Enhancing the Commission’s Waiver Process

Requests for waivers from regulatory disqualifications remain a topic of considerable import—and lively debate—for the Commission. Such requests are typically made when certain individuals or entities become involved in Commission enforcement actions. One consequence of these enforcement actions can be that an entity or individual is automatically disqualified, as mandated by Congress, from conducting certain activities, or from relying on certain exemptions from registration. Commission rules allow entities and individuals subject to such disqualifications to approach the SEC staff and seek a waiver from these prohibitions. This post discusses how the Commission could strengthen its protocols for handling such waiver requests and provide enhanced transparency and clarity on the Commission’s waiver process. In addition, this post discusses the benefit of a more flexible and calibrated approach to waivers.

The Need for Greater Transparency in the Commission’s Waiver Process

Although the Commission must vote on some waiver requests, the vast majority of requests are handled by the staff pursuant to delegated authority. With the possible exception of the Chair in certain circumstances, however, the Commissioners generally are not notified that a waiver has been requested. Furthermore, the Commissioners are not normally informed when the staff, in exercising its delegated authority, does not grant a waiver. In fact, I learned only through a news article earlier this year that, in the past two years, most waiver requests have not been granted. I was also surprised to learn that the number of times the Commission has not granted a well-known seasoned issuer (“WKSI”) waiver or a Regulation D Rule 506 (“Bad Actor”) waiver “has not been recorded consistently.”

To her credit, in a March 12, 2015 speech, Chair White announced that she had directed the staff to keep better track of waivers, including those that have not been granted. In addition, the staff, in response to an outstanding request from my office, provided the Commissioners with a list of all the WKSI and Bad Actor waiver requests that had not been granted since January 2014 and September 2013, respectively. The staff recently updated this list at my request, as well.

Unfortunately, the list only provides a summary, and only includes the names of the requesting parties and the dates the staff communicated to the applicants that it would not support a grant of a waiver request. As a result, the Commissioners lack useful information about these unsuccessful waiver requests. For example, what was the staff’s justification for not granting these waivers? And what about the WKSI waiver requests the Commission received before 2014? It would be helpful to know how many such requests have been made since the WKSI disqualification provisions took effect in 2005, and who made those requests. It would also be helpful to know how many of those requests the staff chose not to grant, and why. Getting answers to these questions has proven challenging. Among other factors that complicated efforts to find answers to these questions is that, to my knowledge, the Commission does not formally maintain a comprehensive and up-to-date database of waiver requests and their status, despite the clear benefits of doing so.

I believe our current waiver process can be improved. As it currently stands, Commissioners generally are only briefed on those waivers that the staff recommends for approval. Since the staff typically handles most unsuccessful waiver requests on an informal basis, this sheds light on only part of the picture.

Furthermore, as noted, while the staff now formally tracks unsuccessful waiver requests at the Chair’s direction, this information lacks the substance that the Commissioners need to understand the staff’s rationale for denying those waivers. One consequence of this approach is that the Commission is presented with a generally one-sided view of the waiver process. In my experience, this can skew the Commission’s perception of waiver requests, for it denies the Commissioners the full benefit of the staff’s thinking and expertise regarding waivers—especially the staff’s reasons for concluding that certain waivers should not be granted. This limited picture of those waiver applications not supported by the staff makes it difficult to determine the nature of the waiver request—that is, whether such waivers bear some similarity to other waivers previously granted or whether such waiver requests are so frivolous that the waiver request should never have been made. The ultimate goal is clarity and transparency, and more insight into the process can enhance the Commission’s ability to objectively assess waiver requests.

It is not only the Commissioners who could benefit from a more balanced perspective on the waiver process. At present, the public generally has access only to Commission orders that grant waiver requests. But, as a significant proportion of waiver requests appear to be unsuccessful, there may be a substantial gap in the public’s ability to understand the rationale that drives the staff’s waiver decisions. Moreover, entities and individuals that may become subject to a regulatory disqualification deserve a complete explanation of the circumstances that may lead to a waiver request not being granted.

Accordingly, I urge the Commission to consider revising its waiver review process so that both the Commission and the public have greater insight into the entire process, particularly for waivers that are handled by delegated authority. Two basic reforms could be implemented easily.

