SEC Acting Chair Removes Bargaining Chip from Enforcement Settlement Negotiations

In February 2021, Acting SEC Chair Allison Herren Lee announced that she is returning the SEC to the policy of segregating its enforcement settlement process from its consideration of requests for waivers from the automatic disqualifications that can arise from certain violations or sanctions. Acting Chair Lee noted that this change is a return to ensuring primarily that the consideration of disqualification waivers is actually forward looking and focused on protecting investors, the market, and market participants from those who fail to comply with the law.

In July 2019, then Chair Jay Clayton determined that it was inefficient and too expensive to maintain the long-standing practice of considering almost exclusively on a segregated basis settlement offers and requests for a waiver from collateral disqualifications. The former Chair noted that it was in everyone’s interest to allow concurrent consideration of the two processes in an effort to speed up the enforcement settlement process with advisers, brokers, and other industry participants subject to the Commission’s jurisdiction, observing that the sooner harmed investors are compensated, the offending conduct is remediated, and appropriate penalties are imposed, the better.

But, of course, there is more to this story. When an industry participant violates federal securities laws, it can be the case that there are consequential automatic disqualifications from the exercise of certain privileges, including being considered a Well-Known Seasoned Issuer (WKSI), engaging in certain private securities offerings under Rule 506 of Regulation D, and serving in certain capacities for an investment company. It has always been the case that the Commission, in its discretion, could grant waivers from these disqualifications. The Acting Chair’s position, however, makes it clear that she does not want the granting of a waiver to be used as a bargaining chip in settlement negotiations with rule violators or regarded as an obstacle to be overcome on the way to a settlement. “A waiver is not the default position under the law, and should not be considered one under our processes.”

SEC (2021) – Statement of Acting Chair Allison Herren
SEC (2019) – Statement Regarding Offers of Settlement
Thomson Reuters – SEC Separates Waivers from Enforcement Settlement Offers
ABA – SEC Enforcement Change