoughts without bearing the entire weight of the ultimate decision. This group may be the entire Board of Directors, or a committee of the Board of Directors, or a group made up of management and outside consultants.

The company’s lawyer responsible for its public disclosure should be a part of these discussions. Topics such as what are the required disclosure obligations, and whether or not the investigation is grounds for termination of a contract will certainly be raised. The company should involve its securities counsel in order to obtain advice on how to best handle these decisions.

3. Make a Decision and Act on It.

This may seem like an obvious step, but you would be surprised how many clients are frozen with indecision and end up doing nothing, sometimes to their detriment. At times, depending on the situation there is nothing wrong with continuing with business as usual during a regulatory investigation of a service provider, as long as that is the agreed-upon strategy. In the alternative, the company may want, or need, to address the situation in a press release, or in an 8-K filing with the SEC. The company may decide to terminate its relationship with the affected provider, or take a stance in support thereof.

Whatever the decision is, stick to it. It is almost always worse to appear undecided or change your position than to take an unpopular stance and stick with it.