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Commissioner Aguilar Suggests More Transparency in Waiver Process

SEC Commissioner Luis Aguilar suggested making the waiver process more transparent and accountable.In the past year, waivers have become a contentious issue, with critics saying the SEC is too lenient to big banks that repeatedly violate the laws but are given waivers to continue business as usual.

SEC Commissioner Luis Aguilar said he wants the commission to make the waiver process more transparent and accountable.

“With additional context on the waiver process, the public and the Commission could better assess how well the Commission is fulfilling its obligation to grant waivers only when it is appropriate to do so, and only in a manner that is consistent with the protection of investors and the public interest,” Aguilar said in a statement on August 27, 2015.

Companies that commit fraud are potentially subject to a variety of punishments, including a disqualification from trading and underwriting securities.The SEC often uses its exemption authority, called waivers, when it believes a company will mend its behavior and isn’t a risk to the financial markets.

However, the waivers have become a contentious issue.In the past year, Aguilar and fellow Democratic Commissioner Kara Stein have criticized the agency’s process in giving waivers.Some investor groups said the SEC has been too lenient on big banks.

In February, for example, Aguilar and Stein objected to the agency’s order that waived Oppenheimer & Co.’s disqualification from offerings covered by Regulation D of the Securities Act of 1933 because, in their view, it ignored the “bad actors rule” from Rule 506 Offerings.The rule bans people with a track record of securities law violations from making use of the exemptions available for limited and small securities offerings.Rule 506 of Reg D permits the marketing of limited securities offerings to so-called “accredited investors.”

In January, the brokerage firm had settled charges with the SEC for its handling of trades for a client who wasn’t registered to sell penny stocks.

At the same time, SEC Chair Mary Jo White and departing Republican Commissioner Daniel Gallagher have defended the waiver process and called it a means to prevent heavy-handed enforcement procedures from harming market activity.

In what may be his last public statement as SEC commissioner, Aguilar suggested the staff provide periodic reports to the commission detailing relevant information about waivers to make the process more transparent and accountable.

This would include a list of the requests and informal inquiries that have been received; the circumstances that triggered the need for those waivers; whether any waiver requests or inquiries were handled by delegated authority to staff; the final disposition of the waiver requests or inquiries; and for requests and inquiries handled by the staff, the justification for granting them or not.

Aguilar’s term ended in June, and President Obama is expected to announce a nominee soon.

Aguilar said the commission could also consider creating a public website to track the progress and resolution of all waiver requests and inquiries.The website could explain the circumstances that led the commission or its staff to grant or not grant a waiver request.

Some, especially those in the corporate community, disagreed with the two Democratic commissioners.

“The fundamental issue with the grant of waivers to financial institutions is the pretense that granting a waiver is an act of forbearance, whereas the reality is that, in most instances, the imposition by the SEC of a broad disqualification as part of a regulatory sanction would be completely inappropriate,” Steven Lofchie, a partner with Cadwalader, Wickersham & Taft LLP, said in a blog.

“That is the problem with a statute that makes the disqualification automatic: it creates the need for a routine waiver process.”

In Lofchie’s view, eliminating automatic statutory disqualification would save the SEC considerable time and money.

“It would also abate the politicization of the enforcement process by curtailing gasps of public shock whenever a waiver is granted,” Lofchie wrote.

He asked what would happen if a government official was charged with misconduct, and the automatic result was a shutdown of that entire agency.

“That sanction would be disproportionate to the misconduct and damaging to society,” Lofchie said.

“It is no different when sanctions are imposed on private industries,” Lofchie added. “The imposition of sanctions that are disproportionate to the violation—which arguably is a fairly common event—enriches the collector of the fine without benefiting the economy or society as a whole.”

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