by Greg D. Andres, Martine M. Beamon, Angela T. Burgess, Tatiana R. Martins, Uzo Asonye, Robert A. Cohen, Neil H. MacBride, Fiona R. Moran, Paul J. Nathanson, and Kenneth L. Wainstein

Parties considering whether to settle an SEC enforcement investigation or criminal proceeding have a reasonable expectation that they will know the likely consequences of a settlement.  This includes whether they can expect to receive a waiver from certain statutory disqualifications.  Last week, however, the Acting Chair of the SEC announced that the Enforcement Division will not recommend any settlement offer that is conditioned on the settling party receiving a waiver.  If this statement reduces transparency between SEC staff and parties negotiating a possible settlement, the result likely will be a more difficult and protracted process for both sides as it becomes difficult for settling parties to make informed decisions about the full implications of a resolution.

Background of Automatic Disqualifications and Waivers

As discussed in a previous client alert (PDF: 60 KB), automatic disqualifications in the federal securities laws prevent parties from relying on provisions that offer flexibility and greater efficiency in issuing securities, including disqualifications from:

• Status as a Well-Known Seasoned Issuer (“WKSI”) under Rule 405 of Regulation C;
• Eligibility to rely on offering exemptions available under Regulations A, D, and E;
• “Forward-looking statements” safe harbor under the Private Securities Litigation Reform Act;
• Receipt of cash solicitation payments from investment advisers under Rule 206(4)-3 of the Advisers Act; and
• Serving as an investment adviser, depositor, or principal underwriter for registered investment companies under Section 9(a) of the Investment Company Act.

Various enforcement actions can trigger these disqualifications, such as court-ordered injunctions, administrative orders, and criminal convictions that involve violations of particular securities laws, such as the anti-fraud provisions.  However, a party that otherwise would be subject to an automatic disqualification may seek a waiver from the Commission. 

As previously discussed (PDF: 290 KB), SEC commissioners have differing views about these disqualifications.  In 2014, former Commissioner Kara Stein said they can be a powerful enforcement tool to garner compliance and deterrence.[1]  In 2015, however, former Chair Mary Jo White said they should not be used as an enforcement tool, but rather as a “determination [of] whether the entity or individual, going forward, can engage responsibly and lawfully in the activity at issue in the particular disqualification.”[2] Also in 2015, former Commissioner Dan Gallagher stated that settlements should “bring finality” and “involve a meeting of the minds on all aspects of the resolution,” including waivers, particularly if the Commission considers disqualifications to be sanctions.[3]

More recently, and as discussed in a previous client alert (PDF: 290 KB), former Chairman Jay Clayton initiated a new waiver approval process in July 2019, in an effort to bring more transparency to the settlement negotiation and waiver request processes.  Under this approach, the Commission considered settlement offers and waiver requests together as a package.  Former Chairman Clayton stated that this approach “honor[ed] substance over form” and decreased complexity in the negotiation process overall. [4]

Recent Statement

On February 11, Acting Chair Allison Herren Lee announced that the Division of Enforcement will not recommend settlement offers that are conditioned on the granting of waivers.[5] Acting Chair Lee stated that the Commission will revert to a “long-standing practice” of separately considering settlement negotiations and waiver requests, thus “reinforc[ing] the critical separation” between the two processes.  Acting Chair Lee further suggested that connecting the settlement negotiation and waiver request processes could result in “structural conflicts or pressures” within the SEC.  She also said that instead of being seen as a “bargaining chip” or “obstacle” during settlement negotiations, consideration of waivers must be “forward looking” and focused on the protection of investors, markets, and market participants.

Practical Impact

Transparency is fundamental to a fair settlement process.  Parties deciding whether to settle an enforcement investigation have a reasonable expectation that they will know the likely consequences of a potential settlement.  Much of the debate over the waiver process has focused on the degree of transparency that SEC staff will give to parties about the likely outcome of a waiver application, while being clear that the decision whether to grant a waiver rests within the authority of the voting Commissioners.  If the recent statement reduces transparency between SEC enforcement staff and parties negotiating a possible settlement, the result likely will be a more difficult and protracted process for both sides as it becomes difficult for settling parties to make informed decisions about the full implications of a resolution.

Footnotes

[1] Kara M. Stein, Comm’r, SEC, Remarks at the “SEC Speaks” Conference (Feb. 21, 2014), https://www.sec.gov/news/speech/2014-spch020421kms.    

[2] Mary Jo White, Chair, SEC, Remarks at the Corporate Counsel Institute, Georgetown University: Understanding Disqualifications, Exemptions, and Waivers Under the Federal Securities Laws (Mar. 12, 2015), https://www.sec.gov/news/speech/031215-spch-cmjw.html.

[3] Daniel M. Gallagher, Comm’r, SEC, Remarks at the 37th Annual Conference on Securities Regulation and Business Law: Why is the SEC Wavering on Waivers? (Feb. 13, 2015), https://www.sec.gov/news/speech/021315-spc-cdmg.html.

[4] Jay Clayton, Chairman, SEC, Statement Regarding Offers of Settlement (July 3, 2019), https://www.sec.gov/news/public-statement/clayton-statement-regarding-offers-settlement.

[5] Allison Herren Lee, Acting Chair, SEC, Statement of Acting Chair Allison Herren Lee on Contingent Settlement Offers (Feb. 11, 2021), https://www.sec.gov/news/public-statement/lee-statement-contingent-settlement-offers-021121.

Greg D. Andres, Martine M. Beamon, Angela T. Burgess, Tatiana R. Martins, Uzo Asonye, Robert A. Cohen, Neil H. MacBride, Fiona R. Moran, Paul J. Nathanson, and Kenneth L. Wainstein are partners at Davis Polk & Wardwell LLP.

Disclaimer

The views, opinions and positions expressed within all posts are those of the authors alone and do not represent those of the Program on Corporate Compliance and Enforcement or of New York University School of Law.  The accuracy, completeness and validity of any statements made within this article are not guaranteed.  We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the authors and any liability with regards to infringement of intellectual property rights remains with them.