Revived SEC Admissions Policy Fizzled in First Year

You could be forgiven if you don’t recall an announcement made by a Securities and Exchange Commission official in 2021. A killer virus spreading around the world, a war in Europe, an attempted insurrection in Washington – there has been a lot going on.

In fact, SEC Director of Enforcement Gurbir Grewal might prefer you don’t recall that in October 2021, he said the agency was resurrecting an Obama era policy requiring some companies to admit wrongdoing as part of settlement agreements. After all, nearly 18 months later, evidence appears thin that the change is leading to dramatic consequences for misbehaving corporations.

The rationale behind the policy is that admitting misconduct ostensibly magnifies the potential collateral damage for the parties involved. Primarily, an admission could add fuel to the fire in a civil class action lawsuit related to the matter against a publicly traded company. Fessing up to misdeeds can also pose serious reputational damage to the companies and individuals involved. Meanwhile, Grewal has cited the deterrent effect as another benefit of requiring public admissions.

That sounds great in theory, but the policy doesn’t seem to have achieved much in application, according to Harris Fischman, a partner at law firm Paul Weiss Rifkind Wharton & Garrison LLP and former assistant U.S. attorney for the Southern District of New York. He analyzed the settlement results from 2022 in a recent article and came away unimpressed: “Although the SEC has secured admissions in a number of high-profile actions, it did so under circumstances that are not likely to have significant collateral consequences.”

Citing enforcement data compiled by Cornerstone Research and public filings, Fischman determined the SEC obtained 22 admissions of wrongdoing in settlement actions from 2022. The total included 16 from public companies, which doubled the highest amount from any previous year. That sounds impressive on its face.

The problem, as Fischman pointed out, is that almost all the admissions dealt with record-keeping violations and didn’t involve “fraud-based claims” or an intent to knowingly engage in misconduct. That limits their usefulness as part of parallel criminal proceedings or in class action cases. Fischman noted that other admissions by and large came from cases in which the accused parties already faced criminal charges, or they weren’t accused of misleading investors.

To be sure, the settlements covered in Fischman’s study occurred during the first year of the revived admissions policy. That doesn’t rule out the possibility that it will become relevant in cases with larger collateral consequences as time goes on.

Going forward, though, SEC officials should still consider that companies may decline settlement offers in cases that would have a broader impact specifically because they don’t want to admit wrongdoing. In other words, the admissions policy may be a little too effective for the agency’s own good.