US Securities and Exchange Commission Chairman Jay Clayton issued a statement on July 3 that should help to rationalize the process for firms seeking waivers from disqualification resulting from certain enforcement actions.
As discussed in our July 1 LawFlash, Representative Maxine Waters (D-Calif.) recently introduced the Bad Actor Disqualification Act of 2019 (the Act) in the US House of Representatives. If enacted into law, the Act would make the disqualification waiver process significantly more cumbersome, likely reduce the number of waivers that can be granted, and consequently result in de facto additional penalties on settling parties that are often wholly unrelated to the conduct underlying the enforcement action.
Chairman Clayton’s statement appears to be a strong counterpunch to the proposed process contemplated in the Act. The “Clayton approach” to waivers does not alter the standards that the Commission staff applies when evaluating whether to recommend a waiver in any particular enforcement matter.[1] Rather, in his statement, Chairman Clayton highlights that the current process has not necessarily allowed for robust consideration of the impact of waivers on investors or the settling firm in relation to the matter being settled. Furthermore, Chairman Clayton acknowledges in his statement that the current waiver process is burdensome and can create significant uncertainty for respondents/defendants seeking to settle matters.
The approach Chairman Clayton endorses has been used informally in some recently settled matters. The approach permits that once settlement terms have been agreed upon and documented and the Commission staff has made a recommendation regarding the requested waivers for a settling entity, the Commission would then consider the offer of settlement simultaneously with any requests for waivers. As such, the Clayton approach will permit the Commission to vote simultaneously on an offer of settlement and on any waiver requests. If the Commission votes only to accept the offer of settlement without granting the recommended waivers, the respondent/defendant will have up to five days to accept the Commission’s action. Absent such notification, or if the respondent/defendant otherwise withdraws its offer of settlement, the negotiated settlement terms may no longer be available and further negotiation, investigation, or enforcement proceedings may follow. If settlement is accepted, then presumably the SEC’s order will be issued.
The Clayton approach benefits all parties. Foremost, respondents/defendants will no longer face automatic disqualifications if a settlement offer is approved by the Commission but the requested waivers are denied. This in turn should make settlement negotiations proceed more smoothly, to the benefit of the Commission staff, because the Division of Enforcement staff will be able to focus fully on reaching a settlement agreement and the staff in the Divisions of Corporation Finance and Investment Management will be able to focus on the merits of waiver requests.
The Clayton approach to waivers is a positive step forward for all parties, as it institutes a process that recognizes the concerns of settling parties and takes into account the potential collateral damage of disqualifications, such as to investors, while preserving the Commission’s and its staff’s obligations to consider the merits of both settlements and waiver requests in light of the facts presented.
[1] There are a number of statutory and regulatory collateral consequences that result from certain criminal actions and also certain administrative and judicial orders. These may include loss of well-known seasoned issuer (WKSI) status for the purposes of securities offerings; loss of statutory safe harbors under the Securities Act of 1933 (Securities Act), and the Securities Exchange Act of 1934 (Exchange Act), for forward-looking statements, which were added by the Private Securities Litigation Reform Act of 1995 (PSLRA); loss of private offering exemptions provided by Regulations A, D, and Crowdfunding under the Securities Act; loss of the exemption from registration under the Securities Act for securities issued by certain small business investment companies and business development companies provided by Regulation E; and the prohibition on a registered investment adviser from receiving cash fees for solicitation under Rule 206(4)-3 of the Investment Advisers Act of 1940 (Advisers Act).
