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US Securities and Exchange Commission

SEC Separates Waivers From Enforcement Settlement Offers

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

In a policy shift, SEC Acting Chair Allison Herren Lee said the enforcement division will no longer recommend to the commission a company’s securities law violation settlement offer that is conditioned on granting so-called bad actor waivers.

If a big company which has violated securities laws does not get an SEC waiver, it risks losing a special status as Well-Known Seasoned Issuer (WKSI). The status gives benefits that include the use of shelf registrations, which streamline the securities offering process for companies with clean records. This means that these large companies can return to the market to sell new blocks of stocks or bonds quickly. The shelf registration process lets the companies avoid waiting for the SEC staff to review their financial statements and disclosures before they can issue the securities.

Companies can also raise funds in private markets under a Rule 506 exemption in Regulation D to “accredited investors” — those who have financial wealth or sophistication.

“Looks like she is just making sure the waiver issue does not become part of settlement which is the traditional rule they use here,” said Thomas Gorman, a partner with Dorsey & Whitney LLP who was previously a former senior counsel in the SEC’s enforcement division.

This will “ensure that these processes remain fair and serve investors’ interests,” Lee said in a February 11, 2021, statement. “This return to the division’s long-standing 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.”

Acting Chair Lee’s move addresses some of the criticisms that the SEC may have been too lenient with violators over the years. For example, about six years ago, congressional Democrats criticized the commission led by Chair Mary Jo White, an Obama appointee, for freely using waivers. In 2015, the SEC granted waivers to several large banks, including Citigroup Inc. and JP Morgan Chase & Co., that admitted guilt to rigging the foreign exchange market. The banks got to keep their WKSI status.

In general, the commission can use its discretion to grant waivers from automatic 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.”

She explained that when the SEC’s Divisions of Corporation Finance (CorpFin) and Investment Management (IM) review waiver requests, they use standards that are separate and distinct from the commission’s law enforcement mandate. Lee said that in many cases a full or conditional waiver may be appropriate, but emphasized that the determination should be made separately from considerations to the settlement of an enforcement case.

“The staff responsible for reviewing waiver applications do so with diligence, professionalism, and independence, as do those working to bring and settle enforcement cases,” she said. “Today’s action is meant to enshrine best practices and ensure that our policies and procedures are designed to eliminate the potential for any structural conflicts or pressures. This is the same standard expected of entities regulated by the Commission, and will help preserve the independence of these separate processes and better protect investors and markets.”

Transparency and Clarity

Some welcomed the policy.

“This commission action will stop the practice defense lawyers used to avoid accountability for their defendants,” former SEC chief accountant Lynn Turner said.

“Companies have a reasonable expectation that they will know the full consequences when they decide whether to settle with the SEC,” said Robert Cohen, a partner at Davis Polk & Wardwell LLP, who spent 15 years in the SEC’s enforcement division. “Transparency is essential to a fair waiver process.”

Dave Brown, a partner with Alston & Bird LLP, wondered whether this will lead to unintended consequences.

“Although the SEC is trying to convey that these are two separate considerations, a likely result is that companies will be less willing to settle,” he said. “This will make it more difficult for companies to make decisions as they may have incomplete information as the consequences of a settlement; that is, ‘will it impact my ability to access the capital markets.’”

Disagreement Among Commissioners

In a joint statement issued a day later, SEC Commissioners Hester Peirce and Elad Roisman said they disagreed with Lee’s action because the two matters are interrelated.

“Negotiated settlement of civil enforcement actions on just and fair terms often best serves [the SEC’s] mission because it allows for prompt correction of unlawful conduct,” they said on February 12. “For this reason, since July 2019, the Commission has considered and accepted contingent settlement offers, meaning offers that would resolve both the claimed violations of the federal securities laws and the collateral consequences that sometimes arise from the violations, most often by granting certain waivers.”

In the meantime, Brown added that it will be interesting to see if a parallel hypothetical waiver track develops with CorpFin, meaning if a company were to settle on these facts, would the division grant a waiver?

“If it is two different considerations, I don’t see why it can’t proceed in parallel and how it would harm investors,” he said.


This article originally appeared in the February 16, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.

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