A recent bill has been introduced again in the US House of Representatives that would make it much tougher for firms subject to SEC enforcement actions to obtain waivers for bad actor disqualifications in federal securities laws, including by imposing a three-step process to request and obtain such waivers, adding significant hurdles to successful resolutions of enforcement proceedings.
Representative Maxine Waters (D-Calif.), chairwoman of the House Financial Services Committee, has introduced a bill entitled the Bad Actor Disqualification Act of 2019 (the Disqualification Act). Similar to legislation that Representative Waters has introduced in each Congress since 2015, the proposed bill is intended to increase the transparency and accountability associated with the process by which the US Securities and Exchange Commission (SEC) and its staff process requests for waivers from so-called “bad boy” disqualifications that are contained in various provisions of the federal securities laws and regulations. The bill, if enacted, would make it much more difficult for firms subject to SEC enforcement actions (or the actions of other regulators) to obtain waivers. This, in turn, may substantially reduce the incentives of persons and entities charged with securities laws violations to settle actual or anticipated actions with the SEC (in administrative or injunctive proceedings)
The Disqualification Act
The Disqualification Act would establish a new process for requesting and granting waivers from a number of disqualifications under the federal securities laws. The impacted waivers would include (1) the disqualification from being treated as a well-known seasoned issuer (WKSI), (2) the disqualification from using Rule 506 under Regulation D for private placements, (3) the disqualification with respect to the use of forward-looking statements, (4) the disqualification under the Advisers Act cash solicitation rule, and (5) disqualifications under Regulations A and E.
The Disqualification Act would eliminate the SEC staff’s ability to handle these disqualification waivers on a confidential basis prior to settlement of the related SEC enforcement action or other triggering event. Instead, the Disqualification Act would create a three-step process to request and obtain a waiver.
- First, the person or entity seeking a waiver would need to petition the SEC for a 180-day temporary waiver, which the SEC could grant if the SEC determines “that such person has demonstrated immediate irreparable injury” absent a waiver.
- Second, notice would then be published in the Federal Register “of the pendency of the waiver determination and . . . afford the public and interested persons an opportunity to present their views [on the waiver application].”
- Finally, the SEC would hold a public hearing during which it would consider granting a permanent waiver. The SEC would not be able to consider the direct costs to the person seeking the waiver, and would need to find that the proposed waiver (1) is in the public interest, (2) is necessary for the protection of investors, and (3) promotes market integrity in order to grant the request.
The Disqualification Act contains other provisions, including for the SEC staff to create a database of “ineligible persons” and to be prohibited from informing a waiver applicant of “the likelihood of a waiver being granted” or of the staff’s recommendation to the SEC. Finally, the Disqualification Act contains a requirement for a Government Accountability Office study regarding the waiver process created under Section 9(c) of the Investment Company Act of 1940.
Effect of the Bill
In addition to the extremely cumbersome nature of the proposed waiver process that the Disqualification Act imposes, the bill, if enacted, would impose de facto additional penalties on settling respondents/defendants that often are wholly unrelated to the conduct at issue. In addition, the unpredictability of the process, as well as the potential significant business impacts on large integrated financial firms, may cause persons facing SEC enforcement action to decline to settle. The uncertainties of potential substantial limitations that could be placed on their businesses—even in areas untouched by any violative conduct—will likely make complex settlement calculations and discussions even more extended and unpredictable. All SEC regulated entities, including public companies, investment advisers, broker-dealer, mutual funds, and private funds, should play close attention to the proposal as it is discussed and debated in Congress.
