Recently, there have been discussions regarding the SEC’s practices with respect to granting waivers for entities that have been subject to statutory disqualifications. Public debate has centered on whether it is appropriate for the SEC to grant waivers to financial institutions that would otherwise be prohibited from engaging in securities activities based on prior misconduct. Some people have questioned whether large financial institutions that are subject to disqualifications, automatically obtain waivers from the SEC because they are “too big to bar.” However, on March 12, 2015, SEC Chair Mary Jo White responded to these concerns at the Corporate Counsel Institute at Georgetown University, where she discussed the SEC’s policies and practices with respect to waivers for statutory disqualifications. In her remarks, she stated that if, based on the nature and extent of the misconduct, a financial institution should not be allowed to conduct a particular line of business or avail itself of certain provisions of the securities laws, a request for a waiver will be denied, regardless of the size or scope of the financial institution’s business.
Chair White emphasized that the SEC staff carefully scrutinizes each waiver decision. In making a waiver decision, the SEC staff makes a determination as to whether an entity or individual, can, going forward, participate responsibly and lawfully in the activity at issue in the particular disqualification.
In making its determination, the SEC staff will generally review, among other things, the nature of the violation, the duration of the wrongdoing, the specific employees involved in the misconduct and their level of seniority, as well as the state of mind of the participants. The SEC staff will also consider whether the misconduct effects the activity at issue in the disqualification and any remediation implemented in the wake of the enforcement action.
Chair White acknowledged that the potential scope of disqualifications under the federal securities laws is broad and can have a significant impact on market participants. She noted situations in which the misconduct at issue in an enforcement action involves a limited number of the firm’s employees or a specific business line that is wholly unrelated to the activities that would be subject to the disqualification. Specifically, she described violations involving a failure to supervise a registered representative that could preclude a firm from being able to rely on Rule 506 of Regulation D under the Securities Act of 1933, even when the failure to supervise has nothing to do with those individuals in a firm who participate in capital raising under a private placement exemption.
In order to compensate for the potential over-breadth of the disqualification provisions, the securities laws provide grants of authority and discretion to the SEC to decide when it is appropriate to waive a disqualification in light of the particular circumstances. Chair White said that the SEC generally will waive a disqualification when it finds that there is “good cause,” the waiver would be in the “public interest” or denial of a waiver would be “unduly or disproportionately severe” in light of the circumstances.
Waivers are Not Enforcement Tools
Chair White emphasized that the SEC does not use disqualifications and denials of waiver requests as an enforcement tool to address misconduct or deter future misconduct. Under the US securities laws, the SEC is authorized to seek a number of enforcement sanctions and other remedies, including injunctions and cease and desist orders, temporary or permanent bars from participating in aspects of the securities industry and financial penalties. According to Chair White, disqualifications provided for under the US securities laws should be treated as separate and distinct from these enforcement remedies and waivers will be granted if the particular facts and circumstances suggest that the disqualification is not warranted.
In an effort to be more transparent about the waiver process, Chair White noted that in 2014, the SEC staff revised its written guidance discussing waivers for well-known seasoned issuers (WKSIs), which can be disqualified from accessing the public capital markets on an accelerated and streamlined basis if they become “ineligible issuers.” Chair White said that the SEC staff is now also preparing similar written guidance for waivers in other contexts, which should provide a clear explanation of the SEC’s decision-making process in evaluating different types of waiver requests.