On July 3, SEC Chairman Jay Clayton issued a statement signaling a policy change in SEC settlements and the consideration of applications for waiver of collateral consequences flowing from those settlements, such as the loss of certain significant procedural advantages in (or even outright exemption from) the securities registration process. In practice, this change could both streamline the process of settling enforcement actions with the SEC and provide additional certainty to settling entities, which, under the current regime, must decide whether to settle a matter before completing and knowing the outcome of negotiations over waivers.
In his statement, Chairman Clayton noted a series of factors that both drive and complicate the SEC’s ability to settle enforcement actions, including the cost of litigation, the SEC’s willingness to litigate quickly cases where it cannot settle, and the SEC’s and settling entities’ ability to craft a settlement that will sufficiently protect investors. However, the bulk of the Chairman’s statement focused on the fact that enforcement settlements may have significant collateral consequences for entities. These include loss of well-known seasoned issuer (“WKSI”) status and the significant procedural advantages WKSI status provides in the registration process, loss of certain exemptions from registration for smaller offerings or offerings by certain types of issuers, as well as protection for forward-looking statements from fraud claims. Settling parties thus need to apply to the SEC or the Divisions of Corporation Finance or Investment Management, acting pursuant to delegated authority, for waivers of these collateral consequences. However, the SEC has traditionally decoupled consideration of settlement offers from waiver applications, which, as Chairman Clayton noted, “can add complexity” and “substantially complicate and lengthen the negotiating process, which . . . may not lead to the best outcome for investors and unnecessarily tap Commission resources.”
Thus, Chairman Clayton announced that going forward settling entities will be able to simultaneously submit offers of settlement and waiver applications for Commission consideration and approval. Under the new regime, “an offer of settlement that includes a simultaneous waiver request negotiated with all relevant divisions (e.g., Enforcement, Corporation Finance, Investment Management) will be presented to, and considered by, the Commission as a single recommendation from the staff.” Chairman Clayton noted that such simultaneous submissions will allow the Commission to consider settlement offerings holistically to determine whether on balance the resolution “best serves investors and the Commission’s mission more generally.”
Importantly, if somewhat unsurprisingly, the statement notes that the Commission is not obligated to accept either or both of the settlement offer and the waiver request—effectively allowing it to decouple those applications should it wish to do so. Specifically, should the Commission accept a settlement offer, but reject a waiver application “in whole or in part, the proposed defendant would need to promptly notify the staff (typically within a matter of five business days) of its agreement to move forward with that portion of the settlement offer that the Commission accepted.” Chairman Clayton also noted that should settling entities fail to “promptly” notify the staff of their agreement to the remaining terms, such terms “may no longer be available and a litigated proceeding may follow.”
Generally speaking, Chairman Clayton’s statement recognizes the reality that collateral consequences can be an important (“extremely significant” in the Chairman’s words) component of any enforcement settlement. Depending on the business at issue, the loss of WKSI status or of available registration exemptions (including registration exemptions for smaller offerings or offerings by business development companies or small business investment companies) or the loss of protection from private securities fraud liability related to forward-looking statements, can dramatically increase costs associated with accessing the securities markets. Indeed, with respect to larger entities, and as the Chairman noted, such automatic disqualifications may negatively affect a business line of the parent company that is wholly unrelated to the misconduct at issue.
A few takeaways are apparent from the statement. First, the statement reflects an acknowledgment that waiver denials may not result in the best settlement for the Commission. As noted above, the statement recognizes that waivers can be a significant component of an enforcement action. Moreover, in the most extreme cases, entities may not be able to accept a settlement—one that would be in the Commission’s interest—due to the serious nature of collateral consequences. Chairman Clayton’s statement recognizes this: “[i]n other cases, in whole or in part, [collateral consequences may not be appropriate], including because other measures may more appropriately address the conduct at issue and related investor protection considerations.” In other words, if considered holistically, the Commission may be better off obtaining other relief—such as injunctions or an independent compliance consultant—than rote application of collateral consequences where such consequences would not protect investors or appropriately deter future misconduct.
Second, a motivating factor behind the statement appears to be to bring enforcement actions to speedier conclusion. As things currently stand, entities negotiate a settlement in principle with the Enforcement Division (typically including negotiations with and presentations to staff members of varying seniority). Only once those terms are agreed (at least in principle) do defendants turn to seeking waivers from either or both of the Divisions of Corporation Finance or Investment Management (also typically entailing multiple opportunities for negotiation and presentation). The new system may allow all relevant stakeholders on the staff to negotiate more quickly with defendants to craft a complete settlement for Commission consideration. However, it remains to be seen whether discussions with the Divisions of Corporation Finance and Investment Management will begin early enough to speed things appreciably.
Third, the efficacy of the new proposal may turn on whether the Commission—as a practical matter—generally approves both the settlement and waiver components. There is reason to believe that this will be the case. First—despite some dissenting voices over the years—the Commission approves the vast majority of recommendations placed before it by the staff. In any event, because the Commission has delegated authority, as a practical matter, the Divisions of Corporation Finance and Investment Management have the power to approve certain waiver applications without full Commission vote. However, these Divisions have been declining to exercise this delegated authority and have been submitting applications to the Commission or at least informally soliciting the Commission’s view, likely because of the dissents and public criticism.
In the end, both staff and settling entities may well benefit from the new policy. Staff may be able to bring cases to a speedier conclusion, whereas defendants would be able to obtain certainty that their enforcement settlements—negotiated over many months—will not be scuttled last minute by business-ending collateral consequences. Perhaps most importantly for defendants, they will be able to know before finalizing the settlement whether they will be able to obtain the waiver. This increased certainty will likely be the most important benefit of the new policy.
 Jay Clayton, Statement Regarding Offers of Settlement (July 3, 2019), available at https://www.sec.gov/news/public-statement/clayton-statement-regarding-offers-settlement.
 Chairman Clayton noted that, in the past, the Commission has permitted such simultaneous settlement offers and waiver applications “often . . . framed as an offer of settlement contingent upon the receipt of a specified waiver,” but that such a practice had since fallen out of use.
 Chairman Clayton noted that “[f]or example, remedies such as the imposition of an injunction against future violations of the antifraud provisions of the federal securities laws, or the requirement that an entity undertake to retain an independent compliance consultant, may subject the entity to collateral disqualifications that, as a practical matter, can prohibit the entity from continuing to conduct certain businesses.”
 See our July 9, 2019 Alert Memorandum, “Proposed Bad Actor Disqualification Act of 2019 Would Severely Limit the Availability of Waivers for Institutions Entering into Settlements with the SEC and DOJ,” available at https://client.clearygottlieb.com/51/1301/uploads/2019-07-09-proposed-bad-actor-disqualification-act-of-2019.pdf.
 See, e.g., Kara M. Stein, Dissenting Statement in the Matter of Deutsche Bank AG, Regarding WKSI (May 4, 2015), available at https://www.sec.gov/news/statement/dissenting-statement-deutsche-bank-ag-wksi.html; Kara M. Stein, Dissenting Statement in the Matter of The Royal Bank of Scotland Group, plc, Regarding Order under Rule 405 of the Securities Act of 1933, Granting a Waiver from Being an Ineligible Issuer (April 28, 2014), available at https://www.sec.gov/news/public-statement/2014-spch042814kms.