SEC Acting Chair Allison Herren Lee last week said the regulator would roll back a policy giving publicly traded companies greater certainty about whether they will be able to maintain access to key regulatory exemptions after settling securities law violations. The move came as the SEC awaits the confirmation of Gary Gensler, President Biden’s nominee to head the agency.
The policy reversal followed another move to return discretion to SEC enforcement staff to approve formal investigation orders. While the practical impact of the policy changes could vary, their symbolic significance is clear, according to white collar defense lawyers.
“The pieces are in place for an aggressive era of enforcement,” said Kara Brockmeyer, a partner at the law firm Debevoise & Plimpton LLP and a former SEC enforcement official.
Under securities law, a company can be automatically disqualified from certain fundraising activities or regulatory exemptions if it is subject to an SEC enforcement action—unless it receives a waiver from the agency. Such so-called disqualification waivers became a controversial topic under the Obama administration, when two of the SEC’s Democratic commissioners accused the regulator of being too soft on repeat offenders.
The SEC under the Trump administration took a more business-friendly approach to the waivers. In a policy created in 2018 by former Chairman Jay Clayton, the SEC said it would notify companies about its decisions to grant waivers when its commissioners approved or denied settlements.
The policy allowed companies to withdraw from settlements if SEC commissioners voted to deny waivers.
Reversing the policy separates processes around negotiating settlements from ones regarding securing waivers, Ms. Lee said in a statement Thursday. While SEC commissioners must sign off on both settlements and waivers, the regulator’s enforcement division is in charge of negotiating the agreements and submitting them for approval. Waiver recommendations, on the other hand, are made by the SEC’s policy divisions.
“This return to the [enforcement] division’s longstanding practice ensures that the consideration of waivers is forward looking and focused on protecting investors, the market, and market participants from those who fail to comply with the law,” Ms. Lee said. Waivers shouldn’t be used as bargaining chips in settlement negotiations, she added.
The change could complicate settlement negotiations, Ms. Brockmeyer said: “It’s kind of like pleading guilty when you don’t know what the judge is going to sentence you to.”
The SEC’s two Republican commissioners on Friday released a statement saying they opposed the reversal. “Insisting that an entity that is willing to settle 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,” the commissioners wrote.
Even before Clayton’s policy on waivers, SEC commissioners rarely denied waivers to companies that applied for them, lawyers said. It is unclear whether the SEC under Mr. Gensler will take a harder line on approving waivers.
If the SEC does, some companies might hesitate to enter into settlements with the regulator, said Kyle DeYoung, a partner at the law firm Cadwalader, Wickersham & Taft LLP.
“Most people within the industry thought that Chair Clayton’s change was a good one,” said Mr. DeYoung, a former SEC enforcement official. Companies settling allegations of securities violations could make informed decisions, making the settlement process more efficient, he added.
Morgan Miller, a partner at law firm Paul Hastings LLP, said companies over the near term will have to be more aware of the knock-on effects of settling with the SEC.
“Going forward, companies and other regulated entities and individuals will have to weigh the likelihood of receiving a waiver post-resolution in determining whether or not to accept a particular settlement offer,” said Mr. Morgan, who also is a former SEC enforcement official.