Elon Musk Can Remain Tesla CEO but Must Step Aside as Chairman in SEC Settlement

Elon Musk has reached a settlement with the Securities and Exchange Commission that allows him to stay on as chief executive of


TSLA -13.90%

but requires that he step aside from the chairman role for three years.

The surprising twist, announced by the SEC on Saturday, comes after he rejected a settlement on Thursday and appeared to be hunkering down to fight a lawsuit by the agency. The SEC alleged he misled investors with Twitter messages on Aug. 7 that claimed the company had funding in place to take the auto maker private. A person familiar with his thinking said on Friday that he believed he could win in court against the SEC.

Instead, on Saturday, the SEC announced that Mr. Musk had settled the lawsuit that sought to ban him from running publicly traded companies. He agreed to step down as chairman and remain ineligible to be re-elected to that position for three years. Mr. Musk will remain on the Tesla board.

Tesla has agreed to appoint two new independent board members, establish a new committee of directors and create controls to oversee Mr. Musk’s communications, according to the SEC.

Mr. Musk and Tesla each agreed to pay a fine of $20 million.

Mr. Musk didn’t admit or deny wrongdoing as part of the settlement. He changed his mind about fighting the SEC allegation after coming to believe that a resolution was in the best interests of the company, himself and shareholders, said a person familiar with the matter.

Tesla has already begun the process of identifying who the two new directors might be, a person familiar with the matter said.

In complying with the settlement, Tesla plans to enhance its social-media usage policy for executives and Mr. Musk will be required to have the company sign off on any written statements that could be deemed material, a person familiar with the matter said.

The settlement is “specifically designed to address the misconduct at issue by strengthening Tesla’s corporate governance and oversight in order to protect investors,” Stephanie Avakian, co-director of the SEC’s enforcement division, said in a statement.

The SEC action was among the highest-profile cases involving securities fraud in years, and the speed with which regulators brought it suggests they were confident they could win.

Mr. Musk’s use of Twitter on Aug. 7 to announce funding was secured for a possible deal to take Tesla private threw Wall Street into confusion.

Subsequent communications by Mr. Musk and the company in the days that followed revealed a deal wasn’t as far along as he had suggested. Instead, he and Tesla’s board raced to put into place teams of lawyers and advisers needed to consider such a plan.

Mr. Musk said in a company blog post in August that he had engaged in meetings with Saudi Arabia’s sovereign-wealth fund about its interest in helping take Tesla private.

Seventeen days after announcing the idea, Mr. Musk issued another shocking statement, saying in a late-night company blog post that he had changed his mind, in part out of concern that small investors wouldn’t be able to participate if Tesla were a private company.

The episode, meanwhile, had become an enormous distraction at a time when Tesla was under intense pressure to consistently build Model 3 sedans and achieve Mr. Musk’s aim of making more-affordable electric vehicles and evolving from a niche luxury-car company.

Mr. Musk has said Tesla’s ability to churn out about 5,000 Model 3s on a weekly basis throughout the quarter will enable it to generate the cash it needs to avoid raising more money. He has targeted turning a profit in the third quarter, and has been pushing employees to deliver as many cars as possible before the quarter ends this weekend.

How Mr. Musk handled his idea to take Tesla private and a series of other self-inflicted missteps have raised questions about the CEO’s ability to manage the company.

In July, he suggested on Twitter that one of the cave explorers who helped rescue a boys soccer team in Thailand was a pedophile, a claim that led to a defamation lawsuit. Earlier this month, Mr. Musk took a puff of a blunt during a live interview broadcast on YouTube.

Write to Tim Higgins at Tim.Higgins@WSJ.com

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