Here’s something from Cooley’s Tejal Shah who just left the SEC’s Enforcement Division to join the firm: “Recently, SEC Chairman Paul Atkins issued this statement in an effort to restore the SEC Enforcement Division’s prior practice of permitting a settling entity to request that the Commission simultaneously consider a potential defendant’s offer of settlement that addresses both an underlying enforcement action and any related request to waive potential statutory disqualifications resulting from the settlement. While this statement is helpful in adding clarity and transparency to the process, as a practical matter, it does not represent a sea change in the SEC’s practices.
Let me give you a little background. The Enforcement staff is tasked with negotiating settlement terms with potential defendants and respondents at the end of investigations in which they determine that there were violations of the securities laws. If a settlement in principle is reached, the staff simultaneously presents both the recommendation to bring an enforcement action and proposed settlement terms to the Commission.
Certain settlement terms can result in statutory disqualifications with significant collateral consequences to a settling party’s business. The disqualifications are not enforcement remedies. Rather, they are intended to protect investors and our markets by placing additional guardrails on the capital market activities of parties who engaged in misconduct to ensure their conduct is in compliance with the law. As a result, potential defendants and respondents frequently request waivers from the SEC to avoid statutory disqualifications arising from the proposed settlement.
Here are a few examples:
- Many of the largest public companies are “well-known seasoned issuer(s)” (WKSI) which means that they are able to register their securities offerings on shelf registration statements that become effective automatically upon filing with the SEC. In other words, companies that qualify as a WKSI do not need to have a registration statement go through the traditional review and comment period with Corp Fin, which in certain cases can take many months, before sales are made.
However, issuers that have violated the anti-fraud provisions of the federal securities laws, or that are the subject of a judicial or administrative decree or order (including a settled claim or order) prohibiting certain conduct or activities regarding the anti-fraud provisions of the federal securities laws, become “ineligible issuers” and therefore do not have WKSI status for three years. Thus, a settlement that includes violations of the anti-fraud provisions can have a significant impact on a company’s ability to conduct offerings in a timely and streamlined manner.
- Many companies rely on the Regulation D “safe harbor” to raise capital through private placements. In addition, companies can also rely on another exemption, Regulation A, to conduct smaller securities offerings to the public through a process that is similar to, but less onerous than a typical registered offering. However, if a company enters into a settlement with the SEC that includes an injunction in connection with making a false filing with the SEC, it is deemed a “bad actor” and triggers a disqualification from relying on the Reg D “safe harbor” or Regulation A exemption for five years.
- A settlement that contains an injunction concerning certain conduct and/or practices in connection with the offer or sale of any security can automatically and immediately disqualify an investment adviser from providing advisory services to US registered investment funds.
In each of the three examples, a settlement with the SEC would have significant collateral consequences for the party’s business, beyond the impact of the settlement itself. However, the SEC can, in its discretion, grant waivers to the disqualifications based on a showing of “good cause” that it is not necessary under the circumstances that the exemptions be denied.
In order to seek a waiver, a party must formally submit a waiver request to Corp Fin’s Office of Chief Counsel, which will ultimately review the request and make a recommendation to grant or deny the waiver to the Commission. Among other things, in evaluating waiver requests, Corp Fin must consider the seniority of the individuals responsible for the misconduct, the duration of the misconduct, remedial actions taken and impact on the business if the waiver request is denied.
What’s Different Now?
In 2021, then Acting SEC Chair Allison Lee issued a statement that “the Division of Enforcement will no longer recommend to the Commission a settlement offer that is conditioned on granting a waiver.” While that directive prohibited “conditional settlements,” as a practical matter, parties still had the opportunity to consider Corp Fin’s determinations as to whether or not they would be recommending a waiver before deciding whether to submit a settlement offer.
Here’s how it worked. If the settlement terms agreed to in principle with the enforcement staff would trigger one or more disqualifications, and those disqualifications were consequential to the party’s business, they would generally submit waiver requests to Corp Fin. Typically, after an initial waiver request was submitted, Corp Fin engaged in significant back and forth with the submitter in which they asked follow-up questions and requested additional information until they were satisfied that they were able to make an informed recommendation to the Commission.
Ultimately, the Corp Fin staff would inform parties if they would be recommending the requested waivers to be granted. While a recommendation to grant a waiver was still subject to a Commission vote, the fact of the recommendation was still a very good indicator that the waiver would be granted. The Corp Fin staff communicate regularly with the Commissioners and their counsel, and has good, reliable insight related to the types of circumstances in which the Commission is likely to grant waivers. Thus, companies could, and generally did, wait until they received feedback on their waiver requests from Corp Fin before submitting signed settlement offers.
If a party learned that Corp Fin’s recommendation was going to be to deny the waiver request, the party could then make a choice as to whether it wanted to go forward with the settlement anyway, notwithstanding the collateral consequences, or if it wanted to forgo the settlement. If it decided it no longer wanted to settle, it would inform the Enforcement staff, who would then most likely pivot to recommending a litigated action to the Commission.
Thus, even prior to Chairman Atkins’ statement, parties were able to make reasonably informed decisions about whether to engage in a settlement with the Commission. However, what’s different now is that the process of simultaneous consideration of settlement offers and waiver requests is more formalized.
Moreover, if the Commission were to decide to accept a settlement offer but decline to approve a waiver request (which as described above, is unlikely if the recommendation of Corp Fin was to grant the waiver), the staff must notify the prospective defendant or respondent, who then has five days to decide if they want to go forward with the settlement offer approved by the Commission.”
Authored by
Broc Romanek