Aug. 27, 2015
Requests for waivers from regulatory disqualifications remain a topic of considerable import—and lively debate—for the Commission.[1] Such requests are typically made when certain individuals or entities become involved in Commission enforcement actions.[2] One consequence of these enforcement actions can be that an entity or individual is automatically disqualified, as mandated by Congress, from conducting certain activities, or from relying on certain exemptions from registration. Commission rules allow entities and individuals subject to such disqualifications to approach the SEC staff and seek a waiver from these prohibitions. This statement discusses how the Commission could strengthen its protocols for handling such waiver requests and provide enhanced transparency and clarity on the Commission´s waiver process. In addition, this statement discusses the benefit of a more flexible and calibrated approach to waivers.
Although the Commission must vote on some waiver requests,[3] the vast majority of requests are handled by the staff pursuant to delegated authority.[4] With the possible exception of the Chair in certain circumstances, however, the Commissioners generally are not notified that a waiver has been requested. Furthermore, the Commissioners are not normally informed when the staff, in exercising its delegated authority, does not grant a waiver. In fact, I learned only through a news article earlier this year that, in the past two years, most waiver requests have not been granted.[5] I was also surprised to learn that the number of times the Commission has not granted a well-known seasoned issuer ("WKSI") waiver or a Regulation D Rule 506 ("Bad Actor") waiver "has not been recorded consistently."[6]
To her credit, in a March 12, 2015 speech, Chair White announced that she had directed the staff to keep better track of waivers, including those that have not been granted.[7] In addition, the staff, in response to an outstanding request from my office, provided the Commissioners with a list of all the WKSI and Bad Actor waiver requests that had not been granted since January 2014 and September 2013, respectively.[8] The staff recently updated this list at my request, as well.
Unfortunately, the list only provides a summary, and only includes the names of the requesting parties and the dates the staff communicated to the applicants that it would not support a grant of a waiver request. As a result, the Commissioners lack useful information about these unsuccessful waiver requests. For example, what was the staff´s justification for not granting these waivers? And what about the WKSI waiver requests the Commission received before 2014?[9] It would be helpful to know how many such requests have been made since the WKSI disqualification provisions took effect in 2005, and who made those requests.[10] It would also be helpful to know how many of those requests the staff chose not to grant, and why. Getting answers to these questions has proven challenging. Among other factors that complicated efforts to find answers to these questions is that, to my knowledge, the Commission does not formally maintain a comprehensive and up-to-date database of waiver requests and their status, despite the clear benefits of doing so.[11]
I believe our current waiver process can be improved. As it currently stands, Commissioners generally are only briefed on those waivers that the staff recommends for approval. Since the staff typically handles most unsuccessful waiver requests on an informal basis,[12] this sheds light on only part of the picture.
Furthermore, as noted, while the staff now formally tracks unsuccessful waiver requests at the Chair´s direction, this information lacks the substance that the Commissioners need to understand the staff´s rationale for denying those waivers. One consequence of this approach is that the Commission is presented with a generally one-sided view of the waiver process. In my experience, this can skew the Commission´s perception of waiver requests, for it denies the Commissioners the full benefit of the staff´s thinking and expertise regarding waivers—especially the staff´s reasons for concluding that certain waivers should not be granted. This limited picture of those waiver applications not supported by the staff makes it difficult to determine the nature of the waiver request—that is, whether such waivers bear some similarity to other waivers previously granted or whether such waiver requests are so frivolous that the waiver request should never have been made. The ultimate goal is clarity and transparency, and more insight into the process can enhance the Commission´s ability to objectively assess waiver requests.
It is not only the Commissioners who could benefit from a more balanced perspective on the waiver process. At present, the public generally has access only to Commission orders that grant waiver requests. But, as a significant proportion of waiver requests appear to be unsuccessful, there may be a substantial gap in the public´s ability to understand the rationale that drives the staff´s waiver decisions. Moreover, entities and individuals that may become subject to a regulatory disqualification deserve a complete explanation of the circumstances that may lead to a waiver request not being granted.
