Collateral Consequences of SEC Settlements.

While negotiations typically focus on fines, disgorgement, and monitoring, SEC settlements frequently trigger regulatory disqualifications that apply by operation of law. Determining whether a settlement will trigger these collateral consequences, and how to avoid them, requires a comprehensive analysis of both the proposed charges and the venue through which a settlement is achieved. Key considerations include: - Securities Offerings: The primary concerns for public companies are “bad actor” disqualifications under Regulation D, Regulation A, and Regulation Crowdfunding. These disqualifications have the potential to delay securities offerings and to increase both the costs of capital and the associated legal burdens for years to come.

• FINRA Membership: For broker-dealers, SEC orders can jeopardize eligibility to maintain membership under the FINRA Rules, including the statutory disqualification eligibility proceedings under the FINRA Rule 9520 Series. Investment advisers must also be aware of their obligations under Advisers Act Rule 206(4)-1, which replaced rescinded solicitation Rule 206(4)-3-1).
• SEC Compliance Filing: SEC compliance procedures, including Form ADV, Form BD, and others, require the disclosure of “disciplinary events.” Determining whether an SEC settlement constitutes a “disciplinary event” requires a detailed review of the SEC’s specific definitions.
• Private Contractual Obligations: Private contractual consequences can depend on the applicable definitions in the agreement at hand and the legal form of the settlement. For example, does the agreement define “default” in a way that triggers additional sanctions?
• D&O Insurance: With respect to D&O insurance, a key consideration is whether a policy’s “conduct exclusions” require a final adjudication of wrongdoing, or whether the settlement agreement itself will trigger an insurance company’s denial of coverage. We address coverage issues as part of our comprehensive defense approach.

Which Settlement Terms Actually Trigger Automatic Disqualification?

We think of SEC settlement negotiations as targeting two distinct categories of consequences: express sanctions and collateral sanctions. While the express sanctions, such as disgorgement and civil penalties, generally do not trigger regulatory or private contractual disqualification, the collateral sanctions can apply by operation of law. This means that: - Industry Bars: While industry bars are often treated as a key concern in SEC enforcement defense, for firms with substantial regulatory obligations, an industry bar may be more akin to an express sanction than a collateral disqualification.

• Neither-Admit-Nor-Deny: It is a common misconception that a neither-admit-nor-deny settlement effectively shields a firm from automatic disqualification. Such settlements can still contain findings and impose terms and conditions that satisfy the triggers for automatic disqualification.
• Consent Injunctions: Consent injunctions are another common subject of SEC enforcement defense. In many cases, obtaining a consent injunction without making an admission can still expose a company to automatic disqualification.
• Criminal Convictions: In matters that involve potential parallel enforcement action by the DOJ, negotiations with federal prosecutors could lead to a criminal conviction. A criminal conviction independently triggers a “bad actor” disqualification under Rule 506(d), regardless of the specific terms of an SEC settlement. As a result, a comprehensive analysis of SEC settlement terms is crucial. All categories of “bad actor” disqualifications arise either from (i) a final order or injunction; (ii) a specific finding; or (iii) an “eligible” or “qualifying” event. For example, among other types of securities-related violations, Rule 506(d) requires a “bad actor” disqualification period of ten years in the case of a conviction, five years for the issuer, its predecessors, and affiliated issuers, five years for court injunctions and restraining orders, and five years in the event of an SEC cease-and-desist order.

Determining the Disqualification Period

With this and similar issues in mind, companies should have questions like: “Do the disqualifications under Rule 506(d) apply to orders or injunctions arising outside the United States?” When making these determinations, companies must also consider the role of the CFTC, the NCUA, the U.S. Postal Service, federal and state courts, and other authorities, all of which can issue orders and injunctions that trigger automatic securities disqualification.

Who Does Rule 506(d) Treat as a “Bad Actor”?

The final key component in determining whether a proposed settlement triggers an automatic “bad actor” disqualification is determining who the Rule 506(d) treats as a “bad actor.” While the definition includes (i) the issuer and any affiliate or predecessor thereof, (ii) any director or executive officer of the issuer, and (iii) any director or executive officer of an entity that controls the issuer, the definition also includes:

• Promoters: Under Rule 506(d)(1), the “bad actor” definition extends to any promoter connected with the issuer in any capacity at the time of the sale.
• Participating Officers: Under Rule 506(d)(1), a “bad actor” can also be an officer of the issuer, a controlling person, or any other person whose direct or indirect participation or efforts are deemed critical to the issuer’s securities offering.
• General Partners and Managing Members: Under Rule 506(d)(1), a “bad actor” can be any general partner or managing member of the issuer when it is a limited partnership or limited liability company.
• Beneficial Owners: Under Rule 506(d)(1), any beneficial owner of 20% or more of the issuer’s outstanding voting equity securities, calculated on the basis of voting power, can be a “bad actor” if a disqualifying event applies.
• Paid Solicitors: Under Rule 506(d)(1), any paid solicitor, and certain principals and officers of any paid solicitor, can also be considered a “bad actor.”

