SEC Chair Clayton announces new coordinated approach to settlement negotiations and the waiver process


Securities Enforcement Alert


Settlements with the Securities and Exchange Commission (SEC) can trigger a wide array of collateral consequences. Among these are the potential loss of Well Known Seasoned Issuer status for security offerings, as well as bad actor disqualifications from conducting exempt securities offerings under Securities Act Regulations A and D and Regulation Crowdfunding.

Until recently, those seeking to settle an action with the SEC were required to pursue two distinct tracks: resolution of a pending investigation negotiated with the SEC’s Division of Enforcement, and waiver of potential collateral consequences negotiated with the SEC’s Divisions of Corporate Finance and/or Investment Management (or SEC staff under delegated authority). The processes moved forward separately, could be time consuming and did not always follow the same timeline.

In light of the SEC’s recent announcement, that should now change.

Chair Clayton’s statement

In his July 3 statement, SEC Chair Jay Clayton announced a significant shift in the SEC’s approach to considering settlement offers and requests to waive the collateral consequences of such settlements. In an effort to streamline its processes, the SEC will now consider proposed settlement and waiver requests simultaneously, rather than separately.

Significantly, this new process makes clear that the SEC itself will decide whether to grant a waiver request rather than allowing the SEC staff to make such determinations under delegated authority.

Chair Clayton first outlined the factors that can lead parties to settle a proposed SEC action:

  • avoiding the cost of litigation
  • the Commission’s willingness to litigate zealously if a timely and reasonable offer of settlement is not made;
  • obtaining a prompt remedy for investors and
  • achieving certainty for the parties.

As to the final factor, he emphasized that granting a waiver of collateral consequences, when appropriate, can provide certainty to negotiating parties and serve as a critical factor for parties seeking to settle.

The SEC Chair then stated that under the new process, “an offer of settlement that includes a simultaneous waiver request negotiated with all relevant divisions…will be presented to, and considered by, the Commission as a single recommendation from the staff.”

Chair Clayton made clear, however, that while the SEC will consider settlement proposals and waiver requests simultaneously, settlement and waiver are not a packaged deal and the Commission may still approve a settlement without granting the waiver. He specifically noted that there are both cases where collateral consequences are appropriate for investor protections and cases where collateral consequences may not be appropriate because other steps may more appropriately address the conduct at issue and related investor protection considerations.

The goal of this new approach is to enable the SEC to consider proposed settlements and waiver requests at the same time that the SEC is evaluating the facts and conduct at issue, together with SEC staff recommendations and analysis. This holistic approach will enable the SEC to determine the best approach for serving investors and the SEC’s mission.

Where the SEC determines not to grant a waiver request, the settling party would need to promptly notify the Commission of its agreement to move forward with the accepted portion of the settlement offer and without the waiver within five days, or risk the Commission rejecting those accepted terms.

Why now?

While Chair Clayton made no mention of Congressional action, his announcement arrived on the heels of June’s proposed Bad Actor Disqualification Act of 2019, introduced in the House of Representatives by Representative Maxine Waters, chair of the House Financial Services Committee. That bill, if passed, would impose restrictions on the SEC waiver process.

Specifically, it would:

  • require an entity to first seek a 180-day temporary waiver upon a showing of “immediate irreparable injury”
  • bar the Commission from considering the “direct costs” of a denial to the entity
  • require that all waiver applications be open to public comment and hearing before a determination is made by the Commission
  • eliminate the ability of SEC staff to informally notify an entity of its recommendation or the likelihood of a waiver being granted or denied and
  • require the Commission to keep a public record of withdrawn waiver requests and a database of all denied waiver requests.

The text of the bill states that automatic disqualifications are “inappropriately underutilized” and waivers are “disproportionately granted to the largest financial institutions on Wall Street.” The bill’s stated purpose is, therefore, to “increase accountability of the SEC and to require the Commission to implement a rigorous, fair, and public process for waiving bad actor disqualifications.”

Chair Clayton’s emphasis on SEC evaluation of all future waiver requests in the context of assessing settlement recommendations and the conduct at issue may be viewed as an answer to Representative Waters’ effort to obtain greater SEC accountability for waiver request decisions. Whether the new approach will impact SEC determinations on the propriety of waivers in cases under its consideration remains an open question.

Waiver requests going forward: key takeaways

Those regulated by the SEC should ensure that they are fully aware of any potential collateral consequences before proposing a settlement offer to the agency. It is prudent to consider seeking any waiver from such consequences as part of a settlement offer and in line with the new process.

If collateral consequences are ignored, companies risk not receiving a full and final resolution of their matter as part of the new streamlined process and may lose their opportunity to obtain a waiver.

The SEC has previously articulated the factors it considers when deciding whether to grant waiver requests and any request should address those factors. In particular, those seeking waivers should consider addressing investor protection factors and highlighting steps taken to address the issues which better resolve any concerns than would the imposition of collateral consequences.

Learn more by contacting Deborah Meshulam, Mason Hubbard or Natasha Kanerva.

*Jennifer Delasco is a 2019 summer associate based in DLA Piper’s New York office.