Wavering on Waivers—Bad Boy/Bad Actor Waivers Under Federal and State Law (Part 3)

Federal and State Ability to Create and then Waive a Disqualification

The SEC has the authority to bring enforcement actions that might result in a bar under the Bad Boy Provisions or the Bad Actor Provisions; so do the states. In Colorado specifically, the Colorado Division of Securities has the statutory authority to conduct investigations and issue subpoenas (C.R.S. § 11-51-601), enforce the securities laws by injunction (C.R.S. § 11-51-602), seek criminal penalties through the state attorney general’s office or through a district attorney (C.R.S. §§ 11-51-603, 603.5), seek civil enforcement (C.R.S. § 11-51-604(14)), and conduct administrative proceedings, including a very prompt-acting cease and desist proceeding (C.R.S. § 11-51-606(1.5)).

Depending on the findings in such proceedings, the respondent’s or defendant’s ability to use Rule 506 (or Rule 505) may be impacted. This clearly should be a consideration for any person negotiating a settlement of any SEC or state enforcement action because the result may be more than bargained for—not only the sanctions included in the order, but an incidental treatment as a Bad Boy, Bad Actor, or both. While the sanctions may be painful, the resultant inability to raise capital may be devastating. 

As the New York Times reported on March 13, 2015 (at page B6), in a speech the previous day SEC Chair Mary Jo White discussed the fact that during 2013 and 2014, the SEC rejected 14 requests for waivers from the Bad Actor Provisions while granting 13 waiver requests. One of the more controversial waivers granted was to Oppenheimer & Company which settled a case that fell within the Bad Actor Provisions. Despite more than 30 regulatory actions over the previous decade, the SEC granted Oppenheimer a waiver. In her speech, Chair White attempted to distinguish enforcement actions from the resultant waivers that may be applicable. 

SEC Chair White was responding to a speech a month earlier by Commissioner Daniel Gallagher. Commissioner Gallagher conflated the enforcement actions taken by the SEC with waivers. He described the SEC’s authority to impose sanctions as being “both remedial and punitive in nature.” He went on to say “that until such time as the Commission officially decides whether disqualifications will continue to be treated as sanctions or whether we will revert to the historical practice of treating them apart from the enforcement process, I will condition my vote on enforcement recommendations matters on an understanding of the planned disposition of requested waivers. A settlement should involve a meeting of the minds on all aspects of the resolution. A settlement should bring finality.” In the opinion of Commissioner Gallagher, where waivers are an important consideration, they should be considered with the other sanctions. 

Reprinted from The Colorado Bar Association, Business Law Section, May 2015

Herrick Lidstone