In her remarks on March 12, 2015, at the Corporate Counsel Institute, SEC Chair White repeatedly emphasized that the WKSI disqualification provisions are not intended to serve as an enforcement tool or to further punish the issuer for underlying criminal conduct. If an issuer has broken the law, the underlying enforcement action, White argued, is the appropriate means by which to punish the issuer, which punishment may include injunctions, prohibitions on future participation in various aspects of the securities industry and financial penalties. In the WKSI waiver context, on the other hand, the SEC’s “central focus is whether the violation in question affects the company’s ability to produce reliable financial reporting disclosures going forward,” and the SEC’s “ultimate objective is for the waiver decision to safeguard the public interest and protect investors.” Under this logic, the SEC should be more willing to grant a WKSI waiver if the underlying misconduct is unrelated to financial reporting (e.g., a criminal conviction under the Migratory Bird Treaty Act, to use an example provided by Commissioner David Gallagher) or if the conduct is limited to a few employees and appropriate remedial action has been taken. Furthermore, White expressed doubt regarding the effectiveness of disqualification from the WKSI rules as a deterrent. White noted, “In my experience, in the enforcement arena, the most effective deterrent is strong enforcement against responsible individuals, especially senior executives. In the end it is people, not institutions, who engage in unlawful conduct.”
White also argued that WKSI waivers, conceptually, are an intended and essential part of the WKSI disqualification framework set forth in Rule 405 under the Securities Act. White noted, “The sweep of the disqualifications is intentionally broad, both in terms of what conduct may trigger them and the range of activities covered by the prohibitions.” Against this backdrop, one should not be surprised that WKSI waivers are issued with some regularity, as the purpose of such waivers is “[t]o temper the potential over-breadth of the disqualification provisions” if the particular facts and circumstances indicate that disqualification is not warranted.
White went on to explicitly refute the claims of Commissioner Stein and others that the SEC has been rubber-stamping the WKSI waiver requests of the world’s largest financial institutions and companies, stating that no institution was “too big to indict or otherwise charge, too big to jail, or even too big to bar.” White also reiterated that the SEC’s WKSI waiver process “is not at all a routine or kneejerk exercise,” but rather a “thorough, rigorous and principled application of the law to the particular facts of each case.” White also noted that, since January 2014, seven WKSI waiver requests had been granted, while four had been denied.
White’s defense of the SEC’s WKSI waiver policy in the face of internal and public criticism should come as a relief to those seeking, or who may need to seek in the future, a WKSI waiver. In explaining the SEC’s policy, White noted that criticism of the SEC’s waiver decisions—which “can take on a political tone that can blur the analysis”—often fails to appreciate that the WKSI disqualification scheme is not intended to punish or deter, but rather to protect the investing public in the future. An issuer seeking a WKSI waiver should continue to craft its request in accordance with the SEC’s guidance, as discussed in our prior entries on this subject, but must be careful to fully describe the remedial activities the issuer has taken and clearly explain why, from now on, the issuer will be able to produce reliable financial reporting disclosures notwithstanding its prior conduct.