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News September 21, 2015 Issue

Waivers: Aguilar Calls for Conditional Waivers, More Transparency

SEC commissioner Luis Aguilar wants the SEC to change how the Commission staff handles requests for waivers from regulatory disqualifications. More comprehensive and detailed reporting of staff waiver action, creation of a public waiver website, and the increased use of conditional waivers are among his suggestions.

Aguilar’s views, offered in a recent public statement, add fuel to what has become an ongoing public discussion among Commission members on the use of waivers, particularly in terms of when they are requested by parties automatically disqualified as a result of SEC enforcement actions. The agency, he said, needs to "strengthen its protocols for handling such waiver requests and provide enhanced transparency and clarity on the Commission’s waiver process."

Opinions and statements from other commissioners about the waivers, while also dealing with requests from parties under enforcement actions, addressed other concerns. SEC chair Mary Jo White, in a March 12 speech, said that waivers are not meant to be an enforcement tool (ACA Insight, 3/16/15). Her statement addressed concerns raised in February by commissioner Daniel Gallagher that the SEC Division of Enforcement was not allowing waivers to be part of settlement negotiations (ACA Insight, 3/2/15), and a call from commissioner Michael Piwowar for the SEC to establish guidelines to address the issuance of waivers in such negotiations.

Aguilar’s concerns seem to be more about how, if at all, SEC staff report their actions on waiver requests to Commission members, and the need to make staff actions more accessible and transparent. In addition, he suggested that the use of conditional waivers would allow some flexibility in how waivers are used.

"The ideas of greater transparency and rigorous standards for granting waivers are commendable ideas, but I wonder whether either is really attainable given the fact-specific nature of every enforcement case and the variety of rules and statutes from which the SEC staff may be requested to provide a waiver," said Stroock partner and former SEC Division of Investment Management deputy director Robert Plaze. "I always wonder whether these statements are issued after a commissioner has tried and failed to get the chair or relevant staff to make certain internal changes and, if so, whether these statements change any minds."

"The more important part of this is the transparency initiatives," said Stern Tannenbaum partner Aegis Frumento. "Who gets waivers and who doesn’t? We don’t really know, but a lot of us who work in this area would not be surprised to learn that requests from individuals and small companies are routinely denied, while requests from big banks will more likely be granted."

A different kind of waiver

The problem with only two alternatives – to grant a waiver or to deny one – is that "many waiver applications … do not always fit neatly into ‘grant’ or ‘deny’ buckets, but sometimes fall somewhere in between," Aguilar said. To remedy this, he suggested that "the Commission waiver protocol could be strengthened by adopting a more versatile approach, one that allows cases that might fall into a grey area to avoid a total prohibition by allowing the requesting party to adopt appropriate limitations designed to protect investors and the public."

These would be conditional waivers, which would permit statutorily disqualified parties, "in cases that are not clear-cut grants or denials," to continue conducting their businesses, but subject to "appropriate limitations."

For instance, he said, a conditional waiver might require some or all of the following:

  • Limit the extent to which the party engages in the activities from which it was disqualified;
  • Retain an independent monitor to verify the party’s continued compliance;
  • Retain a qualified independent consultant to review and suggest enhancements to the party’s compliance function;
  • Require senior management to provide compliance attestments; and
  • Provide the Commission with regular reports on the status of compliance efforts.

In fact, he said, the SEC in November 2014 put in place what amounted to a conditional waiver in an order granting a waiver to Bank of America. That order provided the exemption waiver, but also placed a number of conditions on Bank of America, including that it retain a qualified independent consultant to conduct a comprehensive review of the compliance policies and procedures in question.

"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," Aguilar said. "Conditional waivers could … 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."

Of course, Aguilar added, there will be "many instances" when waiver requests will need to be denied by the Commission, as well as when full waivers should be granted. "But for cases that fall into 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."

"Unless there’s some ‘middle-ground’ waiver, the Commission is left with either denying a waiver or granting it without conditions," said Frumento. "When we are talking about a large institution, this puts the Commission between a rock and a hard place—to be statutorily disqualified would be the equivalent of a bar for a company that is ‘too big to fail,’ and to grant an outright waiver gives the appearance – the reality – of letting the big boys go scott-free. So the conditional waiver is the fig-leaf that allows the Commission to let a big bank continue to do business as usual, at the modest cost of extra monitors and consultants, while still being able to say that it imposed something [emphasis Frumento]."

"But the small players in the market really do need relief from the statutory disqualification stigma," he said. "What is happening is that many times settlements are rendered meaningless. Even if a settlement avoids a suspension or a bar or even a large fine, a finding of a 'willful' violation of the securities laws can render the settling party statutorily disqualified. Quite often, the statutory disqualification status alone will wreck a business or a career just as effectively as a real regulatory sanction would have."

Communication from SEC staff

SEC staff act on the "vast majority" of waiver requests by delegated authority from the Commission, Aguilar said, but in his opinion do not share enough of what they do. "With the possible exception of the Chair in certain circumstances, … the commissioners generally are not notified that a waiver has been requested," he said. "Furthermore, the commissioners are not normally informed when the staff, in exercising its delegated authority, does not grant a waiver."

Aguilar said that he had to rely on a news article to learn that most waiver requests have not been granted. While he credited White with directing the staff to keep better track of waivers, and credited the staff with providing a list of certain waiver requests that had not been granted, he said this was not enough. "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."

"As a result, the commissioners lack useful information about these unsuccessful waiver requests," he said. "For example, what was the staff’s justification for not granting these waivers? … It would be helpful to know how many such requests have been made since the WKSI (well-known seasoned issuer] 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."

A contributing problem is that "to my knowledge, the Commission does not maintain a comprehensive and up-to-date database of waiver requests and their status, despite the clear benefits of doing so," Aguilar said.

The lack of information explaining the staff’s rationale for denying waivers means that "the Commission is presented with a generally one-sided view of the waiver process," he said. "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."

"I believe our current waiver process can be improved," Aguilar said. "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."


Aguilar suggested "two basic reforms" that he said could be "implemented easily" so that both the Commission and the public would have greater insight into the entire [emphasis Aguilar] process:

  • Periodic reports. SEC staff could be directed to provide reports to the Commission on a regular basis, he said. Such reports would include: a list of requests and informal inquiries that have been received; the circumstances that triggered the need for the waivers; whether any waiver requests or inquiries were handled via delegated authority and, if so, why; the final disposition of waiver requests or inquiries, including the dates acted on; and, for requests and inquiries handled by the staff, "the staff’s justification for granting them or not."
  • Public website. The Commission would use such a site to "track the progress and ultimate resolution of all waiver requests and inquiries," Aguilar said, adding that the site could explain the circumstances that led the SEC or its staff to grant or not grant a waiver request. Confidential information, such as the identity of the requesting party, could be redacted, he said. The site would also provide useful guidance, "and would introduce additional transparency to a process that has garnered considerable public interest in recent years."

These two reforms would allow both the public and the agency to "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."