SEC Chairman Mary Jo White recently announced further changes to the SEC’s settlement policy. Under the new policy, as a condition of settlement in a limited type of cases, the SEC intends to require admissions of liability.

Historically, the SEC settled matters on a neither-admit-nor-deny basis. That practice has come under fire from various critics in recent years. One of the most outspoken critics of the practice has been U.S. District Court Judge Jed Rakoff who, in a blistering opinion handed down in November 2011, refused to sign off on a $285 million settlement between the SEC and Citibank. He reasoned that because there was no misconduct acknowledged by Citibank, there was no basis for determining if the settlement was in the public interest. The SEC and Citibank appealed, which is pending. Since then, others have joined Judge Rakoff in criticizing and expressing skepticism about the SEC’s practice of permitting no-admit-no-deny settlements.

In January 2012, then-SEC Enforcement Director Robert Khuzami announced modifications to the settlement policy by removing neither-admit-nor-deny provisions in cases where a defendant or respondent is criminally convicted of conduct that forms the basis of a parallel civil proceeding. Then, in May of this year, SEC Chair White defended and pledged to review the SEC’s no-admit, no-deny policy overall.

This week, Chairman White announced an expansion to the then-current policy. At a CFO Network conference Tuesday, Chairman White told reporters that the SEC will be seeking admissions from certain defendants on a “case-by-case” basis, stating, “There may be particular individuals or institutions where it is very important it be a matter of public record that they acknowledge their wrongdoing, and if not you go to trial.”

Co-directors of the Division of Enforcement Andrew J. Ceresney and George S. Canellos explained the policy shift in a June 17 email to the staff of the Division of Enforcement. The email explains that most cases will continue to be settled on a neither-admit-nor-deny basis, but “there may be certain cases where heightened accountability or acceptance of responsibility through the defendant’s admission of misconduct may be appropriate, even if it does not allow us to achieve a prompt resolution [or results in litigation].” The types of cases identified as potentially being subject to the new policy include:

  • Misconduct that harmed large numbers of investors or placed investors or the market at risk of potentially serious harm;
  • Where admissions might safeguard against risks posed by the defendant to the investing public, particularly when the defendant engaged in egregious intentional misconduct; or
  • When the defendant engaged in unlawful obstruction of the commission’s investigative process.

The SEC has indicated that it will review its cases to determine where an admission of misconduct is appropriate, and Chairman White plans to hold a town hall meeting on a date not yet determined to discuss the policy change. Time will tell how the SEC utilizes the new policy and its impact on the enforcement process. We’ll keep you posted.