Accordingly, I urge the Commission to consider revising its waiver review process so that both the Commission and the public have greater insight into the entire process, particularly for waivers that are handled by delegated authority. Two basic reforms could be implemented easily.
With additional context on the waiver process, the public and the Commission could better assess how well the Commission is fulfilling its obligation to grant waivers only when it is appropriate to do so, and only in a manner that is consistent with the protection of investors and the public interest.[14] The two reforms suggested here would provide the Commission with a more complete understanding of the waiver applications that come before it. These reforms would also introduce a greater degree of accountability and transparency into the Commission´s handling of waiver requests and inquiries. These are certainly goals worth pursuing.
The decision to grant or deny a waiver request involves the careful and rigorous application of numerous factors to the unique facts and circumstances of each case.[15] At the heart of this inquiry, however, lies an important determination that the Commission must make in each matter: namely, whether the requesting party can be expected, going forward, to act lawfully and responsibly when engaging in the activities from which it has been disqualified. The waiver process, therefore, asks the Commission to predict the requesting party´s future conduct based solely on its prior actions and its pledge of future regulatory compliance. Making such predictions is never an easy task,[16] as evidenced by the fact that some entities have sought multiple successive waivers in recent years.[17]
The uncertainty inherent in the waiver process calls for a flexible approach, one that acknowledges both the futility of prescience on the one hand, and the need, in at least some cases, to monitor a requesting party´s future conduct, on the other. Yet, the Commission, or the staff acting by delegated authority, typically grants or denies waiver requests without qualification, so that the waiver is either granted fully or not granted at all. This stark dualism cannot capture the complexity and nuance that many waiver requests present. In fact, my own review of many waiver applications indicates that waivers do not always fit neatly into "grant" or "deny" buckets, but oftentimes fall somewhere in between. The Commission´s waiver protocol could be strengthened by adopting a more versatile approach, one that allows cases that might fall in the grey area to avoid a total prohibition by allowing the requesting party to adopt appropriate limitations designed to protect investors and the public.
Late last year, the Commission fashioned what could be a viable approach to waiver applications—conditional waivers.[18] Such waivers can permit statutorily disqualified persons/parties, in cases that are not clear-cut grants or denials, to continue engaging in a regular course of business, subject to appropriate limitations. For example, pursuant to a conditional waiver, the disqualified party could agree to do some or all of the following: (i) limit the extent to which it engages in the activities from which it has been disqualified; (ii) retain an independent monitor to verify its continued compliance with federal securities laws; (iii) retain a qualified independent consultant to review and suggest enhancements to its compliance function; (iv) require senior management to attest to its compliance with federal securities laws; and/or (v) provide the Commission with regular reports on the status of its compliance efforts.[19]
Of course, there will be many instances when the Commission must deny a waiver request, such as when a requesting party´s misconduct is so egregious or so closely related to the disqualified conduct that the safety of investors and the public demands a full disqualification. And full waivers would remain appropriate when the facts demonstrate that the risk of future misconduct is unlikely. But, for cases that fall in the grey area, a conditional waiver could remove the regulatory impediment of a full disqualification, while allowing for such conditions as appear necessary, under the particular facts and circumstances, to achieve prospective accountability and compliance. Conditional waivers can thus impose meaningful investor protections, while mitigating the potential damage of not granting a waiver at all. Such waivers could also do much to prevent the often seen relapses that trigger subsequent disqualifications.
Conditional waivers could also go a long way toward dispelling the notion that the breadth and severity of the disqualification provisions have led the Commission to be too willing to grant blanket waivers, especially to larger financial institutions.[20] The meaningful and effective limitations that a properly calibrated conditional waiver could provide can reduce the likelihood of future misconduct, as well as the extent and severity of any damage that such misconduct would occasion. Conditional waivers could thus allow the Commission to grant waivers in a judicious manner, one that limits damage to an entity´s operations while, importantly, minimizing to the greatest extent possible the potential risks to investors and the public.
