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Can “Bad Actors” Wave Goodbye to SEC Waivers?

Securities and Derivative Litigation   |   June 15, 2015
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The SEC has been thinking harder before waiving automatic disqualifications that the federal securities laws and regulations impose on so-called "bad actors."

Without such waivers, companies may be barred from, among other things, being investment advisers or broker-dealers or privately selling securities in reliance on SEC Regulation D. For example, such automatic bars can be triggered if a company, or certain of its related persons, has been the subject of court or administrative action based on a violation or alleged violation under the securities or commodities laws.

Some have asserted that the SEC has placed investors at risk by granting waivers too frequently and undermining the deterrent effect of automatic bars. Critics have included SEC Commissioners Kara M. Stein and Luis A. Aguilar. Dissenting from a waiver for a large financial institution, Commissioner Stein, for example, complained that the decision "may have enshrined a new policy – that some firms are just too big to bar." Congresswoman Maxine Waters echoed that sentiment and proposed legislation requiring that, before issuing a waiver, the SEC publish advance notice giving interested persons the opportunity to comment or request that the SEC hold a hearing.

SEC Chair Mary Jo White defended her agency’s approach, asserting that waivers are granted only after careful analysis shows that a bar is unnecessary to protect investors. According to White, "[W]aivers were never intended to be, and we should not use them as, an additional enforcement tool designed to address misconduct or as an unjustified mechanism for deterring misconduct."

Although the proposed legislation faces doubtful prospects, the SEC’s Commissioners, in light of the recent controversy, have been giving more attention to waiver requests, rather than allowing staff members to make the decisions. This has included imposing additional conditions on some waivers, all of which will likely complicate settlement discussions in many enforcement actions.


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