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Factors the SEC Considers When Deciding Whether to Grant a Waiver to a Statutory Disqualification

On March 12, 2015, SEC Chair Mary Jo White gave a speech at the Corporate Counsel Institute at Georgetown University that shed light on disqualifications, exemptions, and waivers under the federal securities laws.  Most notably during her speech, SEC Chair White provided the factors that the Commission will consider when determining if a person should receive a waiver from a statutory disqualification.

SEC Chair White began her speech by explaining how disqualifications “guard against future participation in certain capital market activities by entities or individuals whose misconduct suggests that they cannot be relied upon to conduct those activities in compliance with the law and in a manner that will protect investors and our markets.”  White then noted that in order to temper the potential over-breadth of disqualification provisions under the federal securities laws, the SEC may issue waivers upon a showing of good cause.

White explained that the SEC has and will continue to determine whether to grant waivers on a case-by-case basis, based on the Commission’s determination of whether the entity or individual, going forward, can engage responsibly and lawfully in the activity at issue in the particular disqualification.  White then enumerated the various factors that her staff considers in determining whether an entity or individual has shown good cause to support a waiver from disqualification under the federal securities laws.  These factors include:

  • The nature of the violation;
  • The duration of the wrongdoing;
  • The specific employees involved and their level of seniority and responsibility in the institution;
  • The state of mind of the participants;
  • Whether the conduct touched at all upon the activity at issue in the disqualification;
  • The extent of bona fide remediation implemented by the institution in the wake of the enforcement action and what measures will be used on an ongoing basis in the future, including enhancement in controls, increased training, and personnel changes;
  • Whether the employees involved in the wrongdoing, even if not charged for one reason or another, have been severed from the institution or have been removed from the roles they held when the wrongdoing occurred; and
  • The proportionality of the impact of the disqualification on the institution in light of the nature of the misconduct, as well as any negative effects it could have for the markets, the institution’s clients, and the investing public

After discussing the factors the Commission will consider in deciding whether to grant a waiver, SEC Chair White detailed her goals for the waiver process.  White stated that when she assumed her role as Chair, she asked her staff to “consider more broadly exercising our authority to condition a waiver in appropriate circumstances.”  Such conditions may include requiring an institution to terminate employees involved in the wrongdoing or implementing bona fide internal measures to prevent future misconduct.  White also asked her staff to make clear in letters issued to grant waivers that “any failure to comply with the representations, conditions and affirmative obligations described in the waiver request or the terms of the enforcement judgment is grounds for revocation of the waiver.”  Finally, her staff has revised the SEC’s written guidance regarding waivers in order to increase transparency regarding the process.

The day after Chair White’s speech, the SEC issued a policy statement entitled “Statement on Waivers of Disqualification under Regulation A and Rules 505 and 506 of Regulation D."  This policy statement summarizes the same waiver determination factors that SEC Chair White enumerated during her March 12 speech.  The onus is on the institution or individual seeking a waiver to submit a waiver request which addresses these factors, and the party seeking waiver bears the burden of proof in demonstrating that there is good cause for a waiver to issue.

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Dominique Windberg