Conditional waivers seem to be a fair and sensible approach to an especially nettlesome problem. As such, they merit careful consideration whenever the Commission or the staff is presented with a case that is not clear-cut. To do otherwise could limit the Commission´s ability to achieve its paramount responsibility of protecting investors.
[*] The views I express are my own, and do not necessarily reflect the views of the U.S. Securities and Exchange Commission (the "SEC" or "Commission"), my fellow Commissioners, or members of the staff.
[1] Several Commissioners have spoken publicly this year about the Commission´s waiver process. See Chair Mary Jo White, Understanding Disqualifications, Exemptions and Waivers Under the Federal Securities Laws (Mar. 12, 2015), available at http://www.sec.gov/news/speech/031215-spch-cmjw.html#_ftnref8; Commissioner Daniel M. Gallagher, Why is the SEC Wavering on Waivers?Remarks at the 37th Annual Conference on Securities Regulation and Business Law (Feb. 13, 2015), available at http://www.sec.gov/news/speech/021315-spc-cdmg.html; Commissioner Kara M. Stein, Remarks Before the Consumer Federation of America´s 27th Annual Financial Services Conference (Dec. 4, 2014), available at http://www.sec.gov/News/Speech/Detail/Speech/1370543593434.
[2] There are a number of provisions throughout the federal securities laws that automatically disqualify companies, registered entities, and individuals from certain regulated activities in certain circumstances. For example, if, on account of the unlawful actions of one or more employees, an entity is subject to certain enforcement actions and remedies or convicted of certain crimes, Section 9(a) of the Investment Company Act provides for the disqualification of the entire firm from serving as an investment adviser for a registered investment company. 15 U.S.C. 80a-9(a). Similarly, Rule 405 of the Securities Act provides that a well-known seasoned issuer ("WKSI") can be disqualified from accessing the public capital markets on an accelerated and streamlined basis if it becomes an "ineligible issuer." 17 C.F.R. 230.405. In addition, Rule 506 of Regulation D of the Securities Act, the new "bad actor" provision under the Dodd-Frank Act, provides for disqualification from relying on the rule´s private placement exemption in connection with a securities offering. 17 C.F.R. 230.506(d). Additionally, disqualifications can also be triggered by certain criminal actions or certain enforcement actions by other federal or state regulators. See 17 C.F.R. 230.405 and 17 C.F.R. 230.506(d).
[3] For example, the staff does not have delegated authority to grant permanent exemptions from the disqualifying provisions triggered under Section 9(a) of the Investment Company Act. See Commission Rules of Practice, 17 C.F.R. Section 200.30-5(8).
[4] Authority to grant waivers from ineligible issuer status, for example, has been delegated by the Commission to the Director of the Division of Corporation Finance. See 17 CFR 200.30-1(a)(10) (setting forth the Rules of Organization and Program Management Governing Delegations of Authority to the Director of the Division of Corporation Finance).
[5] See Ben Protess, S.E.C. Commissioners Split on Waiving Financial Industry Punishment, New York Times, DealBook (Feb. 4, 2015) (noting that "([t]wo people who spoke on the condition of anonymity said that under Ms. White, the commission rejects most requests for waivers. The S.E.C., however, does not record such data because many companies convey requests in an informal manner. The people spoke on condition of anonymity because they were not authorized to discuss the matter.)"), available at http://www.sec.gov/servlet/Satellite/goodbye/PublicStmt/1370545973428?externalLink=http%3A%2F%2Fdealbook.nytimes.com%2F2015%2F02%2F04%2Fs-e-c-commissioners-split-on-waiving-financial-industry-punishment%2F.
[6] Chair Mary Jo White, Understanding Disqualifications, Exemptions and Waivers Under the Federal Securities Laws (Mar. 12, 2015), available at http://www.sec.gov/news/speech/031215-spch-cmjw.html#_ftnref8. The Chair acknowledged in this speech that information about the denials of WKSI and Bad Actor waivers "has not been recorded consistently" since those provisions were adopted, and that she had directed the staff to keep track of "formal and informal requests made for both WKSI waivers . . . and Rule 506 bad actor waivers" since January 2014 and September 2013, respectively. Id.
