SEC Commissioner Gallagher Discusses the SEC's "Wavering on Waivers" (with Lofchie Comment)

SEC Commissioner Daniel Gallagher discussed automatic disqualifications and waivers under federal securities laws. He raised this discussion at the 37th Annual Conference on Securities Regulation and Business Law.

Commissioner Gallagher explained that disqualifications can be at the SEC's discretion or may be triggered automatically; for example, upon the entry of a court-ordered injunction or an order in an administrative proceeding, whether through a settlement or following a trial.

The Commissioner also pointed out that, for many disqualification provisions, "the legislative and regulatory history is silent" and has been guided by the notion that exemptions are granted "only to those persons who are unlikely to abuse that relief through fraudulent or other improper conduct."

Commissioner Gallagher stated that there are two competing justifications regarding the use of automatic waivers: (i) reducing recidivism and (ii) utilizing disqualifications as "sanction enhancement," which Commissioner Gallagher argues "punish serious misconduct beyond the statutory and judicial limits otherwise imposed on the Commission's enforcement remedies." Commissioner Gallagher cautioned against conflating disqualifications and enforcement sanctions, since that could leave individuals and entities "unfairly" subject to disqualification without an option to make "rational" decisions regarding defense strategy and settlement.

Commissioner Gallagher recommended that expert policy staff consider requests for waivers individually on their merits by considering the facts and the circumstances of each case without "background noise from the enforcement case inappropriately influencing that decision." If the SEC cannot agree on a suitable practice regarding disqualification waivers, Commissioner Gallagher stated, then Congress should intervene to "draw the lines between disqualifications and enforcement sanctions under the federal securities laws."

Lofchie Comment: It is unfortunate that, in too many cases, federal financial regulations disqualify firms from registration or from other regulatory benefits unless exemptions are granted. A more reasonable system would provide for disqualification as an additional sanction rather than one that applies automatically unless an exemption is granted.

See: Commissioner Gallagher's Remarks: "Why Is the SEC Wavering on Waivers?"