In a speech last Thursday, SEC Chair Mary Jo White publicly addressed the issue of whether the SEC has been too lax in granting waivers to large corporations that are subject to certain restrictions under the Well-Known Seasoned Issuer (“WKSI”) regulations or the so-called “Bad Actor Rule.”
The SEC classifies certain large widely followed issuers as WKSIs under Rule 405 of the Securities Act of 1933. Issuers with WKSI status benefit from greater flexibility in registration and investor communications. Most notably, registration statements filed by WKSIs become effective immediately and automatically upon filing. Certain categories of “ineligible issuers”—including those convicted of certain crimes and those determined to have violated the anti-fraud provisions of the securities laws—are precluded from qualifying for WKSI status. The SEC, however, can (and does) grant waivers to ineligible issuers upon a showing of good cause.
Similarly, under Rule 506(d) of the Securities Act, known as the Bad Actor Rule, a private securities offering to accredited investors is not eligible to be an exempted transaction under Section 4(a)(2) if, among other things, the issuer or one of its directors or officers has been convicted of, or is subject to, a court or regulator’s order finding a violation of state or federal securities laws. As under the WKSI rules, the Bad Actor Rule also permits the SEC to grant a waiver if good cause is shown.
In her comments to the Corporate Counsel Institute last Thursday, White responded to criticism that the SEC has granted these types of waivers too readily. She emphasized that, unlike enforcement remedies that impose sanctions for violations, disqualifications are not punitive in nature. Rather, disqualifications should be imposed against “entities or individuals whose misconduct suggests that they cannot be relied upon to conduct [certain capital markets activities] in compliance with the law and in a manner that will protect investors and our markets.” As White explained, the Commission’s “corollary authority to grant waivers and exemptions” is meant “to calibrate the otherwise overly broad effect of disqualifications” in an organization where “the misconduct at issue . . . involves a relatively limited number of a firm’s employees or a specific business line.” White suggested that the flip side of the SEC’s willingness to entertain waiver requests by companies where the disqualifying conduct was undertaken by only a limited number of the company’s employees is a renewed focus on identifying individual bad actors. White argued that, in her experience, “in the enforcement arena, the most effective deterrent is strong enforcement against responsible individuals, especially senior executives. In the end, it is people, not institutions, who engage in unlawful conduct.” As evidence of the robustness of the SEC’s examination of waiver requests, White stated in 2014, the SEC granted 13 Rule 506 bad actor waivers but denied at least 14. She added that the SEC granted seven WKSI waivers and denied at least four.
White’s statement follows the SEC Division of Corporate Finance’s issuance of a Revised Statement on WKSI Waivers and an unusually public back-and-forth among SEC Commissioners on WKSI waivers last April concerning the SEC’s 3-2 vote to grant a WKSI waiver to a large financial institution.