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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The Conflict Minerals Rule Will Take Effect on Schedule

As reported by Wall Street Journal yesterday, the U.S. Court of Appeals for the D.C. Circuit has denied the National Association of Manufacturers, et al., motion to temporarily stay the entire conflict mineral rule pending the district court’s decision on that portion of the related proceeding still at controversy.

The June 2nd filing deadline is now just over two weeks away and as of this writing only two conflict mineral reports have been filed thus far.

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Following on the heels of Commissioners’ Gallagher and Piwowar’s joint statement calling for a stay of the conflict mineral rules pending final outcome of the National Association of Manufacturers legal challenge, Keith Higgins, Director of Corporation Finance, issued his own statement yesterday clarifying CorpFin’s position in light of the D.C. Circuit Court of Appeals recent ruling on the matter. In relevant part:

[T]he Division expects companies to file any reports required under Rule 13p-1 on or before the due date. The Form SD, and any related Conflict Minerals Report, should comply with and address those portions of Rule 13p-1 and Form SD that the Court upheld. Thus, companies that do not need to file a Conflict Minerals Report should disclose their reasonable country of origin inquiry and briefly describe the inquiry they undertook. For those companies that are required to file a Conflict Minerals Report, the report should include a description of the due diligence that the company undertook. If the company has products that fall within the scope of Items 1.01(c)(2) or 1.01(c)(2)(i) of Form SD, it would not have to identify the products as “DRC conflict undeterminable” or “not found to be ‘DRC conflict free,”‘ but should disclose, for those products, the facilities used to produce the conflict minerals, the country of origin of the minerals and the efforts to determine the mine or location of origin.

No company is required to describe its products as “DRC conflict free,” having “not been found to be ‘DRC conflict free,”‘ or “DRC conflict undeterminable.” If a company voluntarily elects to describe any of its products as “DRC conflict free” in its Conflict Minerals Report, it would be permitted to do so provided it had obtained an independent private sector audit (IPSA) as required by the rule.* Pending further action, an IPSA will not be required unless a company voluntarily elects to describe a product as “DRC conflict free” in its Conflict Minerals Report.

*footnote omitted.

Update: May 5, 2014

On Friday the Commission issued an order formally staying those portions of Rule 13p-1 and Form SD which would require an issuer to disclose that any of its products have “not been found to be DRC conflict free”.

As a procedural matter, the Court of Appeals’ decision which found those portions Rule 13p-1 and Form SD to be in violation of an issuer’s First Amendment rights will not take effect until three days after the rule’s June 2, 2014 filing deadline. As such the Commission is staying those portions of the rule to avoid “the risk of First Amendment harm pending further proceedings”.

The Commission’s order, in a footnote, also denies the National Association of Manufacturers, et al., motion requesting a stay of the entire conflict mineral rule.

(Download File)

Update: May 6, 2014 May 7, 2014

The National Association of Manufacturers, U.S. Chamber of Commerce and Business Roundtable have filed an emergency motion in the U.S. Court of Appeals for the D.C. Circuit seeking a temporary stay of the entire conflict mineral rule until such time as the district court issues a decision on that portion of the related case which was remanded for further proceedings.

The requested return date is May 26, 2014 (one week prior to the conflict mineral rule’s filing deadline).

On May 7, 2014, the motion was granted. The SEC’s response brief is due on Friday and any reply by the National Association of Manufacturers by next Tuesday.

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Yesterday Commissioners Gallagher and Piwowar released a joint statement calling for a stay of the Commission’s conflict mineral rules pending final outcome of a legal challenge to the rules by the National Association of  Manufacturers and other industry groups.

Issuers’ first Form SD is due to be filed by June 2, 2014 (the filing deadline, May 31, 2014, falls on a Saturday so issuers have until the following Monday to file). However, according to a recent report by PricewaterhouseCoopers only 4% of 700 companies surveyed have completed a first draft of their filing.

What’s more, recall that two weeks ago the U.S. Court of Appeals for the D.C. Circuit ruled that requiring an issuer to describe its products as not having been found to be “DRC conflict free” violates the First Amendment. The Court of Appeals affirmed in part and reversed in part the District Court’s judgement and remanded the case to the lower court for further proceedings.

But Gallagher and Piwowar aren’t the only ones urging the Commission to act. Earlier last week twelve members of Congress, including Senator Durbin, author of the conflict minerals provision in the Dodd-Frank Act, issued a joint letter to Chair White urging that the Commission move forward with implementation of those portions of the rules upheld by the Court of Appeals.

What, if anything, the Commission will do remains to be seen. What we do know is that as of right now the June 2nd filing deadline is just 34 days away and it seems that many companies still have quite a way to go to meet the filing deadline.

Update: April 30, 2014

The National Association of Manufacturers, U. S. Chamber of Commerce and Business Roundtable have filed a motion requesting the Commission stay the conflict mineral rules, or at least the filing deadline for Form SD, pending amendment of that portion of the final rule which invalidated by the Court of Appeal’s decision.

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Or perhaps this post should be entitled:

“Lessons in How Not to Preside Over Your Annual Meeting”

While I haven’t been following the proxy contest over at Harvard Illinois Bancorp, things seem to have taken an interesting turn with the filing of this rather unique shareholder proxy statement:

Stilwell Group - Harvard Illinois Bancorp Proxy Statement

Original source: my twitter feed; additional coverage here.

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