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SEC's Reboot on Waiver Requests in Enforcement Settlements
Securities and Exchange Commission (SEC) Chairman Jay Clayton recently announced a change in how the SEC will consider requests for waivers of certain serious collateral consequences that would otherwise result from settlement of an SEC enforcement action. These collateral consequences, often referred to as "bad actor" or "bad boy" provisions, can vary greatly and may disqualify an entity from conducting certain business or utilizing certain means to offer securities. Historically, a company often would not know unequivocally whether the commission would agree to waive these disqualifications until after the announcement of the settlement — a situation that brought a significant degree of uncertainty to the impact of a settlement decision.
Under the agency's new approach, the Commission will make known whether waivers will issue at the same time it provides a decision on a proposed settlement agreement. The Commission's more rational approach — which seems somewhat at odds with the proposed Bad Actor Disqualification Act of 2019 that would make it much harder for a settling party to obtain waivers — will allow companies and their shareholders to have certainty regarding the consequences of the resolution of SEC enforcement proceedings.
Collateral Consequences of Settling
The settlement of an enforcement action can result in potentially devastating disqualifications under the securities laws even if the settlement explicitly disclaims an admission of liability and the alleged wrongdoing involved only a few employees or a specific subsidiary or business area. Unbeknownst even to many experienced securities litigators, terms of certain settlements — such as cease and desist orders, the retention of an independent compliance consultant, or an injunction against further violations — automatically can trigger a number of disqualifications. The consequences may include loss of status as a well-known seasoned issuer, disqualification from serving as an investment adviser or underwriter to certain registered investment companies, loss of safe harbor provisions, and loss of other issuer registration exemptions provided under the securities laws.
In theory, the collateral consequences imposed after resolution of an enforcement action safeguard investors from bad actors who engage in misconduct.
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