Automatic Disqualification Waivers: A Recurring Theme

Stamp of ApprovalLast Thursday Senator Sherrod Brown (D-Ohio), Chairman of the Banking Subcommittee on Financial Institutions and Consumer Protection, penned a letter to Chair White questioning the Commission’s practices and procedures related to waiver of the automatic disqualification provisions (triggered by certain civil and criminal suits as well as administrative proceedings) of the federal securities laws.*

Senator Brown, citing the recent dissenting statement by Commissioner Stein, wants to know just how many waiver provisions are available to issuers? He also wants to know:

  • whether the Commission has written policies and procedures in place for each provision;
  • the steps taken to ensure uniformity and consistency in the decision-making process;
  • whether the policies and procedures in place have been examined since Chair White’s confirmation and, if so, what are the conclusions regarding their suitability; and
  • finally what changes, if any, have been or will be made, or if no changes are to be made, why not.

Of late, the Commission’s waiver of ineligible issuer status — WKSI disqualification — has been an internally contentious topic and the subject of  increasing Congressional interest, but as Senator Brown inquires, and Commissioner Stein points out in her dissent, there are other automatic disqualification provisions from which issuers have sought and been granted waivers.

Two provisions of particular relevance to operating companies of all sizes:

  • Forward-Looking Statements — The limited safe harbor for forward-looking statements provided by Securities Act Section 27A and Exchange Act Section 21E is unavailable to issuers who, during the preceding three years, have been convicted of certain felonies or misdemeanors, or have been the subject of certain judicial or administrative decrees or orders related to violations of the antifraud provisions of the securities laws.
  • Regulation A and Regulation D, Rules 505 and 506 — The private offering exemptions afforded by Regulation A and Regulation D, Rules 505 and 506, are unavailable to issuers and covered persons who are bad actors.


* Senator Sherrod’s inquiry specifically addresses financial institutions, but let’s presume for the moment that the Commission will apply more or less the same practices and procedures to most if not all types of issuers.

See In re Royal Bank of Scotland Group, PLC (where the Commission waived RBC’s WKSI disqualification by a vote of 3-2; only the second WKSI waiver following a criminal conviction since WKSIs were first introduced almost 10 years ago); cf. Commissioner Gallagher’s opinion on WKSI waivers. In addition, just yesterday Reuters reported that Commissioner Piwowar’s approval of RBC’s waiver was, in a way, conditioned on a second update to the Commission’s WKSI disqualification framework.

 While I’m not aware of any published guidance that specifically addresses waivers of forward-looking statement disqualification, in this 2010 report (investing the Commission’s settlement with BofA in connection with its Merrill Lynch merger) the SEC-OIG notes that according to the Commission (pg. 39) forward-looking statement waivers are generally considered using the same criteria as WKSI waivers. Also notable is that the report goes on to recommend that the Commission develop and publish clear and consistent waiver practices.

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