May 20, 2015

The SEC “Waivers” Debate: Heating Up Over WKSI Status – And a New Battlefield!

Even with the SEC’s new policy on Reg A & D waivers fresh on the books, the topic of whether to grant waivers remains topical. Last week, SEC Commissioner Stein dissented from the SEC’s order granting a waiver to Deutsche Bank over its WKSI status (you may recall that Corp Fin issued a revised statement about how it would process WKSI waivers last year).

The WKSI waiver debate is new; there’s been controversy before. And interesting, although Deutsche Bank got its WKSI waiver request, apparently the same did not happen for Credit Suisse. According to this Reuters article, Credit Suisse withdrew a WKSI waiver request after SEC Staff informed it that the request would likely be denied.

But what apparently is new is a growing battle between the SEC and the CFTC, as noted in this excerpt from Stein’s dissent:

However, based on a loophole contained in Rule 506(d)(2)(iii), the CFTC has intervened and prevented the bad actor disqualification question from even coming before the Securities and Exchange Commission. The CFTC saw fit to opine on the SEC’s Rule 506 jurisprudence about whether Deutsche Bank AG should receive a waiver from automatic disqualification under SEC rules. It is unclear to me what, if any, analysis went into this decision and what prompted the CFTC to insert language into its final order stating that a bad actor disqualification “should not arise as a consequence of this Order.” The implications of the CFTC’s actions here — and in other actions — are deeply troubling. The Commission should closely review this provision and how it is being used.

The Rule 506(d)(2)(iii) provision has actually been used once before by the CFTC to “waive away” the 506 disqualification – last year in this CFTC order against JPMorgan for the London Whale incident. So two times now makes a trend perhaps.

But what may be the interesting trend is whether companies – faced with the SEC’s deadlock over 506 waivers – will look to get around the deadlock by relying on this provision in its negotiations with other state or federal regulators. The provision also allows courts to decree that there should be no 506 disqualification as well. Below is the language from the adopting release for Rule 506(d) (which was adopted by a 5-0 vote) that explains the purpose of this provision:

The amendments we are adopting include a provision under which disqualification will not arise if a state or federal regulator issuing an order advises in writing that Rule 506 disqualification is not necessary under the circumstances. We believe this provision will create cost savings for affected covered persons such as issuers, individuals and compensated solicitors by eliminating the need to seek waivers from the Commission or pursue other means of raising capital. We expect that some issuers and other covered persons will adjust their settlement negotiations to bargain for an express determination that disqualification from Rule 506 is unnecessary. As the provision applies only where state or federal regulators have determined that Rule 506 disqualification is not necessary, we do not believe it is likely to impair the intended investor protection benefits of the bad actor disqualification scheme.

Former Corp Fin Deputy Director Lona Nallengara to Leave SEC

Yesterday, the SEC announced that Lona Nallengara – who was Corp Fin’s Deputy Director before he headed upstairs to be Chair White’s Chief of Staff – will leave the agency at the end of next month. No next destination listed…

As noted in this blog, the House Financial Services Committee will mark-up a flurry of JOBS Act-related bills today…

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Form 10-K Preparation Tips
– How to Proactively Tackle the Director Tenure Issue
– Code of Ethics/Conduct Primer
– Audit Committee Role in Improving Disclosure
– CEO Succession Planning Guidance for CEOs & Boards

– Broc Romanek