A determination of which individuals, entities, and affiliates need to be included in an SEC settlement analysis requires an integrated review of (i) the company’s present and previous corporate structure, (ii) the company’s current and previous securities offerings, and, (iii) the specific terms and conditions of the settlement arrangement. With that said, once potential “bad actor” statuses have been identified, determining the applicable disqualification period is a relatively straightforward process under Rule 506(d). When securities are sold under Rule 506(b), issuers and related “bad actors” are subject to the following:

• Five-Year Disqualification Period: Under Rule 506(d)(1)(ii), a five-year disqualification period applies if an issuer, predecessor, affiliated issuer, or other “bad actor” is subject to a court injunction or restraining order, entered within five years of the securities offering, that restrains or enjoins conduct in connection with the purchase or sale of securities. A five-year lookback also applies to an SEC cease-and-desist order under Rule 506(d)(1)(v), and to criminal convictions of the issuer, its predecessors, and affiliated issuers under Rule 506(d)(1)(i).
• Ten-Year Disqualification Period: Under Rule 506(d)(1)(iii), a ten-year disqualification period applies if a “bad actor” is subject to a final order of a state securities, banking, insurance, or credit union regulator, a federal banking agency, the Commodity Futures Trading Commission, or the National Credit Union Administration, entered within ten years of the securities offering, that is based on a violation of any law or regulation prohibiting fraudulent, manipulative, or deceptive conduct. Under Rule 506(d)(1)(i), a ten-year lookback also applies to criminal convictions of covered persons other than the issuer, its predecessors, and affiliated issuers.

How Can One Settlement Restrict Fundraising and Fund Affiliations?

In cases involving specified antifraud outcomes, companies may also need to consider whether a settlement would disqualify the issuer from well-known seasoned issuer (WKSI) status under Securities Act Rule 405. As the SEC explains, the status of WKSI “allows for automatic shelf registration, which means a company can register its securities without going through a pre-filing review process by SEC staff.” Rule 405 provides that “if, within the past three years, an issuer has received a judgment, order, or finding by the SEC or the Federal court,” a company will be unable to obtain WKSI status. A three-year disqualification for the following situations can apply as well:

• Ineligibility for Safe Harbor Protections: Companies may also be unable to rely upon the safe harbor protections of Section 27A of the Securities Act and Section 21E of the Exchange Act if a “bad actor” disqualification applies.
• Bar from Working with an Investment Company: Investment Company Act Section 9(a) bars persons from serving as supervisors or other persons involved in the investment of securities in a registered investment company if they have been subject to (i) an injunction or restraining order in a securities fraud case or (ii) a final order from the SEC or another regulatory body involving “the fraudulent, manipulative, deceptive, or otherwise unlawful sale of securities.”
• Disqualification of Investment Companies: Under Section 9(a) of the Investment Company Act, an affiliated company can be disqualified if a covered person has a criminal conviction involving securities fraud or is subject to an injunction or restraining order.
• Bar from Regulation A: Disqualification from accessing Regulation A applies to issuers and other covered persons who are subject to one of the disqualifying events listed in Securities Act Rule 262(a), which sets out the “bad actor” disqualifications for Regulation A offerings.
• Bar from Crowdfunding: The disqualifications under Section 9(a) of the Investment Company Act are not the only ones that establish conditions triggering disqualification. Regulation Crowdfunding Rule 503 established several provisions that require issuers to determine whether they qualify for certain crowdfunding exemptions. Rule 503(a) disqualifies an issuer from relying on the Securities Act Section 4(a)(6) crowdfunding exemption if the issuer or another covered person has been convicted of a qualifying criminal offense, is subject to a court injunction or restraining order entered within the past five years under Rule 503(a)(2), or is subject to a qualifying final order of the SEC or another regulator.

Can I Condition an SEC Settlement on Waiver Relief?

