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SEC Commissioner Kara M. Stein gave a speech where she described a recently granted Rule 506 bad actor waiver.  According to Ms. Stein, “The waiver was for a limited time, and only if certain conditions were met, creating essentially a probationary period for the firm with a right to reapply after a second showing of good cause.  And the conditions are important.  For example, the recent case included a review by an independent compliance consultant, and a document signed by the principal executive or principal legal officer when the consultant’s recommendations have been implemented.  These conditions will focus and empower management to change behavior throughout the corporate culture.”

The waiver described is a departure from plain vanilla waivers granted in the past without any conditions.  I never considered those waivers a wrist slap because the bad conduct was appropriately sanctioned in the relevant proceeding and often the waiver is necessary for a normally law abiding entity to continue to do business.

Some may have surmised that the waiver Ms. Stein was referring to was an outlier, because it was rumored the SEC was deadlocked because one Commissioner was recused.  So perhaps conditions were piled on to avoid deadlock.

But Ms. Stein doesn’t see it as a one-time thing but as a new model.  According to Ms. Stein “This approach represents a breakthrough in the Commission’s method of handling waivers, and I hope to see more of this and other thoughtful approaches in the future.”  She also remarked “Each waiver request should receive an individualized, detailed, and careful analysis based on all of the relevant facts and the particular waiver policy.”

Ms. Stein also noted  “Our waiver policies should be clear and public.  Both companies and investors are entitled to know when a firm or individual may, for good cause, be allowed to avoid disqualification.” With that we can all agree.


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