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Clearing a Waivering Bar

February 25, 2015

Photo from Wikipedia. Some rights reserved.

Ever since SEC Commissioner Kara M. Stein asked last April whether some financial firms were too big to bar, there has been a growing debate over whether and when the SEC should waive a firm’s automatic disqualification from participation in certain securities-related activities after a SEC enforcement action.

What the debate is about (or supposedly not about). According to Stein and Commissioner Luis A. Aguilar, who has joined Stein in her dissents, the imposition (or non-imposition) of an automatic bar is not about punishment. Rather, automatic bars are about reducing recidivism. In the profession of that belief they are joined by Commissioner Daniel M. Gallagher and one assumes by Commissioner Michael S. Piwowar and Chair Mary Jo White.

But how should recidivism be reduced? In mid-February Gallagher gave a speech in which he recounted the historical antecedents of administrative waivers, noting that waiver requests were “dispassionately considered by the relevant policy division staff, on the merits and not in conjunction with the underlying enforcement case giving rise to the disqualification.” View the text of the speech here. (emphasis added).  And therein lies the rub. While a majority of the Commissioners appear willing to support a waiver provided it is unrelated to the underlying enforcement action (and therefore unrelated to reducing recidivism), Stein is not. At the recent SEC Speaks conference Stein voiced her view that “the argument that we should grant a waiver whenever the reason for automatic disqualification is ‘unrelated’ to the waiver defies common sense.” She continues, “problems of compliance start and end at the top. The degree to which those at the top knew or should have known about a violation or a failed culture of compliance is an important factor in analyzing whether an automatic bad actor bar should occur. I have been urging the Commission to adopt and use this factor in the context of evaluating these bars.  And if a firm is so sprawling and large that the top simply cannot manage it at all, isn’t that a problem in and of itself?” View the text of her remarks here.

Despite this apparent impasse, a possible way forward may be in the offing. In his mid-February speech Gallagher said he intends to condition his votes on enforcement recommendations on an understanding of the planned disposition of requested waivers, a position for which Piwowar voiced support in his remarks at the SEC Speaks conference. View the text of Piwowar’s remarks here.

But an irony remains. Although the Commissioners agree that automatic disqualifications are not an additional punishment, it appears their waiver will be considered in the sanctions context. And the consideration of waivers in this context may force firms to agree to additional undertakings as part of the settlement process.

When Stein and Aguilar dissented from a SEC order granting a waiver to Oppenheimer & Co. from the “bad actor” automatic disqualification provision of Securities Act Rule 506(d)(1)(ii), they criticized the majority’s failure to require the involvement of Oppenheimer’s senior management in future compliance reviews and the failure to condition the continuation of the waiver on evidence of Oppenheimer’s continued compliance with the securities laws. View the text of the dissent here.

Because Stein and Aguilar were outvoted with respect to Oppenheimer, such conditions were never imposed. But given the frequency with which Commissioners must recuse themselves, instances in which additional undertakings may be required in order to secure the necessary votes to approve a settlement may arrive in the near future.

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