The Securities and Exchange Commission (SEC) plans to make it harder for companies and individually charged officers to settle allegations of wrongdoing without first admitting guilt.

SEC enforcement chief Gurbir Grewal said last week the agency wants to move away from its policy in which defendants can settle claims without admitting or denying wrongdoing. 

“When it comes to accountability, few things rival the magnitude of wrongdoers admitting that they broke the law,” said Grewal, speaking at a Practicing Law Institute conference. “We will, in appropriate circumstances, be requiring admissions in cases where heightened accountability and acceptance of responsibility are in the public interest.”

An SEC that aggressively pursues an admission of guilt before settling will make it more likely companies and individual officers will litigate the claims, say legal specialists. That’s because admitting guilt could open them to subsequent private lawsuits by shareholders. 

“Such an admission would cause significant reputational damage to companies and individuals and have severe collateral consequences under the SEC’s bad-actor rules and in follow-on litigation,” says Ken Henzinger, a partner at Paul Hastings and a former SEC attorney.  

Limited success

The SEC tried this more aggressive approach during the Obama administration, which was under pressure after the 2008 financial crisis to hold companies to account for risky practices. But it had limited success, with only a 2% increase in the number of cases in which defendants admitted wrongdoing, according to a Northern Illinois University College of Law study

In most cases, defendants ended up settling, as they’ve done historically, without admitting or denying guilt, in part because the SEC simply lacks the resources to go toe-to-toe with companies in all-out court battles. 

“The SEC is vastly outgunned by the companies it oversees,” Kurt Schacht of the CFA Institute said in an opinion piece published in The Hill. The agency is supposed to oversee some $97 trillion in securities with an enforcement budget of about $1.6 billion. 

Under the Trump administration, the SEC went back to its traditional no-admit, no-deny settlement policy. 

Against this background, don’t expect much to change this time around either, according to an analysis by the law firm Paul, Weiss. 

“These are aggressive policy shifts, but it remains to be seen how aggressively the Enforcement Division will pursue them in practice,” the analysis says.

Staff role

Even so, negotiations between defendants and the agency can be expected to be more contentious. Among other things, there’s less chance of companies working things out early in the process through what’s known as a Wells meeting — a meeting in which the two sides come together before charges are filed to look for compromise.

The meetings are expected to be less fruitful because, as part of the policy shift, they’ll be conducted by SEC staff rather than the agency’s two top enforcement officers, unless the case involves a novel area of law. 

Analysts see this as a problem for defendants because agency staff tend to be hardliners on enforcement matters.

“Staff … have traditionally been viewed as more aggressive,” the Paul, Weiss analysis says. 

Long-sought change

For critics of the SEC’s traditional no-agree, no-deny settlement policy, the change is a welcomed one. The New Civil Liberties Alliance has called the SEC’s policy a kind of gag order that’s without precedent in the federal government. Once companies or officers settle without admitting or denying wrongdoing, they’re effectively banned from coming back later to contest facts of the case. 

“SEC’s gag rule was unlawful and unconstitutional from the day the agency deceitfully slipped it into the Federal Register as a ‘housekeeping rule’ without notice and comment,” says Peggy Little, senior litigation counsel at the New Civil Liberties Alliance. “The passage of time only multiplies the constitutional injury suffered by defendants, who cannot settle with SEC unless they agree to a lifetime gag that a court has no power to enter. Other federal agencies do not require gags, nor do courts enter them in cases brought by other agencies.”

The New Civil Liberties alliance has sued the SEC multiple times over the policy, most recently on behalf of a former Xerox CFO whose settlement with the agency cost him $5 million in penalties and disgorgement and prevents him from contesting disputed facts. 

His case is stymied; last month an appellate court upheld the SEC policy. But to the extent the agency moves away from its no-admit, no-deny policy in practice, there could be fewer cases like this one going forward.