Dan Brecher
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212-286-0747 dbrecher@sh-law.comSEC “Bad Actors” Bill Would Limit Agency’s Use of Waivers
Author: Dan Brecher|September 5, 2017
Bad Actor Disqualification Act of 2017 To Protect Investors From Bad Actors
SEC “Bad Actors” Bill Would Limit Agency’s Use of Waivers
Bad Actor Disqualification Act of 2017 To Protect Investors From Bad Actors
Bi-partisan legislation working its way through Congress would restrict the Securities and Exchange Commission’s (SEC) ability to grant waivers to financial firms that have violated the law. Rep. Maxine Waters, the ranking member of the House Financial Services Committee, introduced the Bad Actor Disqualification Act of 2017. She argues that the law is needed to ensure that the SEC “protects investors from bad actors by implementing a rigorous, fair, and public process for waiving automatic disqualification provisions in the law.”
Photo courtesy of Stocksnap.io
Disqualifications for Bad Actors
Several federal securities laws, such as Regulation A and Regulation D, include automatic “bad actor” and “ineligible issuer” disqualifications, which ban disqualified firms from relying on relaxed disclosure and reporting requirements. Mandatory disqualification may result from certain enforcement actions, such as criminal convictions for certain felonies and misdemeanors as well as violations of the antifraud provisions of the securities laws.
As the SEC noted when implementing Regulation D’s Rule 506 in 2013, “The disqualification provisions of Rule 506 were intended to and should lead to enhanced investor protection by reducing the number of offering participants who have previously engaged in fraudulent activities or who previously violated securities, insurance, banking or credit union laws or regulations, and by providing an additional deterrent to future fraudulent activities.”
While disqualification is considered “automatic” under certain securities laws, many regulations (including Rule 506) also authorize the SEC to waive disqualification in certain circumstances. For instance, the agency may waive Regulation A or Regulation D disqualifications upon a showing of good cause that it is not necessary under the circumstances that the exemptions be denied. The party seeking a waiver bears the burden of establishing such justification. However, they are frequently granted.
Scrutiny of SEC’s Waiver Process
The SEC’s waiver process has been subject to criticism for allegedly adopting a “too big to bar” policy. In 2014, a study found that large financial firms received a large majority of SEC waivers, accounting for 81.6 percent of waivers granted between July 2003 and December 2014. In addition, the study found that waivers are often granted to repeat violators whose track record suggests legal compliance concerns. The study also found that the SEC had developed unwritten criteria for granting waiver requests that lacked transparency.
In 2015, the SEC’s Division of Corporation Finance issued new guidance on the factors that should be used to determine when waivers will be granted. However, according to Waters, the SEC is still being too lenient on financial firms with a history of misconduct. The SEC “should not automatically give those who break the law a free pass by allowing them to continue to conduct business as usual,” Rep. Waters stated. “This commonsense legislation will subject waiver requests to public scrutiny and robust SEC review so that the law protects investors, the markets, and the public. No one is above the law, including large financial firms.”
The proposed bill makes several changes to the SEC waiver process, including:
- Requiring the waiver process to be conducted and voted on at the Commission level, rather than at the staff level;
- Requiring the SEC to consider whether granting a waiver would be in the public interest, protect investors, and promote market integrity;
- Requiring the SEC to publish notice and afford the public an opportunity to comment and present their views at a public hearing on whether a particular waiver should be granted or denied; and
- Requiring SEC staff to keep complete, public records of all waiver requests (formal and informal) and create a public database of all disqualified bad actors.
We will continue to track the Bad Actors Disqualification Act of 2017 as it makes its way through the legislative process. Please stay tuned for updates.
Do you have any questions? Would you like to discuss the matter further? If so, please contact me, Dan Brecher, at 201-806-3364.
SEC “Bad Actors” Bill Would Limit Agency’s Use of Waivers
Author: Dan Brecher
Bi-partisan legislation working its way through Congress would restrict the Securities and Exchange Commission’s (SEC) ability to grant waivers to financial firms that have violated the law. Rep. Maxine Waters, the ranking member of the House Financial Services Committee, introduced the Bad Actor Disqualification Act of 2017. She argues that the law is needed to ensure that the SEC “protects investors from bad actors by implementing a rigorous, fair, and public process for waiving automatic disqualification provisions in the law.”
Photo courtesy of Stocksnap.io
Disqualifications for Bad Actors
Several federal securities laws, such as Regulation A and Regulation D, include automatic “bad actor” and “ineligible issuer” disqualifications, which ban disqualified firms from relying on relaxed disclosure and reporting requirements. Mandatory disqualification may result from certain enforcement actions, such as criminal convictions for certain felonies and misdemeanors as well as violations of the antifraud provisions of the securities laws.
As the SEC noted when implementing Regulation D’s Rule 506 in 2013, “The disqualification provisions of Rule 506 were intended to and should lead to enhanced investor protection by reducing the number of offering participants who have previously engaged in fraudulent activities or who previously violated securities, insurance, banking or credit union laws or regulations, and by providing an additional deterrent to future fraudulent activities.”
While disqualification is considered “automatic” under certain securities laws, many regulations (including Rule 506) also authorize the SEC to waive disqualification in certain circumstances. For instance, the agency may waive Regulation A or Regulation D disqualifications upon a showing of good cause that it is not necessary under the circumstances that the exemptions be denied. The party seeking a waiver bears the burden of establishing such justification. However, they are frequently granted.
Scrutiny of SEC’s Waiver Process
The SEC’s waiver process has been subject to criticism for allegedly adopting a “too big to bar” policy. In 2014, a study found that large financial firms received a large majority of SEC waivers, accounting for 81.6 percent of waivers granted between July 2003 and December 2014. In addition, the study found that waivers are often granted to repeat violators whose track record suggests legal compliance concerns. The study also found that the SEC had developed unwritten criteria for granting waiver requests that lacked transparency.
In 2015, the SEC’s Division of Corporation Finance issued new guidance on the factors that should be used to determine when waivers will be granted. However, according to Waters, the SEC is still being too lenient on financial firms with a history of misconduct. The SEC “should not automatically give those who break the law a free pass by allowing them to continue to conduct business as usual,” Rep. Waters stated. “This commonsense legislation will subject waiver requests to public scrutiny and robust SEC review so that the law protects investors, the markets, and the public. No one is above the law, including large financial firms.”
The proposed bill makes several changes to the SEC waiver process, including:
- Requiring the waiver process to be conducted and voted on at the Commission level, rather than at the staff level;
- Requiring the SEC to consider whether granting a waiver would be in the public interest, protect investors, and promote market integrity;
- Requiring the SEC to publish notice and afford the public an opportunity to comment and present their views at a public hearing on whether a particular waiver should be granted or denied; and
- Requiring SEC staff to keep complete, public records of all waiver requests (formal and informal) and create a public database of all disqualified bad actors.
We will continue to track the Bad Actors Disqualification Act of 2017 as it makes its way through the legislative process. Please stay tuned for updates.
Do you have any questions? Would you like to discuss the matter further? If so, please contact me, Dan Brecher, at 201-806-3364.
