Commissioner Gallagher Delivers Remarks Regarding Revised SEC Statement on WKSI Waivers (with Lofchie Comment)

SEC Daniel Gallagher spoke about the SEC's revised statement on well-known seasoned issuer ("WKSI") waivers, which updated a policy on assessing the eligibility of issuers seeking to qualify as WKSIs under Securities Act Rule 405 ("Definitions of Terms").

Commissioner Gallagher stated that the touchstone of the analysis of the revised statement on WKSI waivers ("WKSI Statement") is the reliability of the issuer's current and future disclosure. In other words, if the misconduct that triggered the disqualification does not affect the issuer's current and future disclosure, then granting the WKSI waiver is appropriate. However, Commissioner Gallagher explained, the language in the WKSI Statement places a greater burden on the issuer to show why disqualification is inappropriate, thus undermining the notions that WKSI status is a privilege and that disqualification for bad actions is an appropriate punishment. According to Commissioner Gallagher, the new language in the WKSI Statement is troubling because assessment should be driven not by placing an additional burden on the issuer, but by careful analysis of the facts underlying the misconduct.

Furthermore, Commissioner Gallagher stated, the punishment-focused view of WKSI waivers is troubling, since the question of whether to grant a WKSI waiver used to be undertaken by the technical experts in the Division of Corporation Finance apart from the enforcement process. Additionally, Commissioner Gallagher noted, this punishment-based view is "constitutionally dubious," since the basic tenets of due process require that respondents have the ability to be heard, but there is now a clear trend toward increasing automatic disqualification in the securities laws.

Therefore, Commissioner Gallagher stated, when approaching each request for a WKSI waiver, the SEC should be mindful of the fact that "our disqualification provisions are prophylactic, and therefore over-inclusive in nature."

Lofchie Comment: Commissioner Gallagher's statement was issued in response to Commissioner Stein's dissent (linked below) to the issuance of a WKSI waiver to a major financial institution, the Japanese subsidiary of which had been found guilty of fraud. Commissioner Stein had argued that the waiver was inappropriate in light of her view that the bank was a bad actor, or at least had not demonstrated itself to be a good one.The differing statements of the Commissioners express two distinct views on the purpose of the WKSI regime. That is, Commissioner Stein is inclined to view the WKSI regime as a privilege that must be earned on an ongoing basis through corporate behavior, and which can be lost by misbehavior – even misbehavior that is not directly related to the disclosure requirements under the U.S. securities laws. By contrast, Commissioner Gallagher would likely say that the bank had been punished by the court, as the court determined appropriate, for its misdeeds; therefore, withdrawal of WKSI status should not be imposed as a further punishment, but only if the SEC had reasonable grounds to believe that the issuer would abuse the WKSI regime.While both sides of this debate seem reasonable, Commissioner Gallagher has the better argument. The U.S. securities laws impose a variety of draconian punishments on companies that have violated the law – punishments which are so draconian that, in the absence of waivers, they could force companies out of business. In order to avoid that result, which is not desirable in many circumstances, the SEC is forced to grant waivers of various types routinely (not just as to WKSI status). If the SEC wants to get out of the business of habitually issuing waivers, then it or Congress will have to reexamine situations where securities laws impose additional punishments on wrongdoers that go far beyond those imposed by the judicial process.

See: Commissioner Gallagher's Remarks.Related news: SEC Grants Waiver to RBS from Being Ineligible Issuer under Rule 405, but Commissioner Stein Dissents (April 28, 2014); SEC Division of Corporate Finance Issues Revised Statement on Well-Known Seasoned Issuer Waivers (April 24, 2014).