SEC Reverts to Two-Step Enforcement Settlements and Waiver Requests

On February 11, SEC Acting Chair Lee announced that the Commission no longer would permit settlements in enforcement actions to include, or be contingent on the grant of, waivers of statutory disqualifications that flow from certain securities offenses.

Various securities offenses statutorily disqualify Respondents from certain regulated activities, for example, participating in a Reg. D private offering or acting in some capacities for an investment company.  Those statutes, however, also vest the Commission with the discretion to waive those disqualifications, often with conditions.

For many years, Respondents in SEC Enforcement actions faced an uncertain two-step process in determining whether to settle an enforcement proceeding. First, one had to reach an agreement with the Enforcement Division on settling the underlying action – almost always a “neither admit nor deny” settlement that nevertheless precludes a Respondent from contesting the factual allegations by the SEC.  Then, the Respondent would have to file a separate waiver request for consideration by the Division of Corporate Finance or Investment Management, as appropriate.  The rub was that one couldn’t know whether settlement of the Enforcement action might nevertheless leave in place a disqualification that was a material consideration in resolving the matter to begin with.

Under SEC Chairman Jay Clayton, however, the SEC allowed the Enforcement Division – in consultation with its sister divisions – to address all the ramifications of a settlement in a single process, yielding a settlement that was conditional upon the granting of the associated waivers.  That preserved the Commission’s discretion with respect to waivers, but allowed Respondents to withdraw the settlement offer if they could not receive a complete resolution.  That process arguably was more efficient as well.

Acting Chair Lee’s statement clothes the change in language about investor protection and differing policy concerns from those animating enforcement actions. But it’s not as though Corporate Finance or Investment Management simply gave up all input to Enforcement before.  The change re-introduces greater uncertainty and more hurdles for Respondents.  It is the latest roll-back of regulatory changes under the prior administration and return to the Obama-era status quo ante.

The changes are within the Acting Chair’s authority, as were some similar changes made by Acting Chair Piwowar during these same circumstances in 2016.  See, e.g., here.

It arguably would serve the Commission and the public better for these sorts of changes to be made by notice-and-comment rulemaking, instead of executive edict each time the White House changes parties.

The statement is here.

Thomas K. Potter, III ( is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas, and Louisiana. He has over 34 years of experience representing financial institutions in litigation, regulatory, and compliance matters. See attorney profile.

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