The Securities and Exchange Commission (SEC) recently further limited the ability of companies to settle claims without admitting to the SEC’s charges. Traditionally, the SEC had allowed defendants to settle enforcement actions without admitting or denying wrongdoing. Among the benefits of this policy are that defendants could settle SEC enforcement actions without admitting any guilt, which allows them to deny the same or similar allegations of wrongdoing in parallel or later-filed criminal or civil proceedings. No admit, no deny settlements allowed the SEC to settle a high percentage of its cases, thereby conserving its enforcement resources.

In recent years, the SEC’s policy came under attack from some federal judges and politicians who criticized the SEC for being too lenient and not demanding more accountability from defendants. In one case a federal judge ruled that he could not determine if the SEC’s proposed no admit, no deny settlement was fair without knowing if the defendant had, in fact, engaged in wrongdoing.

In response to such criticism, the SEC announced in January 2012 that it would no longer allow defendants to neither admit nor deny wrongdoing if they had admitted to, or been convicted of, criminal violations in a related proceeding. In June 2013, the SEC’s newly appointed chair, Mary Jo White, announced a further change to its settlement policy — going forward, defendants may not be allowed to settle SEC charges on a no admit, no deny basis even if there has been no admission or finding of guilt in a related criminal proceeding. A memo distributed to the SEC’s enforcement staff notes that even though the no admit, no deny settlement is a “powerful tool” for the SEC, “there may be certain cases where heightened accountability or acceptance of responsibility through the defendant’s admission of misconduct may be appropriate.” The memo explains that requiring an admission of wrongdoing may be appropriate in cases where: (i) a large number of investors were harmed or the market or investors were placed at risk of serious harm; (ii) obtaining an admission of wrongdoing would serve a protective purpose, such as where the defendant engaged in egregious intentional misconduct; or (iii) the defendant unlawfully obstructed the SEC’s investigative process.

Given that the application of this new policy will cause many defendants to fight the SEC’s charges in court, the SEC likely will apply it only in a relatively small subset of cases. Nevertheless, it will be a challenge for defendants to determine at the outset of an investigation which policy the SEC will choose to apply to them. Defendants who are being investigated or sued in their capacity as a corporate director or officer will also need to consider whether an admission of wrongdoing would cause them to lose their insurance coverage.