Wednesday, July 10, 2019

Commission will consider offers of settlement and waiver requests as a single recommendation

By Amanda Maine, J.D.

In a statement outlining the factors that drive the SEC’s approach to settlements, Chairman Jay Clayton announced that a settling entity’s offer of settlement which includes a simultaneous waiver request negotiated with all the Commission’s relevant divisions will now be presented to and considered by the Commission as a single recommendation from the staff. According to Clayton, considering offers of settlements and waiver requests on a segregated basis as if they were unconnected events adds complexity to the negotiation process and taxes SEC resources unnecessarily.

Settlement factors. Clayton first described several factors that drive appropriate settlements, including the desire to avoid the costs of litigation. Another factor is the importance of promptly remedying harm to investors by returning their money to them more quickly than through litigation. A desire for certainty is another factor driving appropriate settlements, according to Clayton. The SEC’s ability to provide such certainty by zealously pursuing all appropriate remedies can be “a strong stick, and at the same time, the ability of the Commission to provide a full and final resolution of a matter is often a significant carrot,” Clayton said.

Collateral disqualifications and waivers. Clayton noted that certain remedies that are often a part of the SEC’s settlements, such as injunctions against future violations of the antifraud provisions of the securities laws, can prohibit an entity from continuing to conduct certain business through collateral disqualification. These include the loss of well-known seasoned issuer (WKSI) status; the loss of private offering exemptions provided by Regulations A, D and Crowdfunding; and the loss of statutory safe harbors for forward-looking statements. While in some cases, the collateral disqualifications are appropriate, in other cases, different measures may be appropriate to address the conduct at issue, Clayton observed.

The Commission has the authority to grant waivers from these collateral consequences, and the parties seeking waivers often make their offers of settlement and requests for waivers at the same time, Clayton noted. However, in recent years, the Commission has considered these matters almost exclusively on a segregated basis, according to Clayton. This “formulaic separation” is inconsistent with appropriate consideration of the interconnected nature of the matters at issue, Clayton said. He pointed out that the staff uses robust analysis when determining whether a waiver should be recommended, such as examining whether the operations affected by the collateral disqualification are related to the conduct at issue and how material the impact would be on investor protection. An approach that uses a single staff recommendation for a waiver request and a settlement offer will enable the Commission to consider all relevant facts and conduct at the same time, Clayton advised.

Clayton stated that after consulting with the Office of the General Counsel and the Enforcement Division, he will expect that in situations where a settlement offer and a waiver request are made simultaneously, and the offer is accepted but the waiver is not approved, the prospective defendant must notify the staff within five business days of its agreement to move forward with the accepted offer of settlement. If the staff is not promptly notified, the negotiated settlement terms may no longer be available and a litigated proceeding may follow, Clayton warned.