In March, responding to an ongoing debate over how and when waivers are granted for companies that otherwise face an automatic disqualification from registration exemptions when raising capital, the Securities and Exchange Commission’s Division of Corporation Finance issued new guidance on how it evaluates waiver requests. Now, Commissioner Luis Aguilar has a few ideas of his own—including conditional waivers and an online database—for improving the process and improving transparency.
Companies that violate federal securities laws or enter into a settlement of SEC charges lose their Regulation A and Regulation D exemptions for Rule 506 and Rule 505 eligible private placements. CorpFin can issue a waiver from those disqualifications, at its discretion, provided that the violations are not related to the offerings. In some cases, the decision is bumped up to commissioners.
In a written statement this week, Aguilar stressed the need for improving transparency in the process. Currently, he said, commissioners are typically not notified that a waiver has been requested, nor are they told when CorpFin does not grant a waiver.
CorpFin, under the direction of Chairman Mary Jo White, is making an effort to better document the process. But, Aguilar says, data on denied waiver requests only provides basics, not “useful information” or insight into how, and why, the decision was made. “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,” he wrote.
While CorpFin staff now formally tracks unsuccessful waiver requests at the White’s direction, a consequence of this approach is that the Commission is presented with a one-sided view of the waiver process. “It is not only the Commissioners who could benefit from a more balanced perspective on the waiver process,” Aguilar wrote. “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.”
Aguilar presented his fellow commissioners with several proposals for improving the waiver process:
Having staff provide periodic reports detailing relevant information about the waiver process, including: a list of the requests and informal inquiries that have been received; the circumstances that triggered the need for those waivers; the final disposition of the waiver requests or inquiries; and, for requests and inquiries handled by the staff, the staff’s justification for granting them or not.
Creating a public website to track the progress and ultimate resolution of all waiver requests and inquiries. In order not to discourage informal communications with the Commission staff, the website could redact information that might reveal the identity of the requesting party, if necessary.
Granting “conditional waivers” that 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. Pursuant to a conditional waiver, the disqualified party could agree to: limit the extent to which it engages in the activities from which it has been disqualified; retain an independent monitor to verify its continued compliance with federal securities laws; retain a qualified independent consultant to review and suggest enhancements to its compliance function; require senior management to attest to its compliance with federal securities laws; and/or provide the Commission with regular reports on the status of its compliance efforts.
“Conditional waivers seem to be a fair and sensible approach to an especially nettlesome problem,” Aguilar wrote.