The Securities and Exchange Commission in February announced what it billed as significant updates to the manual that governs SEC investigations and litigation. These updates encourage staff to share evidence with those they propose to charge and aim to ensure parties can thoroughly explain to senior SEC officials why they shouldn’t bring a case.
SEC Chairman Paul S. Atkins called the revisions an “important and long-overdue step” toward greater transparency, fairness, and due process.
The changes are welcome news for any corporation that has found itself in the SEC’s crosshairs. In some ways, the amendments echo and complement SEC v. Jarkesy, the US Supreme Court’s 2024 landmark decision guaranteeing those the SEC accuses of fraud the right to a jury trial before an impartial district court, rather than an administrative trial before the SEC.
This right to trial, the high court said, is ‘“of such importance and occupies so firm a place in our history and jurisprudence that any seeming curtailment of the right’ has always been and ‘should be scrutinized with the utmost care.’”
But these updates will fall short of giving companies a real opportunity to have their day in court unless the SEC or Congress revisits the securities laws’ so-called “bad actor” provisions.
These rules bar individuals with certain disqualifying histories, such as felony convictions for securities fraud, from engaging in specified financial activities. When adopted, they often were presented as modest safeguards to protect investors from “criminals” and “fraudsters” by preventing proven rogue actors from engaging in activities that might endanger investors.
In practice, they operate far more broadly, and they effectively close the courthouse door to large corporations and financial institutions, leaving them little choice but to settle on terms dictated by the SEC’s enforcement division. Two features drive that result.
First, the rules are sweeping. They apply to individuals and entire corporations—often defined to include the corporation that committed the violation, as well as all others under common control. They’re triggered by serious misconduct as well as by minor and unintentional regulatory infractions. This means corporations can be barred from critical business activities if even one employee of one of their affiliates commits a single regulatory violation.
Second, the SEC generally controls the only escape hatch: discretionary waivers from bad-actor status. The result is a regulatory regime that heavily tilts the playing field in the SEC’s favor, making it extraordinarily risky for corporations to challenge the agency in court regardless of the strength of their legal defenses.
Consider a recent example. Long before email or text messaging existed, the SEC adopted rules requiring regulated financial institutions to preserve business-related written communications. Today, the agency interprets those rules to cover all forms of text and instant messages.
Regulated firms typically require employees to conduct business communications only on firm-approved channels and preserve all communications.
But text messaging is now ubiquitous, and the line between personal and business communications is often blurred. Any stray business-related text messages can violate SEC rules—even if unrelated to any misconduct.
This expanded interpretation triggered one of the most aggressive SEC enforcement initiatives in history. Between 2021 and 2025, the agency collected more than $2.3 billion in fines from at least 95 firms. Major financial institutions each paid $200 million in combined penalties to the SEC and the Commodity Futures Trading Commission.
Many lawyers believed courts wouldn’t impose penalties of that magnitude for conduct that involved no fraud or investor harm, especially given the practical difficulty of eliminating all off-channel communications. Looking back on the agency’s work under prior leadership, Atkins has criticized the SEC’s decision to pursue these cases.
Yet no company chose to test the SEC’s theory in court. Why? Because doing so could trigger devastating collateral consequences, even if a company largely defeated the agency’s claims. If a court found any securities law violation, one of the most routine remedies is an injunction prohibiting future violations.
But such injunctions automatically trigger bad-actor disqualifications that can bar companies from critical activities, such as managing or distributing mutual funds and exchange-traded funds or raising capital through private placements. For large financial institutions that depend on these lines of business, these restrictions are crippling or fatal. For other companies, such restrictions may cut off common avenues for funding operations.
That leaves firms with a stark choice: Settle on the SEC’s terms and receive assurance that the agency will grant the waivers needed to preserve their businesses, or risk catastrophe by litigating.
A company theoretically could apply for waivers while contesting the SEC’s claims in court, but that offers little comfort in practice. The SEC generally won’t consider waiver requests before the triggering event—such as a court injunction—has occurred or is certain to occur.
Even then, there often is a fatal mismatch in timing. The disqualification takes effect immediately, while the SEC’s waiver decision may take months. There is no fixed timeline. In the interim, the company would be required to shut down business lines that may be impossible to rebuild and withdraw vital services from clients who may never return.
The strategic optics are equally problematic. Few companies want to ask the SEC for discretionary relief while challenging the agency in court. And waiver decisions involving large institutions often become politicized.
Because bad-actor disqualifications operate automatically, commissioners who vote to grant waivers are portrayed as giving firms a break. Large companies can readily be branded “recidivists,” because regulatory violations are virtually inevitable in organizations employing thousands of people.
These dynamics have played out in decisions involving prominent international banks and other companies. Some SEC decisions to grant waivers have produced sharp public dissent from opposing commissioners. Sen. Elizabeth Warren (D-Mass.), a member of the Senate committee responsible for SEC oversight, has similarly criticized the SEC’s waiver practices, declaring that “big corporations should not get special treatment when they break the law” and warning that such waivers send “a dangerous signal.”
Such criticisms are understandable if one assumes that barring entire corporations from critical business activities whenever any employee violates securities laws should be the default. But that assumption deserves reconsideration. If the SEC truly wants to encourage fairness and meaningful judicial review, it must reconsider how the bad-actor provisions operate.
Several reforms are available. Automatic disqualifications could be limited primarily to individuals rather than corporations and their affiliated entities. Corporate disqualifications could be triggered only by misconduct involving senior executives.
The rules could be restricted to violations involving fraudulent intent. Disqualifications could be tied more closely to the specific business activity involved—for example, only specified misconduct in managing mutual funds might trigger restrictions on the management of mutual mutuals.
The SEC also could adopt bright-line, judicially enforceable criteria that entitle companies to waivers as a matter of right when certain conditions are satisfied, reducing reliance on discretionary judgments.
Congress itself could play a role. Many corporate disqualifications embedded in the securities laws would make sense as court-imposed remedies after the SEC proves they’re warranted. They make far less sense as automatic penalties triggered by almost any violation. Congress could amend these provisions to require the SEC to demonstrate that corporate disqualification is justified based on specific conduct.
Any of these reforms would help restore balance between regulators and the regulated. More importantly, they would strengthen the adversarial process, encourage principled enforcement decisions, and improve the administration of the nation’s securities laws.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.
Author Information
George S. Canellos is a partner at Milbank, the global head of the firm’s litigation and arbitration group, and a former co-director of the SEC’s Division of Enforcement.
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