The decision by the U.S. Securities and Exchange Commission to seek admissions of wrongdoing in select enforcement cases is expected to put pressure on other federal financial regulators to get tougher with their own Wall Street settlements.

The shift in the SEC’s settlement policy, announced late Tuesday by SEC Chair Mary Jo White, breaks from the standard practice of letting defendants settle without admitting or denying charges.

White said the old policy will still apply in the majority of cases, an acknowledgment that it has been effective at avoiding costly courtroom battles and securing settlements that return money to harmed investors more quickly.

Nevertheless, the move is winning praise from consumer advocates and White’s predecessor at the SEC, Mary Schapiro, who on Wednesday told Reuters it is “a great step” that adds firepower to the SEC’s enforcement program.

Like the SEC, the Commodity Futures Trading Commission and Federal Deposit Insurance Corp, for instance, regularly let defendants settle without admitting or denying charges.

Other agencies, including the U.S. Department of Justice’s civil division, are even more lenient than the SEC and permit defendants to deny allegations in some settlements.

Defense lawyers are watching to see how the SEC applies its new policy, and whether other regulators will follow.

“In the financial services arena, the SEC is often the pace setter for other regulators,” said Stephen Crimmins, a former SEC enforcement attorney who is now a partner with K&L Gates.

“If the public sees the SEC succeeding with this new initiative, it’s likely that other agencies will feel pressure to follow suit.”

The CFTC and the FDIC declined comment.

Under Pressure

The SEC’s traditional settlement practice became a lightning rod for controversy after the 2007-2009 financial crisis.

U.S. District Judge Jed Rakoff in Manhattan has been credited with highlighting the issue after he denied some SEC settlements with big banks on the grounds they were too weak.

The federal appeals court in New York is considering an appeal by the SEC and Citigroup of Rakoff’s November 2011 ruling striking down the bank’s $285 million settlement of charges it misled investors about a collateralized debt obligation. Rakoff said he could not tell if the settlement was fair because Citigroup was not required to address the charges.

In recent months, consumer advocates and some lawmakers such as Democratic Senator Elizabeth Warren of Massachusetts have also questioned the track record of regulators other than the SEC, and demanded to know more about how they hold banks accountable and why more cases have not gone to court.

On Wednesday, Warren praised the SEC’s policy change but said she was still worried about other regulators.

“I remain very concerned that banking regulators have been losing leverage in their enforcement programs by rushing to settle and too rarely pressing forward with a more aggressive litigation strategy,” she said in a statement to Reuters.

“We need to make sure that large financial institutions are held accountable when they break the law and that the penalties are tough enough to deter future violations.”

Officials from the Office of the Comptroller of the Currency, which regulates big U.S. banks, have told lawmakers that requiring an admission of guilt would delay enforcement actions.

Travis Nelson, a former OCC enforcement official who is now with the law firm Reed Smith, said he is skeptical the OCC will change its approach. “The SEC must have a broader appetite for litigation than the OCC,” Nelson said.

The OCC declined comment.


Former officials said they expect regulators to observe how the SEC’s new policy works in practice before deciding whether to follow the SEC’s lead, especially because of its potential downsides.

They said the policy could create disincentives for defendants to agree to settlements because admissions of wrongdoing could open the door to private litigation. It could also potentially encourage federal criminal charges by the Justice Department or litigation from state attorneys general who may piggyback on the SEC’s case.

“I think it is a huge change in policy,” said William McLucas, a former SEC enforcement director who is now a partner at WilmerHale and chairs the firm’s securities department.

“I think it is going to have a significant impact on the process, and I think it will be challenging to predict what the scope of that impact will be.”

The criteria that White laid out for how the SEC will select cases are also murky, lawyers said.

In a memo to staff, top SEC enforcement officials said the kinds of cases in which the SEC might seek admissions would have to contain egregious intentional misconduct, cause widespread harm to investors, or involve efforts to obstruct an SEC investigation.

But those standards could arguably capture many fraud cases, potentially forcing the SEC to direct resources to defend them in court instead of focusing on new cases.

“This will strain an already underfunded agency to devote its scarce resources to trials, rather than investigations, potentially resulting in fewer enforcement actions being brought,” said Toby Galloway, a former SEC trial attorney who recently became a partner at Kelly Hart & Hallman LLP.

Because of that concern, lawyers say they suspect White and the enforcement division will stick with the plan to apply the new policy narrowly.

“It may be only three or four cases a year, but that may be a good message for the SEC to send,” said Solomon Wisenberg, a partner at Barnes & Thornburg LLP.