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On December 26, 2013, the SEC granted its second waiver from disqualification from reliance on Regulation D because of prohibited conduct under new Rule 506(d).   The waiver was granted to a Broker-Dealer alleged to have paid about $430,000 in soft dollars to one of its Clients for improper purposes that were outside of the Exchange Act Section 28(e) safe harbor for the use of commission credits for certain research and brokerage expenses.  Allegedly, the soft dollar payments were used to pay personal obligations of the Client’s president to his ex-wife, to pay sham-rent in the president’s home, and to pay for the president’s personal time share property.  Despite nearly overwhelming red flags in the payment review process, the Broker-Dealer approved the payments. 

A December 26, 2013 Exchange Act Release indicates that the Broker-Dealer and the SEC agreed to settle the matter, with the Broker-Dealer paying about $800,000 in penalties and agreeing to a number of undertakings.  Nevertheless, the Exchange Act Release constitutes an administrative order relating to conduct prohibited by Rule 506(d).

On the same day that the Exchange Act Release was made public, the Broker-Dealer requested by letter, and the SEC granted, a waiver from the disqualification from future reliance on Regulation D.  Since all of this happened on December 26, 2013, the waiver was likely a part of the settlement discussions between the Broker-Dealer and the SEC.

The reasons for the granting of the waiver include:

  • The conduct alleged to have occurred did not relate to a Regulation D offering and allegedly occurred more than three years ago;
  • Pursuant to the settlement agreement, the Broker-Dealer would engage a consultant to review the relevant soft dollar policies and procedures, under SEC supervision, and the Broker-Dealer would agree to adopt all changes recommended by the consultant;
  • Barring the broker-dealer from participation in Regulation D offerings would have an adverse effect on third parties that rely on the Broker-Dealer; and
  • For a period of five years, the Broker-Dealer would provide disclosure of the settlement order to purchasers in Regulation D offerings that the Broker-Dealer would have been disqualified from participating in.

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