United States: Rep. Waters Introduces Legislation To Amend SEC Disqualification Waiver Process

House Committee on Financial Services ranking member Congresswoman Maxine Waters (D-CA) introduced a bill that would amend the current SEC process for waiving automatic disqualifications of "bad actors."

The bill includes:

• a requirement that the SEC maintain a database of all disqualified bad actors, and keep a comprehensive public record of waiver requests;
• a new process by which persons can ask for a temporary waiver, which may be given by Commission vote for a single 180-day period, followed by a notice-and-comment period, after which the SEC may grant a permanent waiver if it determines that such a waiver (i) is in the public interest, (ii) is necessary to protect investors, and (iii) promotes market integrity; and
• a "prohibition" on SEC staff advising persons of the recommendations that staff will make to the SEC or the likelihood of waivers to be granted.

The bill also would require the U.S. Government Accountability Office ("GAO") to study the existing waiver process and issue a report to Congress on its findings.

Representative Waters stated that the bill would help to protect investors and preserve market integrity:

"The SEC should not automatically give those who break the law a free pass by allowing them to continue to conduct business as usual. This commonsense legislation will subject waiver requests to public scrutiny and robust SEC review so that the law protects investors, the markets, and the public. No one is above the law, including large financial firms."

Commentary / Nihal Patel

The bill contains a "Sense of Congress" clause which attempts to frame the issue. It refers to the automatic disqualification provisions in the securities laws as "valuable tools" that are "inappropriately underutilized," and says that waivers should be "granted sparingly." This almost certainly does not accurately state the sense of the (Republican majority) 115th Congress.

The bill states something with which many can agree: waivers are common and, in particular, waivers to large financial institutions are common. While this is not ideal, responses differ. Rep. Waters seems to think that waivers are improperly given and show bias in favor of large institutions. Her solution is to grant fewer waivers and add more administrative steps in the waiver process.^[1] An alternative approach may be to examine why we have automatic bars in the first place.^[2] In looking at numbers that suggest large financial institutions are receiving waivers, one should ask what percentages of the examination and enforcement resources are given to large firms and what percentages of those firms are well-known seasoned issuers, regular participants in private placements, or otherwise involved in regulated activities that have associated automatic bars. Another question might be what percentage of the waivers are granted in connection with enforcement cases directly relevant to the securities law for which a waiver is necessary.

These are all questions that should be addressed, perhaps in the study that the bill directs the GAO to undertake. As a procedural matter, the study should come first. Such a study could inform the legislation. If the GAO finds that waivers are good, bad or ugly (or, more likely, that waivers of particular types but not others are good, bad or ugly), then Congress would be better informed in directing the SEC to address the bad and ugly parts.

Footnotes

^{[1] The GAO should be asked to predict how much of the SEC's time would be taken up by the new waiver process.}

^{[2] At least one of  my colleagues has taken this approach, as has a former  SEC Commissioner.}