SEC Changes Longstanding Practice on Waivers

What is the waiver process? The resolution of an enforcement action with the SEC or other governmental entities can trigger certain disqualifications under the federal securities laws. Such disqualifications may, among other things, prohibit a company from raising capital pursuant to Rule 506 of Regulation D, using the significant reforms in the securities offering and communication processes that the Commission adopted in 2005, including the ability to register securities for offer or sale under an automatic shelf registration statement, which becomes effective upon filing, and filing posteffective amendments to register additional or new types of securities or relying on the safe harbor for forward-looking statements. Firms can request that the Commission grant a waiver from such disqualifications.

How has the waiver process been handled in the past? Historically, as noted in the Clayton Waiver Statement, “[a]lthough settlement offers and waiver requests have generally been made contemporaneously, and resolution of both often is critical to achieving the necessary level of certainty, in recent years, the Commission has considered these matters almost exclusively on a segregated basis.” The Commission would vote separately on an offer of settlement and a waiver request, and firms were not permitted to make their offers of settlement contingent on receipt of a waiver. As a result, firms have had to agree to an offer of settlement without certainty as to whether they will receive a waiver, even though a “factor that drives appropriate settlements is a desire for certainty.”² Therefore, the prior process left a settling firm in the unfortunate position where the Commission could accept the very settlement that triggered the disqualification, reject the waiver and place the settling respondent in the highly undesirable posture where it became subject to a settlement from which it could not withdraw (because the Commission already accepted the offer or even issued the settled Order) and yet be subject to a potentially crippling disqualification for which it had sought a waiver. Uncertainty in the waiver process can be detrimental to both firms and the Commission in seeking a timely resolution to enforcement proceedings.

How does the Clayton Waiver Statement change the waiver process? The Clayton Waiver Statement eliminates the prohibition on making offers of settlement contingent on receipt of a waiver, providing that “a settling entity can request that the Commission consider an offer of settlement that simultaneously addresses both the underlying enforcement action and any related collateral disqualifications.” Therefore, “an offer of settlement that includes a simultaneous waiver request negotiated with all relevant divisions (e.g., Enforcement, Corporation Finance, Investment Management) will be presented to, and considered by, the Commission as a single recommendation from the staff.” The Commission will not be obligated to accept both the settlement offer and the waiver request; however, the Commission will institute a formal process by which a defendant is notified of what terms of the settlement and waiver requests the Commission has approved or disapproved, and the defendant will be provided time (generally five business days) to decide whether it nonetheless wants to move forward with the settlement.³

What does this mean for the waiver process? The Clayton Waiver Statement should provide firms with more certainty regarding the waiver process. Although the Commission will not be obligated to approve both the offer of settlement and the waiver, firms will have time to consider how to proceed if its waiver application is not approved. This will add welcome structure to the waiver process.

The Clayton Waiver Statement was announced at an interesting time for the Commission as the Bad Actor Disqualification Act of 2019 (the Disqualification Act) was recently introduced in the U.S. House of Representatives by California Democrat Maxine Waters. One of the goals of the Disqualification Act is to eliminate the ability of the staff to issue waivers, and the Clayton Waiver Statement appears to accomplish this goal (in part). In the past, any of the Commissioners could choose to call certain waiver applications for a vote or, if a waiver application was not called for a vote, the applicable division was able to issue the waiver by delegated authority. Pursuant to the Clayton Waiver Statement, it appears that all waivers (that are issued in connection with a SEC enforcement action) will be issued by Commission order rather than by delegated authority. It will be interesting to see whether the applicable divisions continue to issue waivers by delegated authority that are not issued in connection with SEC enforcement actions.

Furthermore, it is unclear if the form in which a waiver is granted will change. Currently, waivers are granted through a letter from the relevant division or by Commission order. Pursuant to the new waiver procedure, it is possible that the Commission may grant waivers in its enforcement orders rather than in a separate letter or order.

Takeaways. Overall, the Clayton Waiver Statement provides structure and a degree of certainty to the waiver process, which has been lacking in recent years. It is encouraging that the Commission is reviewing the waiver process and looking at ways to improve the process.

¹ Public Statement: Statement Regarding Offers of Settlement, Chairman Jay Clayton (July 3, 2019).

² See Clayton Waiver Statement.

³ In the recent self-reporting initiatives related to the Municipalities Continuing Disclosure Cooperation Initiative and Share Class Selection Disclosure Initiative, the Commission informally used a simultaneous waiver process.