• First, the Commission could consider implementing procedures that would give the Commission a more holistic view of the waiver process. For instance, the staff could be directed to provide periodic reports to the Commission detailing relevant information about the waiver process, including: (i) a list of the requests and informal inquiries that have been received; (ii) the circumstances that triggered the need for those waivers; (iii) whether any waiver requests or inquiries were handled via delegated authority, and, if so, why; (iv) the final disposition of the waiver requests or inquiries, including the dates acted on; and, (v) for requests and inquiries handled by the staff, the staff’s justification for granting them or not.
• Second, the Commission could consider creating a public website to track the progress and ultimate resolution of all waiver requests and inquiries. This website could explain the circumstances that led the Commission or its staff to grant or not grant a waiver request. In addition, in order not to discourage informal communications with the Commission staff, this website could redact information that might reveal the identity of the requesting party, if necessary. This information would provide useful guidance, and would introduce additional transparency to a process that has garnered considerable public interest in recent years.

With additional context on the waiver process, the public and the Commission could better assess how well the Commission is fulfilling its obligation to grant waivers only when it is appropriate to do so, and only in a manner that is consistent with the protection of investors and the public interest. The two reforms suggested here would provide the Commission with a more complete understanding of the waiver applications that come before it. These reforms would also introduce a greater degree of accountability and transparency into the Commission’s handling of waiver requests and inquiries. These are certainly goals worth pursuing.

The Benefits of a More Calibrated Approach to Waivers—Conditional Waivers

The decision to grant or deny a waiver request involves the careful and rigorous application of numerous factors to the unique facts and circumstances of each case. At the heart of this inquiry, however, lies an important determination that the Commission must make in each matter: namely, whether the requesting party can be expected, going forward, to act lawfully and responsibly when engaging in the activities from which it has been disqualified. The waiver process, therefore, asks the Commission to predict the requesting party’s future conduct based solely on its prior actions and its pledge of future regulatory compliance. Making such predictions is never an easy task, as evidenced by the fact that some entities have sought multiple successive waivers in recent years.

The uncertainty inherent in the waiver process calls for a flexible approach, one that acknowledges both the futility of prescience on the one hand, and the need, in at least some cases, to monitor a requesting party’s future conduct, on the other. Yet, the Commission, or the staff acting by delegated authority, typically grants or denies waiver requests without qualification, so that the waiver is either granted fully or not granted at all. This stark dualism cannot capture the complexity and nuance that many waiver requests present. In fact, my own review of many waiver applications indicates that waivers do not always fit neatly into “grant” or “deny” buckets, but oftentimes fall somewhere in between. The Commission’s waiver protocol could be strengthened by adopting a more versatile approach, one that allows cases that might fall in the grey area to avoid a total prohibition by allowing the requesting party to adopt appropriate limitations designed to protect investors and the public.

Late last year, the Commission fashioned what could be a viable approach to waiver applications—conditional waivers. Such waivers can permit statutorily disqualified persons/parties, in cases that are not clear-cut grants or denials, to continue engaging in a regular course of business, subject to appropriate limitations. For example, pursuant to a conditional waiver, the disqualified party could agree to do some or all of the following: (i) limit the extent to which it engages in the activities from which it has been disqualified; (ii) retain an independent monitor to verify its continued compliance with federal securities laws; (iii) retain a qualified independent consultant to review and suggest enhancements to its compliance function; (iv) require senior management to attest to its compliance with federal securities laws; and/or (v) provide the Commission with regular reports on the status of its compliance efforts.

Of course, there will be many instances when the Commission must deny a waiver request, such as when a requesting party’s misconduct is so egregious or so closely related to the disqualified conduct that the safety of investors and the public demands a full disqualification. And full waivers would remain appropriate when the facts demonstrate that the risk of future misconduct is unlikely. But, for cases that fall in the grey area, a conditional waiver could remove the regulatory impediment of a full disqualification, while allowing for such conditions as appear necessary, under the particular facts and circumstances, to achieve prospective accountability and compliance. Conditional waivers can thus impose meaningful investor protections, while mitigating the potential damage of not granting a waiver at all. Such waivers could also do much to prevent the often seen relapses that trigger subsequent disqualifications.

Conditional waivers could also go a long way toward dispelling the notion that the breadth and severity of the disqualification provisions have led the Commission to be too willing to grant blanket waivers, especially to larger financial institutions. The meaningful and effective limitations that a properly calibrated conditional waiver could provide can reduce the likelihood of future misconduct, as well as the extent and severity of any damage that such misconduct would occasion. Conditional waivers could thus allow the Commission to grant waivers in a judicious manner, one that limits damage to an entity’s operations while, importantly, minimizing to the greatest extent possible the potential risks to investors and the public.

Conditional waivers seem to be a fair and sensible approach to an especially nettlesome problem. As such, they merit careful consideration whenever the Commission or the staff is presented with a case that is not clear-cut. To do otherwise could limit the Commission’s ability to achieve its paramount responsibility of protecting investors.