In 2013, the Securities and Exchange Commission announced a new policy of sometimes requiring admissions when settling enforcement actions.  The policy was a radical departure from the agency’s more than four decades-old practice of allowing companies and individuals to settle cases without admitting or denying the allegations against them. The change came in the wake of the financial crisis of 2008 and in response to widespread criticism that the agency was being too soft on wrongdoers, allowing them to resolve matters without taking responsibility for their actions.  Since the new policy went into effect, the SEC has repeatedly trumpeted its success.  A thorough examination of the cases in which admissions have been obtained – and a comparison with those where admissions are lacking – reveals a very different story.  The SEC has obtained admissions in only a very small number of cases, and the agency has very rarely obtained admissions in cases involving the most egregious misconduct, namely scienter-based fraud.

In adopting the new policy, then-SEC Chair Mary Jo White stressed the importance of public accountability.  She also set out the parameters of the new policy, emphasizing the need for admissions in the most egregious cases.  Admissions might be required in four instances: (1) “cases where a large number of investors have been harmed or the conduct was otherwise egregious”; (2) “cases where the conduct posed a significant risk to the market or investors”; (3) “cases where admissions would aid investors deciding whether to deal with a particular party in the future;” and (4) “cases where reciting unambiguous facts would send an important message to the market about a particular case.”

The new policy was greeted with considerable dismay by the defense bar and industry insiders, who predicted that it would have dire ramifications.  Critics pointed out that an admission in an SEC settlement could be used against a company or individual in criminal cases, private class actions, and other regulatory proceedings.  Many predicted that the result of the SEC’s new policy would be fewer settlements, more litigation, and a diversion of scarce SEC enforcement resources.  Some saw a potential slowdown in SEC enforcement activity.  In particular, there was concern that large, deep-pocketed, financial institutions would be unwilling to enter into settlements that required admissions for fear of liability in private securities actions.  The result would be an increase in litigation, which could cripple the SEC’s enforcement program.

Four years on, it’s safe to say that the critics’ worst fears have failed to materialize.  The SEC’s enforcement program remains robust, and the agency continues to report record enforcement numbers.  But the success of the admissions policy is open to question for several reasons.  First, the SEC has actually obtained admissions in only a very small number of cases.  Consistent with what the SEC stated at the outset – that admissions would only be required in egregious cases and no-admit/no-deny would otherwise continue to be the norm – the policy of requiring admissions has been used sparingly.  There are various metrics for assessing the admissions ratio, but even under the most generous measures, since inception of the policy, admissions have been obtained in settlements with well under 3 percent of the individuals and entities charged over that period, and by other measures the figure drops to well under 2 percent.  Most SEC cases continue to settle (rather than go to trial), and the overwhelming majority of those cases are still settled on a no-admit/no-deny basis.

Because the policy has been used sparingly, the feared collateral consequences have mostly been avoided.  At the same time, because there have been so few admissions, the goal of public accountability has often remained unmet.  More pointedly, while the SEC stated that the policy was aimed at, and would be used in, the most egregious cases – presumably those in which public accountability was most necessary– that has rarely been the case.  With a few notable exceptions, the SEC has not often obtained admissions in cases involving scienter-based fraud, particularly with respect to entities.  This may simply be a reflection of what critics of the new policy said at the outset: that the fear of collateral consequences would lead more companies to tell the SEC that they would rather fight than settle.  But it strongly suggests that, faced with the prospect of going to trial or settling without an admission, the SEC has caved.

Even more troubling is the inconsistent application of the admissions policy.  The SEC has given little guidance on when admissions will be required, and what little guidance there is provides almost no clue as to why the SEC has obtained admissions in some cases and not others.  Cases that appear on their face to be extremely similar have yielded vastly different results.  An analysis of the relevant settlements, and a comparison with cases where admissions were not obtained, yields no discernible pattern.  The problem is compounded by the fact that the SEC has largely failed to explain why it deemed admissions necessary in certain cases but unnecessary in others.  The lack of clear standards, consistency, and transparency has undermined the fairness and effectiveness of the policy, and has bred cynicism that the SEC may be using the threat of a required admission to extract higher penalties in settlements.

Moreover, the one trend that has emerged is unsettling.  It appears that the SEC is typically seeking admissions from large financial institutions in cases where no individuals are being charged and where there is no realistic possibility of collateral consequences such as criminal charges, private class-action liability, or further regulatory sanctions.  The lack of individual charges is particularly jarring, given that the entity that is making the admission can only act through the individuals that comprise it.  If accountability is the goal, it would seem to require some measure of individual accountability.  At the same time, requiring admissions only in cases where collateral consequences are remote or non-existent leads to an odd result: Either admissions are not being sought with respect to the most egregious misconduct, or cases of egregious misconduct are being settled with an admission to a less serious charge.

In a new article, I suggest that these trends reveal a deliberate strategy of accommodation on the part of the SEC, through which the agency has trumpeted a message of tough enforcement and public accountability, while in reality continuing business as usual.  In light of these issues, I conclude that the admissions policy should be reconsidered or abandoned altogether.

This post comes to us from David Rosenfeld, an assistant professor at Northern Illinois University College of Law. It is based on his article, “Admissions in SEC Enforcement Cases: The Revolution that Wasn’t,” forthcoming in the Iowa Law Review and available here.