[7] Chair Mary Jo White, Understanding Disqualifications, Exemptions and Waivers Under the Federal Securities Laws (Mar. 12, 2015), available at http://www.sec.gov/news/speech/031215-spch-cmjw.html#_ftnref8. The Chair acknowledged that the review conducted by the staff at her instruction does not "capture the instances where inquiries are made to the staff seeking guidance and information and a company or individual that is subject to a disqualification is not identified." Id. The Chair added that the staff´s review also did not "capture the situations where a disqualification has occurred and no waiver is ever sought." Id.
[8] Over one year ago, I asked the staff of the Division of Corporation Finance to provide my office with advance notice of the staff´s intention to grant waivers on certain types of cases. This led to a process in which the staff generally provides the Commissioners with a memo outlining its recommendation to grant a waiver, either by delegated authority or by Commission action. In addition, I also asked the staff of the Division of Corporation Finance to keep a log of those instances in which it does not support the grant of a waiver. Beginning in March of this year, the staff has provided my office—but only upon my request and on an entirely ad hoc basis—with limited information regarding the denial of waivers.
[9] The Bad Actor disqualification provisions did not take effect until September 2013. See Disqualification of Felons and Other "Bad Actors" from Rule 506 Offerings, Securities Act Release No. 33-9414 (July 10, 2013), available at http://www.sec.gov/rules/final/2013/33-9414.pdf.
[10] The WKSI waiver provisions, by contrast, took effect in 2005. See Securities Offering Reform, Securities Act Release No. 8591 (July 19, 2005), available at https://www.sec.gov/rules/final/33-8591.pdf.
[11] In her March 12, 2015 speech, the Chair also recognized the need for the Commission to track unsuccessful waiver requests. Specifically, she noted that she had herself directed the staff to compile statistics on the "the number of instances where WKSI or Rule 506 bad actor waivers were not granted." Chair Mary Jo White, Understanding Disqualifications, Exemptions and Waivers Under the Federal Securities Laws (Mar. 12, 2015), available at http://www.sec.gov/news/speech/031215-spch-cmjw.html#_ftnref8.
[12] In some instances, the requesting party will simply withdraw its waiver request once the staff explains it will not support the waiver request. Such waivers are not formally denied, but the effect is ultimately the same. Similarly, in some instances, a party will seek information or guidance about a possible waiver, without making a formal waiver request.
[13] Currently, the Commission posts to its website all waiver requests that are granted, along with a copy of the initial request, when available. Information on the different types of waiver requests, however, is posted to different areas of the Commission´s website, which can make it difficult to identify all waivers that have been granted. See U.S. Securities and Exchange Commission, Division of Corporation Finance No-Action, Interpretive and Exemptive Letters, Rule 405 – Determination regarding ineligible issuer status, available at http://www.sec.gov/divisions/corpfin/cf-noaction.shtml#405; U.S. Securities and Exchange Commission, Division of Corporation Finance No-Action, Interpretive and Exemptive Letters, Regulation D – Rule 506(d) Waivers of Disqualification, available at http://www.sec.gov/divisions/corpfin/cf-noaction.shtml#405; U.S. Securities and Exchange Commission, Division of Investment Management, Investment Company Act Notices and Orders Category Listing, Ineligible – Disqualified Firm, available at http://www.sec.gov/rules/icreleases.shtml#ineligibledisqfirm. The Commission´s website, however, generally makes no mention of waiver requests that prove unsuccessful, including requests that are denied by the staff pursuant to its delegated authority, or that are withdrawn once the staff advises it will not support the request.
