When the SEC brings an enforcement action against you or your company, settlement is often preferable to the uncertainty, expense, and publicity of litigation. Understanding how SEC settlement negotiations work helps you evaluate options and achieve the best possible resolution.

Why Settle with the SEC?

Most SEC enforcement actions end in settlement rather than trial. Settling offers several advantages: avoiding the uncertainty of litigation, reducing legal costs, limiting negative publicity, ending the matter more quickly, and potentially achieving better terms than a court might impose after trial.

However, settlement involves admissions and penalties that carry their own consequences. The decision to settle—and on what terms—requires careful analysis.

The Wells Notice

Before filing charges, SEC staff typically issue a Wells notice—formal notification that staff intend to recommend enforcement action. This is your opportunity to persuade staff not to proceed or to limit charges. A Wells submission presents your side, challenges the staff's legal theories, and argues why action is unwarranted.

While Wells submissions rarely stop enforcement entirely, they can influence what charges are filed and provide a foundation for settlement discussions.

Settlement Timing

Settlements can occur at various stages:

Pre-filing: Reaching agreement before charges are filed minimizes publicity and legal expenses but may occur before you fully understand the SEC's case.

Early litigation: After charges are filed but before significant discovery, settlements may benefit from increased information while avoiding trial preparation costs.

Pre-trial: As trial approaches, both sides better understand case strengths and weaknesses, often spurring resolution.

During or after trial: Even after trial begins, settlement remains possible—though leverage and options may change based on proceedings.

Components of SEC Settlements

SEC settlements typically include several elements:

Consent decree or order: A court order (for civil actions) or administrative order containing the settlement terms.

Injunctions: Orders prohibiting future violations of specific securities laws.

Disgorgement: Returning ill-gotten gains plus prejudgment interest.

Civil penalties: Monetary fines that can be substantial—often equal to or exceeding disgorgement.

Bars and suspensions: For individuals, prohibitions on serving as officers/directors or working in the securities industry.

Undertakings: Commitments to take specific remedial actions.

Admissions Policy

The SEC's policy on admissions has evolved. Traditionally, settlements allowed defendants to "neither admit nor deny" allegations. However, since 2013, the SEC has required admissions in certain cases—particularly those involving egregious conduct, significant harm to investors, or where admissions would benefit the public interest.

Admissions in SEC settlements can have significant collateral consequences, including use in private securities litigation.

Negotiating Penalties

Penalty negotiations consider multiple factors: the egregiousness of violations, harm caused to investors, profits gained from misconduct, defendant's cooperation and remedial efforts, defendant's ability to pay, and precedent from similar cases.

Demonstrating cooperation, taking responsibility, and implementing remedial measures can reduce penalties. Conversely, obstruction or repeated violations increase them.

Cooperation Credit

The SEC provides credit for cooperation that can substantially reduce sanctions. Cooperation includes self-reporting violations, conducting internal investigations and sharing findings, providing documents and testimony beyond legal requirements, and taking prompt remedial action.

The SEC's Cooperation Program provides specific incentives, including deferred prosecution agreements and non-prosecution agreements in appropriate cases.

Collateral Consequences

Consider broader implications of settlement terms:

Private litigation: Admissions or findings may be used against you in shareholder lawsuits.

Professional consequences: Bars may end careers in finance; some settlements trigger licensing consequences in other industries.

Business impact: Settlements may affect contracts, relationships, and regulatory approvals.

Criminal exposure: While settling with the SEC doesn't prevent criminal prosecution, it may influence DOJ decisions.

Board and Shareholder Approval

Corporate settlements require appropriate authorization. Boards must approve settlements, consider fiduciary duties, and potentially disclose settlement terms. Shareholder approval may be required for settlements affecting corporate structure or involving significant payments.

Finalizing Settlement

SEC settlements require Commission approval. Staff negotiates terms, but the five-member Commission must authorize any settlement. Commissioners occasionally reject staff-negotiated settlements, though this is uncommon.

Once approved, settlements in litigated matters require court approval as consent judgments. Administrative settlements become effective upon Commission order.

Getting Legal Help

SEC settlement negotiations require experienced securities defense counsel. Attorneys who regularly practice before the SEC understand staff priorities, precedent settlements, and negotiation strategies. They can help you achieve the most favorable resolution while protecting your interests in related proceedings.