SEC’s return to simultaneous weighing of settlement offers and waiver requests applauded

The Securities and Exchange Commission’s decision to restore its prior practice of considering settlement offers and related waiver requests simultaneously will reduce settlement-related uncertainty for firms and add fairness and efficiency to the SEC’s enforcement process, industry sources said. 

The SEC’s decision to return to its earlier practice, which SEC Chairman Paul Atkins outlined in a Sept. 26 statement and also commented on in a speech for an Oct. 7 event hosted by Fordham’s Corporate Law Center, “brings common sense back to the process,” Peter Chan, a partner at law firm Baker McKenzie, said. 

“It shows the chairman’s understanding of the practical realities of firms – including muni firms but also other financial actors – when confronted with a situation where they have to consider SEC settlement,” said Chan, who previously served as assistant regional director in the SEC’s Chicago regional office and also formerly served as head of the SEC Chicago office’s Municipal Securities and Public Pensions Unit.

In his statement, Atkins, who was sworn in as SEC chairman in April, said an area he saw as  “ripe for change” was how the SEC evaluates settlement offers in SEC enforcement actions that are “accompanied by contemporaneous requests for commission waivers from automatic disqualifications and other collateral consequences” resulting from the underlying SEC enforcement action. 

“I believe that it is appropriate to restore the commission’s prior practice of permitting a settling entity to request that the commission simultaneously consider an offer of settlement that addresses both an underlying commission enforcement action and any related waiver request,” the SEC chairman said in his statement, adding the practice “promotes fairness and economy of commission resources but unfortunately was changed by the prior administration.” 

Atkins also addressed the topic in his Oct. 7 speech, in which he said that the agency’s abandonment in recent years of its previous practice of considering enforcement settlements and related waiver requests “in tandem” had resulted in “uncertainty for settling parties and inefficiency for” the SEC and its staff. 

“Enforcement staff negotiated settlements in one silo, the policy division considered waiver requests in another, and often on different timetables,” Atkins said in the speech, which was posted on the SEC’s website.

Margaret “Peg” Henry, who last summer launched her own municipal securities legal consulting and expert witness services business, Peg Henry PLLC, after retiring from her role at Stifel Financial Corp., cited Atkins’ Oct. 7  comments regarding returning to the practice of considering settlement offers and waiver requests simultaneously as an important development for firms when it comes to making decisions about entering into settlements with the SEC. 

For instance, if a firm decides to enter into an SEC settlement process and agrees that it has willfully committed a violation under the Securities Act of 1933 or the Securities Exchange Act of 1934, the firm must then get a waiver to prevent the firm from being disqualified from engaging in certain types of business,  Henry said.

“If you don’t get certain waivers, you could be limited in your ability to do investment advisory business or you could be limited in your ability to serve as a placement agent,” she said.

Decisions about waivers, which could have “significant impacts” on a firm’s business were being made on a “completely separate track” at the SEC “from the decision to enter into a settlement of the enforcement proceeding,” she said. While SEC staff from the different divisions involved would sometimes coordinate, “there was no requirement that they do so,” Henry said. 

An SEC settlement can potentially entail major financial sanctions and reputational risk for firms, but in addition to that “because you’re settling with a regulator and based on statutory restrictions, you’re dealing with potential disqualification and other obstructions to your basic business,” Chan said. 

Consequently, when the commission changed its historical practice in recent years, that made things challenging for firms contemplating settlements with the SEC, he said. 

“You may or may not agree ultimately with … whether you did anything wrong, but while you’re trying to deal with these difficult decisions, you will have to separately consider the possibility that the commission may or may not provide waiver to disqualifications as a result of the settlement,” Chan said. “So, you have to take your chances.” 

To Chan, that doesn’t make sense. 

“It became sort of like this Gordian Knot where, ok, I don’t know when I’m settling to something that may kill my business but I have to blindly trust the SEC,” he said. “And so I think that this is really Chairman Atkins’ effort to untie this Gordian Knot and actually rationalize and bring common sense back to a settlement.” 

While the SEC chairman isn’t guaranteeing that waivers will be granted, returning to the previous policy provides transparency for firms contemplating a settlement, Chan said. 

“And it may be that if you know that you will not get a waiver, you’ll decide not to settle,” he said, adding that it’s also possible that a firm denied a waiver might still opt to settle. “But at least you are actually … having the transparency to make an informed decision.” 

While the decision to reinstate the SEC’s previous practice is good for clients, it’s also beneficial for the SEC, which wants to be viewed as being “rational and fair,” said Chan, who also referenced comments Atkins made in his Oct. 7 speech regarding the Wells process. 

“This is not the SEC being more gentle or less tough,” Chan said. “This is the SEC basically trying to really make sure that it acts in a fair way.” 

The return to the SEC’s prior practice of considering settlement offers and related waiver requests simultaneously was also welcomed by broker-dealer groups, including the American Securities Association.

“The previous administration’s practice created unnecessary confusion in the industry and costly spending on professional class lawyers who fed off the confusion,” ASA President and CEO  Chris Iacovella said in a statement provided through a spokesperson on Monday. “Firms should never have to resolve a matter with enforcement and then relitigate it with other areas in the agency’s bureaucracy.” 

The Bond Dealers of America and the Securities Industry and Financial Markets Association also voiced support for the move.

“We believe this approach will restore efficiency to the enforcement process and allow the commission to consider all aspects of a settlement decision at the same time,” Michael Decker, senior vice president for research and public policy at BDA said in an Oct. 17 email. “The chairman’s action will also preserve the commission’s flexibility to consider settlements and waivers separately when appropriate.”

In a Sept. 29 statement, Saima S. Ahmed, executive vice president and general counsel at SIFMA, said SIFMA appreciated the SEC’s decision to return to its prior practice. 

“The terms of SEC settlements can trigger significant collateral consequences for firms, and this is an important initial step in making the waiver process more equitable and predictable,” Ahmed’s statement said. “Improving the transparency, efficiency, and predictability of the SEC’s waiver process is a key issue for SIFMA’s members, and we look forward to engaging with the SEC on this important topic.”