SEC Amends Settlement Policy! (But Not Really)

I was briefly stunned on Friday to read this headline in the New York Times: SEC Changes Policy on Firms’ Admissions of Guilt. My shock didn’t last long. Had the SEC abandoned its longstanding policy of allowing settling defendants to do so without either admitting or denying the allegations in accompanying complaints? Well, the Commission announced a policy change, but not one that will have a significant effect on most of its actions.

What the SEC did was modify its settlement policy to say that defendants would no longer be able to avoid admitting the allegations in a complaint when they simultaneously are convicted of criminal violations in a parallel case. This isn’t nothing. It avoids the cognitive dissonance that happens when a truly bad actor is convicted of crimes and the SEC allows the same defendant to say that he neither admits nor denies the allegations in the SEC’s complaint. At some point that charade just becomes silly, and the SEC’s standard policy has left it looking silly in those instances as well.

But the vast majority of the Commission’s enforcement actions do not involve parallel criminal actions. And it isn’t clear to me from the Times article or this Reuters piece whether the policy change will take effect only when the criminal convictions overlap perfectly with violations alleged by the SEC.  In many cases, the Justice Department indicts for, say, mail fraud or money laundering under facts that the SEC doesn’t have jurisdiction over and cannot charge under the statutes available to it. In others, the SEC will bring non-scienter-based charges (that are not criminal) along with fraud claims. In those situations, the cases with asymmetrical charges could put the Commission’s general policy of allowing defendants not to admit charges in stark relief.

To explain what I mean further, assume the Justice Department secures a criminal conviction for a willful violation of Section 10(b) of the Exchange Act.  Meanwhile, the SEC settles with the same defendant under the same facts to a violation of Section 10(b). But the SEC also charges the defendant with selling securities without the benefit of a registration statement, in violation of Section 5 of the Securities Act, a statute that does not require scienter. While it has happened before, DOJ typically does not charge defendants with willful violations of Section 5, and let’s assume that didn’t happen under this hypothetical. Presumably under the new policy, the defendant would be compelled to admit to the Section 10(b) violation, but would be allowed neither to admit nor deny the Section 5 violation. It would seem incongruous that the defendant would be compelled to admit committing securities fraud but allowed to avoid admitting or denying the non-scienter-based violation. The disconnect might be even more frustrating for judges and the general public than the general policy already is.

Still, I think this is a somewhat useful policy change, and it is encouraging that the SEC – which can be somewhat hidebound when it comes to longstanding policies and procedures – has shown some flexibility here. It may seem small, but it bodes well for the Commission’s enforcement program generally.