[This story previously appeared in Securities Regulation Daily.]
By Anne Sherry, J.D.
Representative Maxine Waters (D-Cal) has released draft legislation that would require the SEC to overhaul its process for waiving bad-actor disqualifications. The congresswoman, who has been critical of the lack of accountability for individual wrongdoers at big banks, said the Commission’s seemingly automatic waiver process “enshrines a policy of ‘too-big-to-bar.’”
Waivers for bad actors. Nine provisions across the securities laws disqualify wrongdoers from eligibility for certain exemptions and safe harbors. But these “bad actors” may apply for waivers, which proceed to review by the staff of the Division of Corporation Finance or Investment Management. Representative Waters maintains that these waivers are seemingly automatic at times and disproportionately benefit large financial firms, many of whom are recidivists. She notes that, as Commissioner Stein pointed out, one large financial firm received over 22 waivers in a 10 year period, yet maintained in its waiver applications that it has a “strong record of compliance with federal securities laws.”
Commissioners’ views. Commissioner Stein objected to the waiver process during a vote at the Commission level on whether to grant Royal Bank of Scotland a waiver despite its subsidiary’s role in manipulating LIBOR. (The waiver was approved over her dissent.) But Chair Mary Jo White defended the waiver process earlier this month, calling it a “thorough, rigorous, and principled application of the law.” She denied that the SEC routinely grants waivers without rigorous analysis and said that it should not be surprising that large financial firms have sought multiple waivers, given that corporate liability can be triggered through the act of a single employee. On the heels of these remarks, the Division of Corporation Finance issued a policy statement concerning the factors it will consider in granting waivers from disqualification under Regulations A and D.
Discussion draft. White also acknowledged that the numbers and public record to not reflect the “extensive and exacting work” of the SEC staff in analyzing waiver requests. This lack of transparency would also be addressed through Rep. Waters’ bill.
The legislative proposal was timed to coincide with Chair White’s testimony today before the House Financial Services Committee, of which Rep. Waters is ranking member. The Bad Actor Disqualification Act of 2015 would require the SEC to conduct and vote on its waiver process at the Commission, rather than staff, level; require the Commission to consider whether granting a waiver would be in the public interest, protect investors, and promote market integrity; provide a public notice and comment period and the opportunity to request a hearing; and require SEC staff to keep public records of all waiver requests and denials along with a public database of bad actors.