[14] The precise wording of the waiver provisions differs somewhat, but they generally impose a "good cause" or "public interest" standard. For example, Rule 506 of Regulation D of the Securities Act states that the disqualification should not apply "upon a showing of good cause . . . if the Commission determines it is not necessary under the circumstances that the exemption be denied." 17 C.F.R. 230.506(d). Rule 405 of the Securities Act provides that an issuer shall not be an ineligible issuer if the Commission determines, upon a showing of good cause, that is not necessary under the circumstances that the issuer be considered an ineligible issuer. 17 C.F.R. 230.405. The staff has issued written guidance setting forth the criteria the Commission staff will consider in making this determination under Rule 405, which provides that the staff may grant a waiver "if a review of all of the facts and circumstances leads the Division to conclude that granting the waiver would be consistent with the public interest and the protection of investors." U.S. Securities and Exchange Commission, Division of Corporation Finance, Revised Statement on Well-Known Seasoned Issuers (Apr. 24, 2014), available at http://www.sec.gov/divisions/corpfin/guidance/wksi-waivers-interp-031214.htm. For its part, Section 9(c) of the Investment Company Act directs that the Commission "shall . . . grant such application [for a waiver]" if it is established that the disqualification "as applied to such person [is] unduly or disproportionally severe or that the conduct of such person has been such as not to make it against the public interest to grant [the waiver]." 15 U.S.C. 80a-9(c).
[15] See, e.g., U.S. Securities and Exchange Commission, Division of Corporation Finance, Waivers of Disqualification under Regulation A and Rules 505 and 506 of Regulation D, available at https://www.sec.gov/divisions/corpfin/guidance/disqualification-waivers.shtml; U.S. Securities and Exchange Commission, Division of Corporation Finance, Revised Statement on Well-Known Seasoned Issuer Waivers (Apr. 24, 2014), available at http://www.sec.gov/divisions/corpfin/guidance/wksi-waivers-interp-031214.htm#_ftn4.
[16] Using past performance to predict the future is an exercise so fraught with uncertainty that the Commission requires investors to be cautioned against it in some instances. Specifically, Commission regulations mandate that investment companies, including mutual funds, that choose to advertise their prior performance must warn investors that "past performance does not guarantee future results." 17 CFR § 230.482(3)(i).
[17] Jonathan Weil, Which Mystery Bank Received the Most SEC Waivers?, BloombergView (May 2, 2014), available at http://www.sec.gov/servlet/Satellite/goodbye/PublicStmt/1370545973428?externalLink=http%3A%2F%2Fwww.bloombergview.com%2Farticles%2F2014-05-02%2Fwhich-mystery-bank-received-the-most-sec-waivers.
[18] In the Matter of Bank of America, N.A., et al., Order Under Rule 506(d) of the Securities Act of 1933 Granting A Waiver Of The Rule 506(d)(1)(ii) Disqualification Provision, Securities Act Rel. No. 9682 (Nov. 25, 2014), available at http://www.sec.gov/rules/other/2014/33-9682.pdf.
[19] See, e.g., In the Matter of Bank of America, N.A., et al., Order Under Rule 506(d) of the Securities Act of 1933 Granting a Waiver of the Rule 506(d)(1)(ii) Disqualification Provision, Securities Act Rel. No. 9682 (Nov. 25, 2014), at 2 (requiring that the respondents "[r]etain, at [their own] expense and within sixty (60) days of the issuance of this Order, a qualified independent consultant (the ‘Consultant´) not unacceptable to the Staff. Respondents shall require the Consultant to conduct a comprehensive review of the policies and procedures relating to compliance with Rule 506 of Regulation D by Respondents and the subsidiaries of Respondents conducting any activities that would otherwise be disqualified pursuant to the Judgment (together with Respondents, the ‘Rule 506 Entities´)."), available at http://www.sec.gov/rules/other/2014/33-9682.pdf.
[20] See, e.g., Letter from Representative Maxine Waters, U.S. House of Representatives Committee on Financial Services, to Mary Jo White, Chair, U.S. Securities and Exchange Commission, at 2 (May 14, 2015) (noting "concerns that the SEC has granted waivers on a seeming automatic basis and done so disproportionately for large financial firms, leading to the public perception that these firms are ‘too-big-to-bar.´"), available at http://democrats.financialservices.house.gov/uploadedfiles/letter_to_chair_white_5.14.15.pdf.