How to Negotiate With the SEC
A Dozen Things to Know Before You Try to Settle an SEC Enforcement Action
The U.S. Securities and Exchange Commission (SEC) has broad powers to investigate and enforce violations of U.S. securities laws. However, the vast majority of SEC enforcement actions end with negotiated consent decrees – not courtroom drama. If you’re facing an SEC investigation, knowing how to negotiate can make the difference between an existential threat to your business or career and a manageable, strategic resolution.
This guide pulls back the curtain on the SEC settlement process, revealing the unwritten rules, hidden leverage points, and critical missteps to avoid when negotiating with the world’s most powerful securities regulator.
1. The SEC’s Primary Goal Is Settlement: 98% of Cases Resolve Out of Court
The SEC’s Enforcement Division files hundreds of cases annually, but over 98% settle before trial. Why? The agency’s mandate is deterrence and investor protection, not courtroom victories. SEC staff attorneys are evaluated on cases closed—not cases won. This creates a powerful incentive to resolve matters efficiently, especially in an era of limited budgets and political pressure to “do more with less.”
The SEC’s civil enforcement action is not about putting people in jail. It’s about protecting investors and promoting integrity in the marketplace. You’re not negotiating with a prosecutor gunning for headlines. You’re negotiating with career civil servants whose metric of success is closing cases, not winning trials.
2. Timing Is Everything: The First 60 Days Determine Your Fate
The most critical window for negotiation is the first 60 days after receiving a Wells Notice or Enforcement Action Notice. This is when the SEC is still formulating its case, conducting interviews, and analyzing documents. Once a formal charge is filed, your leverage drops dramatically. Early engagement allows you to shape the SEC’s narrative, highlight mitigating factors, and potentially avoid harsh charges before they’re cemented in the public record.
3. The Wells Submission Is Your Best Opportunity to Negotiate
The Wells Notice is not just a formality; it’s your invitation to a dialogue. A strategic Wells Submission can accomplish three critical goals:
- Limit the Scope: By providing factual context, you can sometimes convince the SEC to drop certain charges or focus on lesser violations.
- Frame the Narrative: The Wells Submission is your opportunity to present exculpatory evidence and introduce mitigating factors the SEC may have missed.
- Signal Cooperation: Expressing a willingness to engage in good-faith settlement discussions demonstrates contrition and can lead to penalty reductions.
4. The SEC’s Internal Penalty Guidelines Are Not Public
While the SEC publishes general guidelines for determining penalties, the actual ranges used by Enforcement staff are internal and not public. Penalties are often calculated based on ill-gotten gains, investor losses, and the egregiousness of the conduct. However, there is significant discretion, and penalties can vary widely for similar violations, depending on the quality of your defense and the perceived strength of the SEC’s case.
5. Dodd-Frank Increased the SEC’s Leverage (But Also Their Incentive to Settle)
The Dodd-Frank Act of 2010 significantly increased the SEC’s enforcement power, including expanding the categories of individuals and entities subject to charges and increasing the maximum penalties. However, Dodd-Frank also created new resource constraints, making it even more critical for the SEC to resolve cases quickly through settlement. The agency simply does not have the personnel or budget to take every case to trial.
6. The SEC Is Not a Monolith: Know Your Audience
Negotiations with the SEC occur on three levels:
- Staff Attorney: Your initial point of contact, often a junior or mid-level lawyer.
- Branch Chief: The first layer of management, responsible for overseeing multiple cases.
- Associate Director or Director of Enforcement: The highest level of authority, involved in the most significant or precedent-setting cases.
The vast majority of settlements are negotiated at the staff attorney or branch chief level. However, for high-profile cases or those involving novel legal issues, approval might be required from the highest levels.
7. SEC Commissioners Rarely Get Involved in Settlements
The five SEC Commissioners are political appointees who set agency policy and vote on new rules. They are not involved in day-to-day enforcement actions or settlement negotiations. However, the Commissioners can vote to reject a proposed settlement, especially in politically sensitive cases or those involving high-profile defendants.
8. The SEC’s Ultimate Settlement Authority Lies With the Commission
The staff attorney and branch chief can recommend a settlement, but the final approval lies with the Commission. The Commissioners will consider the recommendation, the Wells Submission, and other relevant factors before voting on whether to approve the settlement.
9. The SEC Can Seek Injunctive Relief, Disgorgement, and Civil Penalties
SEC settlements typically involve three main components:
- Injunctive Relief: A court order prohibiting future violations of the securities laws.
- Disgorgement: The return of ill-gotten gains, plus prejudgment interest.
- Civil Penalties: Fines imposed for the violation, often calculated as a multiple of the ill-gotten gains.
10. SEC Settlements Often Include Language To Avoid Admissions
Most SEC settlements include language stating that the defendant neither admits nor denies the allegations. This allows the defendant to avoid an admission of liability while still resolving the matter and paying penalties.
However, in 2022, the SEC announced a new policy requiring admissions in certain cases, such as those involving egregious misconduct or where a defendant has already admitted liability in a parallel criminal case.
11. The SEC Can Still Pursue Charges Even After Settlement
In some cases, the SEC may agree to settle a case on the condition that the defendant cooperates with ongoing investigations or agrees to comply with certain undertakings. However, if the defendant later violates the terms of the settlement agreement, the SEC can still pursue enforcement action.
12. The SEC’s Enforcement Priorities Can Change Rapidly
The SEC’s enforcement priorities can change with different administrations and leadership. What might have been considered a minor violation under one chairman could be a top enforcement priority under another. It’s critical to stay informed about the SEC’s current areas of focus and adjust your strategy accordingly.
How to Leverage These Insights in Your SEC Negotiations
Armed with this insider knowledge, you can approach SEC negotiations from a position of informed strength, rather than fear or uncertainty. Here’s how to put these lessons into practice:
- Engage Early and Often: Don’t wait for a formal complaint. Engage with the SEC staff attorney as soon as possible to shape the narrative and explore settlement options.
- Build a Strong Defense: Gather all relevant documents and evidence to support your position. Highlight mitigating factors and demonstrate a commitment to compliance.
- Be Transparent and Cooperative: The SEC values transparency and cooperation. Demonstrating a willingness to cooperate can lead to significant penalty reductions.
- Understand Your Leverage: Use the SEC’s resource constraints and desire for efficiency to your advantage. Negotiate from a position of knowledge and confidence.
- Hire Experienced Counsel: SEC investigations can be complex and intimidating. Hiring experienced securities counsel is essential to navigate the process effectively.
The Bottom Line
SEC settlements are the norm, not the exception. By understanding the SEC’s priorities, internal dynamics, and negotiation process, you can significantly improve your chances of a favorable outcome. Remember, the SEC’s goal is not to destroy your business or career, but to protect investors and maintain market integrity. By approaching negotiations strategically, you can resolve your matter efficiently and move forward.
Contact the SEC negotiation attorneys at Spodek Law Group today for experienced legal defense. Call 212-300-5196.
