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Too Big to Bar?

SEC Commissioner Kara Stein dissented from Commission’s decision to overturn the automatic disqualification of the Royal Bank of Scotland Group (RBS) from eligibility as a “Well-Known Seasoned Issuer” (WKSI).  RBS was automatically disqualified from eligibility for status as a WKSI due to the criminal conviction of one of its subsidiaries for its role in manipulating LIBOR.  In her dissent, Commissioner Stein questioned whether the Commission’s action would result in a new policy of the Commission “that some firms are just too big to bar.”  She acknowledged that the SEC may need better tools to regulate the markets it oversees, but queried whether the Commission was using the tools it did have correctly and fairly.  She expressed concern that waivers are disproportionately granted to large firms when “size and complexity should not insulate them from the same regulatory consequences that other issuers must bear.” 

She also stated that the facts of the RBS case weighed against granting a waiver following the Division of Corporate Finance’s guidelines for WKSI waivers including the egregious nature of the criminal conduct, the duration and extent of misconduct, and the fact that RBS did not offer any evidence to indicate that would “show any significant impact from loss of WKSI status.”  She was also unconvinced that the remedial steps taken by RBS should be weighed in favor of granting a waiver.  Finally, she found that the misconduct in question was “directly related to disclosure.”  She concluded:

We have a rule that confers a special benefit to issuers that have a good track record.  And we have a rule that calls for automatically rescinding that benefit when the issuer misbehaves.  Here, the Commission waived that common sense rule despite egregious criminal conduct.  RBS failed to justify why we should do so.  In granting this waiver, I believe the Commission has strayed from its mission, and strayed from a careful and prudent course.  Accordingly, I cannot and do not support the Commission’s order.

In a separate statement, Commissioner Gallagher also discussed WKSI waivers.  He noted the tension between the Division of Corporate Finance’s policy of granting a waiver if the misconduct does not affect current or future disclosure with the fact “that WKSI status is a privilege, and disqualification for bad actions is an appropriate punishment for those actions.”  Commissioner Gallagher was troubled by the punishment focused waiver review, however.  He stated that the misconduct is “appropriately punished through the underlying criminal or civil enforcement process.”  In addition, he found this approach to be “constitutionally dubious” because if the disqualification is punitive, it should follow an administrative proceeding “including notice and an opportunity to be heard.”  Finally, rather than harming those who committed the misconduct, Commissioner Gallagher is concerned that the loss of WKSI status harms a company’s shareholders.  He concluded by stating that disqualification is justified “in circumstances where the issuer’s financial reporting cannot be trusted,” and that “refusing to grant a waiver is not a step that we should take lightly.”