SEC Chair Sheds Light on New Settlement Policy

In recent remarks before the Council of Institutional Investors, Securities and Exchange Commission (SEC) Chair Mary Jo White offered additional details about the agency’s new settlement policy. The speech, entitled “Deploying the Full Enforcement Arsenal,” also detailed the SEC’s priorities in creating a tougher enforcement program.

To start, White highlighted the following as key enforcement priorities:

• Misconduct by investment advisers at hedge funds, private equity funds, and mutual funds.
• Financial statement and accounting fraud.
• Insider trading
• Fraud in connection with microcap securities, particularly those perpetrated through social media
• New markets and regulatory regimes resulting from the new rules mandated by the Dodd-Frank and JOBS Acts

White also highlighted that the SEC will be “aggressive and creative in the way we use the enforcement tools at our disposal.” As she explained, this means the agency will “neither shrink from bringing the tough cases, nor fail to bring smaller ones.”  White further added that the Enforcement Division will consider all the legal avenues available, including bringing negligence cases when there is not enough evidence to prove intentional wrongdoing.

White also shed further light on the SEC’s revised settlement policy, which will more frequently require defendants to admit wrongdoing. While White acknowledged that settling cases on a no-admit-no deny basis still makes sense in a large majority of cases, she also reaffirmed that “more may be required for a resolution to be, and to be viewed as, a sufficient punishment and strong deterrent message.” According to White, cases potentially requiring admissions include:

• Cases where a large number of investors have been harmed or the conduct was otherwise egregious
• Cases where the conduct posed a significant risk to the market or investors
• Cases where admissions would aid investors deciding whether to deal with a particular party in the future
• Cases where reciting unambiguous facts would send an important message to the market about a particular case

With regard to penalties, White noted that the agency plans to incorporate more forward-looking mandatory undertakings, such as requiring companies to implement new policies, procedures and compliance testing. As she noted, these sanctions are intended to prevent future wrongs rather than simply punish prior conduct.

The recent SEC defeat in the insider trading case it brought against Mark Cuban evidences that the Commission intends to carry through on Ms. White’s stated priorities, including not avoiding tough cases, which the Cuban case certainly appeared to be from the outset, years ago. On the other hand, the recent SEC “victory” in obtaining a $13 billion settlement from JP Morgan Chase certainly shows proof of the SEC’s revised settlement policy, a much tougher approach than in the past.

For a larger discussion of these two cases, please stay tuned.

If you have any questions about the SEC’s new policies or would like to discuss the legal issues involved, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work.