Along with seeking a negotiated settlement that avoids triggering disqualification in the first place, many companies and other covered entities seeking to avoid automatic disqualification also make good-cause showings in support of waiver relief. While the SEC’s discretion to grant (or deny) waiver relief is a key consideration for all respondents, it can be particularly important in cases that involve complex settlement negotiations. As a result, three key questions frequently arise:

1. Can I Condition My Settlement Offer on Waiver Relief?

Yes, respondents can submit a settlement offer that includes a contemporaneous waiver request, and the Commission may consider the settlement and waiver request together. However, there are significant risks for both sides. For example, if the Commission makes a combined settlement-and-waiver proposal and the respondent rejects the settlement’s substantive terms, the Commission can reject the combined proposal in its entirety.

2. When Will the Commission Make a Decision?

The timing of waiver decision making is a key practical consideration for respondents as well. When the Commission determines whether to grant waiver relief, it can make a decision on waiver relief in one of two ways. It may either (i) consider the enforcement terms separately from the requested waiver relief or (ii) consider the request for waiver relief in tandem with the settlement’s substantive terms.

3. Will the Commission Make Its Decision at the Same Time?

This is the issue at the center of a recent and consequential procedural debate. In 2019, then-Commission Chair Jay Clayton adopted a policy permitting “simultaneous consideration of settlement and waiver,” or simply “linked consideration.” On a policy basis, Chair Clayton reasoned that this change would “streamline the process by providing an efficient way to address settlement and waiver issues” and that “there is nothing in the law that prevents the Commission from considering the two issues together.”

What Was the Outcome of the Procedural Debate?

The procedural debate that had its origins in 2019 continued for several years, and, throughout much of that time, the question of whether “linked consideration” was permissible was left unsettled. In fact, Acting Chair Allison Herren Lee discontinued the “linked consideration” process in 2021, but did not formally resolve the procedural debate by intervening with a new policy. On September 26, 2025, however, the Commission restored the “linked consideration” policy, restoring “simultaneous consideration of settlement and waiver” as an option. While this restoration reflects a shift in policy direction, respondents have still been left with the same risks and uncertainties in mind. When seeking to resolve SEC enforcement proceedings through settlement, a comprehensive and efficient approach to avoiding automatic disqualification is essential.

Does the 2025 Waiver Process Create Any Enforceable Rights?

Following the Commission’s restoration of the “linked consideration” process, the September 26, 2025 chair statement states that, following its determination to deny any pending, requested waiver relief, “an issuer or any other respondent whose offer of settlement is pending before the Commission will have five business days to accept or reject settlement on the terms offered.” However, the statement continues, “if an issuer or any other respondent does not timely accept the offer of settlement, the Commission will not enter a settlement order and the enforcement action at hand will not terminate without an order.” While this provision appears to give issuers and other respondents a right to the enforcement action’s termination, it also clearly warns of the risk of the action’s continuation. Importantly, however, Rule 506(d)(2)(ii) does not establish any deadline for the Commission’s action on any pending waiver requests. And the September 26, 2025 chair statement did not amend any SEC rules through notice-and-comment rulemaking.

This means that (i) a future Commission may not be bound by the policies or procedures set forth in the September 26, 2025 chair statement; (ii) a future Commission could revise or abandon the simultaneous-consideration procedure; and, (iii) a future Commission could also substantially change the time period for issuers and other respondents to make informed decisions following a waiver denial.

While issuance of settlement orders and waiver decisions under the restored simultaneous-consideration procedure still requires a formal announcement, SEC commissioners are frequently reluctant to publish detailed reasoning in support of their issuance decisions. And this lack of responsiveness is particularly apparent when the Commission is not handling a public matter. If the SEC continues its practice of handling administrative or non-public enforcement actions as a “secret” process, this will create significant concerns for issuers and companies seeking to ensure transparency and consistent application of SEC rules.

Finally, the September 26, 2025 chair statement clarifies that the restored simultaneous-consideration process applies in all “administrative proceedings, both those that are already pending and those that the Commission is anticipating initiating.” The decision to seek waiver relief through the restored simultaneous-consideration process, and not wait until after the successful negotiation of an administrative settlement or a pleading-agreement settlement, can be a powerful but also highly disruptive and high-risk strategic option. When considering enforcement proceedings in the Securities and Exchange Commission, issuers and companies should consult with experienced SEC enforcement defense counsel who can also advise them of all available options. At Spodek Law Group, we offer the guidance and insight that you need to effectively evaluate all options in light of your specific circumstances, and, when necessary, we will work with the Commission on your behalf to protect your company’s interests.

Contact a Federal Criminal Defense Attorney

Nothing here is legal advice, and the details of your case matter. Todd Spodek and Spodek Law Group take federal criminal and white collar cases nationwide, from offices in New York, Brooklyn, Queens and Los Angeles. You can reach the firm at 212-300-5196.