SEC policy reversal puts settlement/waiver pairing back in spotlight

Provisions in securities laws allow law-abiding companies to engage in activities with less oversight, fewer disclosure requirements, and limited liability. Companies that violate certain provisions of federal securities laws or settle SEC charges can lose those privileges, however, including the opportunity to register as a “well-known seasoned issuer,” engaging in certain private securities offerings under Rule 506 of Regulation D, and serving in certain capacities for an investment company.

In certain circumstances, the SEC may grant waivers for these disqualifications. “These waivers, however, should not be used as a bargaining chip in settlement negotiations or regarded as an obstacle to be overcome on the way to a settlement,” Lee said. “A waiver is not the default position under the law and should not be considered one under our processes.”

Historically, the SEC considered the settlement and waiver processes as separate matters. However, Clayton in July 2019 issued a statement explaining his stance that settling companies could request the Commission consider an offer of settlement that simultaneously addresses both the underlying enforcement action and any related collateral disqualifications.

In a joint statement rebuking Lee’s policy reversal, SEC Commissioners Hester Peirce and Elad Roisman argued contingent settlements under Clayton did not in any way impede the SEC of its powers. They further argued insisting that a settling entity “be left in the dark about whether its waiver application will be granted significantly alters the entity’s settlement calculus because it undercuts the certainty and finality that settlement might otherwise provide.”

“This change marks a return to an unwieldy process that treats as completely separate what is, in fact, interrelated,” Peirce and Roisman stated. “It re-introduces an artificial separation between the process by which an entity reaches a resolution on its violations of securities laws and the process by which it obtains clarity with respect to the collateral consequences of those violations. The result will be a longer period between the initiation and resolution of enforcement matters.”

Compliance consequences: Companies that are in the process of resolving enforcement actions with the SEC now face uncertainty about the result. As stated in a client alert from Shearman & Sterling: “It signals, in no uncertain terms, that the SEC is looking to be extremely aggressive in enforcement, will almost certainly be far more stingy in granting waivers in future matters, and is prepared to deal with the consequences.”