SEC Offers Path to Ease Misconduct Burdens

Never get involved in a land war in Asia, and never ignore a regulator’s policy announcement dropped just before a long holiday weekend. SEC chairman Jay Clayton yet again proved how true that maxim is, with a statement on Wednesday opening the door to easier treatment of companies that violate securities laws.

Clayton said that from here forward, the SEC will consider granting waivers more quickly to companies accused of misconduct, so that those firms can hit up the capital markets more easily when they want to raise fresh money. 

Under prior policy, a company accused of misconduct could make an offer of settlement, and request a waiver of “collateral consequences” — but the SEC considered those two issues separately. In a statement Clayton quietly posted Wednesday afternoon, he said agency officials will now happily consider both issues simultaneously.

Say, for example, your firm offers to accept a monetary penalty, a deferred-prosecution agreement, and a compliance monitor. Those sanctions could trigger collateral consequences such as requiring a firm to publish a new prospectus when it wants to raise more capital from investors; or weakening legal protections that typically apply when a firm makes statements about future prospects. 

This policy wouldn’t waive the DPA or the monitor; you will still need to negotiate them as part of the settlement offer. The policy would, however, give the company a faster answer about waiving those other consequences. I’ll let the cynics out there guess what the SEC’s standard answer is likely to be.

As Clayton said: 

Recognizing that a segregated process for considering contemporaneous settlement offers and waiver requests may not produce the best outcome for investors in all circumstances, I believe it is appropriate to make it clear that a settling entity can request that the Commission consider an offer of settlement that simultaneously addresses both the underlying enforcement action and any related collateral disqualifications. 

Could SEC enforcement attorneys accept a company’s settlement offer but still reject the waiver request? Yes. In that circumstance, the company could also then withdraw its settlement proposal. Or if the company doesn’t reply within a few days, the SEC could assume the company has decided to fight, and move forward with litigation.


This strikes me as more relevant to registered investment advisers and other financial firms, rather than to corporate ethics and compliance officers. CCOs typically encounter the SEC around violations of the Foreign Corrupt Practices Act and weak internal controls. Whatever remediation you might need to manage as part of that settlement, those steps are still going to be there regardless of any other collateral consequences that get waived out the window.

This is mostly a gift to the legal department folks down the hall from you, working on securities filings for a private placement or a follow-on offering; they’ll be doing handsprings over this news. Sure, a more generous waiver policy is also likely to accelerate the company’s path to a settlement, and compliance officers will need to anticipate that, but faster settlements aren’t necessarily a bad thing for compliance officers. 

That said, the logic here is worth contemplating. Clayton says he wants to streamline settlement offers and waiver requests to reduce the complexity of negotiating with the SEC. At a theoretical level that’s not wrong; the more complex those negotiations are, the more time and money it costs the company. That’s money could otherwise go to shareholders or investment. Drawn out negotiations reduce the restitution that could to shareholders harmed by the misconduct. 

Well, yes and no. Clayton’s policy sets up conditions where a firm accused of wrongdoing could buy its way out of any other consequences. You offer a settlement, ask for a waiver, get the waiver — and really, the practical conversation boils down to, “How much do we have to pay the SEC to put this issue behind us and get on with our corporate lives?” 

That’s a bad attitude to have. A firm that committed misconduct should not be able to buy its way out of trouble and get on with its corporate life. It needs to think about how to improve its behavior, and perhaps face collateral consequences, to learn that misconduct hurts, so don’t do it.

Moreover, Republicans are generally loathe to impose monetary penalties anyway. So if we’re imposing fewer penalties; and offering an easier way to avoid other consequences; and even sometimes not imposing sanctions against executives because they’re supposedly so important to the success of the firm (which is what Clayton said last fall about Elon Musk) — well, then, exactly how are we supposed to inflict discomfort on firms that commit misconduct? 

Yet Again, Legal vs. Compliance

I see Clayton’s point that penalties and other consequences might hurt current investors. That point ignores the plight of future investors, who might buy into this company that never learned its lesson about misconduct, because the SEC keeps defanging its own enforcement posture. 

Nobody talks about future investors, but they’re real. They’re us. In modern capital markets, Mr. and Mrs. 401(k) have their retirement funds circulating far and wide. The investor who suffers less today because of smaller penalties today is the same one who suffers more tomorrow because another fraudulent company didn’t hear the message on good compliance. 

Corporate lawyers might like Clayton’s policy, because it helps them to reduce legal liability and increase the company’s options. But then, that’s their job. No wonder Clayton, a corporate lawyer his whole life, sees it that way. 

Ethics and compliance officers have (or should have, anyway) a bigger picture to consider. So should everyone else who cares about ethical conduct.

Yet again, while Clayton is a thoughtful and respectful SEC chairman, he also has a streak of knowing what he wants and ramming those ideas forward. And ramming them through on the afternoon before a long holiday weekend is exactly when you want to do it.

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