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Bill Takes Aim at S.E.C. Waivers for Firms That Broke Law

March 23, 2015
In The News

The Securities and Exchange Commission faces new pressure from Congress to make it harder for lawbreaking companies to hold on to important privileges that help them raise money in the markets.

Representative Maxine Waters, Democrat of California, is set to announce on Tuesday legislation that takes aim at how the commission grants the privileges. The announcement will coincide with the appearance that day of Mary Jo White, the S.E.C.’s chairwoman, before the House’s powerful Financial Services Committee, where Ms. Waters is the leading Democratic member.

When a company is found to have broken securities laws, the S.E.C. can disqualify it from issuing certain types of securities, which can affect how the firm raises money and impinge on client activities. The firms, however, typically request waivers from these disqualifications — and the agency has often granted them.

The S.E.C. has given waivers, for instance, to several large Wall Street firms that were found to have broken securities laws. And this year, the commission granted a waiver to Oppenheimer & Company even though it had been hit with at least 30 regulatory actions over the last decade.

“I have been disappointed with the seemingly reflexive granting of waivers to bad actors, which can enshrine a policy of ‘too big to bar,’ ” Ms. Waters said in a statement. “For large financial institutions, fines are often a mere cost of doing business, and waiving disqualification provisions allows bad actors to continue to operate in the marketplace undeterred.”

Critics of the waivers also include Kara M. Stein and Luis A. Aguilar, two of the S.E.C.’s Democratic commissioners.

In recent months, the waivers have become a lightning rod for consumer advocates who contend that more should be done to punish and deter corporate wrongdoing.

Ms. White, however, devoted almost all of a recent speech to defending the agency’s handling of the waivers. She said that the S.E.C. did not routinely grant waivers but was instead rigorous when deciding whether to grant one.

Ms. White also questioned the appropriateness of barring a company from issuing certain types of securities, asserting that such a ban might affect an activity that has little to do with the company’s actual misconduct.

“A strong and effective enforcement program is at the heart of the S.E.C.’s efforts to protect investors and instill confidence in the integrity of the markets,” a draft of Ms. White’s statement for delivery to the House committee on Tuesday said. She has at times voted for waivers, putting her at odds with the Democrats.

The waivers affect only certain types of money-raising. The disqualifications that firms seek to avoid do not, for instance, place an outright ban on a company issuing securities in public markets. Instead, they may bar a company from issuing securities in public markets on an accelerated, continuing basis, forcing it to file a fresh request with the S.E.C. to sell the securities.

The S.E.C. can also disqualify a company from issuing into private markets, which can be a big source of financing and revenue for certain firms.

Ms. Waters’s bill seeks to shed more light on the waiver process. It would require the S.E.C. to maintain public records of all waiver requests and denials, something that it does not currently provide.

The bill also requires the agency to make waiver requests public, and gives the public the opportunity to comment and ask for a hearing on whether a company should be granted a waiver. The S.E.C.’s staff lawyers can, in theory, handle and vote on waivers, but the agency’s five commissioners have taken up recent waiver requests.

Ms. Waters’s bill intends to formally and permanently shift the responsibility for waivers to the commissioners.

The prospects for the bill look unpromising in the Republican-dominated House. Still, the legislation will most likely add fuel to the debate over corporate wrongdoing and perhaps reverberate through Wall Street.

“I hope this proposal sends a message to every financial institution that they can no longer expect to receive a waiver in the same manner as they were issued in the past,” Representative Waters said in her statement.