SEC Chairman Weighs in on Waiver Dispute

For more than a year, members of the Securities and Exchange Commission have been divided over the use of waivers that allow an individual or firm to engage in certain capital raising activities despite an enforcement action. Speaking publically on the matter for the first time on Thursday, SEC Chairman Mary Jo White attempted a Solomonic compromise, agreeing with commissioners who say the waivers should not be wielded as an enforcement tool, but also opining that no institution is “too-big-to-bar."

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 eligible private placements, as well as the opportunity to register as “Well-Known Seasoned Issuers,” or WKSIs, and gain nearly instant access to capital markets without the delays of a traditional registration process. The SEC's Division of Corporation Finance, or Commissioners if they intervene, can issue a waiver to one of those disqualifications. Provided that the violations are not related to those offerings.

The issue of waivers and when they should, or shouldn’t, be provided has divided SEC commissioners along political party lines. On one hand, Democrat Kara Stein:  “The argument that we should grant a waiver whenever the reason for automatic disqualification is ‘unrelated’ to the waiver defies common sense; If you manipulate LIBOR, enable offshore tax evasion, or launder drug money, should we wait for you to defraud a pension fund before barring you from raising money outside of strict Commission oversight?” Republican Daniel Gallagher, however, has called automatic disqualifications, and a punishment-focused view of waivers, “troubling” and “constitutionally dubious.” “The misconduct itself is appropriately punished through the underlying criminal or civil enforcement process,” he said.

In a speech at Georgetown University, White detailed her view, one that falls somewhere between the two camps. “My bottom line is that, as we have been doing, we must carefully scrutinize each waiver decision, faithfully apply the applicable legal standards and always keep in mind the purpose of the inquiry – to determine whether the entity or individual, going forward, can engage responsibly and lawfully in the activity at issue in the particular disqualification,” she said. “If the answer is ‘no’ at the end of that analysis, we should deny the waiver, no matter the size of the institution or consequences. But waivers were never intended to be, and we should not use them as, an additional enforcement tool designed to address misconduct or as an unjustified mechanism for deterring misconduct.”

White stressed that “disqualifications are not enforcement remedies.” Addressing concerns raised by Stein and Commissioner Louis Aguilar, she gave a “resounding no” to the idea that some financial institutions subject to disqualifications are “too big to bar.” Large financial institutions should be treated exactly the same as any other firm or person when considering whether a waiver is appropriate, “no better, and no worse.”  “Unfortunately, the public discussions about the SEC’s waiver decisions sometimes do not recognize these important distinctions and can take on a political tone that can blur the analysis,” she added.

Agreeing with Gallagher and Commissioner Michael Piwowar, however, White rejected the notion that the waiver process should be leveraged as punishment. The SEC has many enforcement tools at its disposal to address and deter conduct by financial institutions that violate the federal securities laws, she said, but disqualifications “are merely intended to guard against future participation in certain capital market activities by entities or individuals whose misconduct suggests that they cannot be relied upon to conduct those activities in compliance with the law or in the best interests of investors and markets.”  

The SEC’s Division of Corporation Finance is in the midst of developing additional guidance on the waiver process. More of White’s commentary on how waivers are currently issued can be found here.