Earlier this week, on February 9, 2021, Acting Chair of the US Securities and Exchange Commission (SEC) Allison Herren Lee announced that the SEC has restored the power of senior SEC officials to authorize opening formal investigations. This new rule will allow SEC staff to subpoena documents and take sworn testimony without requiring the approval of the Division of Enforcement director, in a reversal back to a relaxation of internal procedures first made under President Obama (that was later rolled back during President Trump’s administration).
As has been widely described elsewhere, the number of white-collar defendants and fines issued to corporations declined significantly during President Trump’s years in office, which also ended with a string of end-of-term pardons granted to individuals convicted of white-collar crimes. The move in early 2017 to revoke the authority of SEC officers to open investigations scaled back the SEC’s power to initiate probes: under President Trump’s term, the number of new investigations fell from 1,063 in 2016 to 827 in 2019, according to figures published in the SEC’s Annual Performance Plans. In contrast, the Biden administration is expected to take a more aggressive approach to enforcement, and with this recent change appears poised to ramp up white-collar probes once again.
In the press release announcing the change, Lee stated, “Returning this authority to the [Division of Enforcement’s] experienced senior officers, who have a proven track record of executing it prudently, helps to ensure that investigative staff can work effectively to protect investors in an era when the pace of fraud – like the pace of markets themselves – is ever more rapid.” How swiftly the SEC will move to exercise its new powers remains to be seen.
The direction of travel, however, seems assured. Only two days later, on February 11, 2021, Commissioner Lee announced another critical change to the SEC's practice: the Commission will no longer approve settlements recommended by the Division of Enforcement that are conditioned on a waiver of so-called “bad actor” disqualifications. These disqualifications can arise when a company settles certain types of securities-law violations with the SEC (among other triggers, including from other state and federal authorities). Unless they are waived, the disqualification can prevent a company from engaging in types of business (for example, related to private placements) or enjoying certain regulatory protections (like well-known seasoned issuer status). In the past, under former Chairman Jay Clayton, considering a waiver of collateral consequences was a permissible part of the SEC's settlement negotiations, and the Division of Enforcement could submit to the Commission a single recommendation that included a waiver as part of the resolution. Now, waiver requests will be considered solely by the SEC's Divisions of Corporation Finance and Investment Management.
Past Democratic Commissioners have criticized the SEC's waiver practice, with former Commissioner Kara Stein arguing in 2014 that the practice undermined the SEC's aim to protect the market from bad actors by creating a policy "that some firms are just too big to bar." In announcing the new policy, Lee stated that waivers should not be used "as a bargaining chip in settlement negotiations or regarded as an obstacle to be overcome on the way to a settlement," noting that waivers are not a "default position" and any future waivers will be considered separately from settlement negotiations. This change suggests that it may be more complicated and time-consuming for settling companies to obtain a waiver; it also seems aimed at putting companies on notice that they now may have a lot more to lose than monetary penalties and disgorgement in the upcoming era of enforcement.