The U.S. Securities and Exchange Commission’s Division of Corporation Finance (“Corp Fin”) recently updated its guidance concerning how it will evaluate requests for waivers by Well Known Seasoned Issuers (“WKSI”) who would otherwise become ineligible to be WKSIs under Rule 405 of the Securities Act.. According to Corp Fin, this update is more of a refinement than it is a change to the existing policy.
WKSIs have benefits such as the ability to sell their securities through shelf registration statements that become effective upon filing rather than after Corp Fin review and declaration of effectiveness. WKSIs cannot be “ineligible issuers” under Rule 405. A WKSI could lose its status by becoming an “ineligible issuer” under Rule 405 as the result of certain activities, such as violating the anti-fraud provisions of the federal securities laws or a criminal conviction. A WKSI can request that the Commission waive the ineligible issuer status. The Commission has delegated that authority to Corp Fin. An issuer in need of a WKSI waiver must send a request letter to Corp Fin addressing the considerations described below. The issuer bears the burden of establishing that a waiver is justified. Corp Fin may grant such a waiver if it concludes that the waiver is consistent with the public interest and protection of investors.
In July 2011, Corp Fin issued guidance on what it considered “good cause” to issue such waivers. On March 12, 2014, Corp Fin issued a revised statement regarding its evaluation of these waiver requests. The revised statement refines how the inquiry is articulated and focuses more sharply on who within the organization knew of the offending conduct, the level within the organization of those personnel, and whether red flags were missed or ignored. In addition, the new guidance considers subsidiaries’ disclosures for the first time.
According to the recent guidance, Corp Fin will consider whether the violation involved a criminal conviction or scienter-based violation; and the nature of the violation or conviction and whether it involved disclosure for which the issuer or its subsidiaries was responsible, or otherwise calls into question the ability of the issuer to produce reliable disclosures. The following factors also will be considered by Corp Fin, with no single factor being determinative: (1) who was responsible for the conduct and the duration of the conduct; (2) what remedial steps have been taken; and (3) what would be the impact of a denial of the waiver request. As to the responsibility factor, Corp Fin will look at the level of personnel involved, whether “red flags” existed, whether such warning signs were ignored, and whether the conduct was recurring or isolated. Corp Fin will be looking at the “tone at the top” and how that affected the conduct. Corp Fin will also look at the remedial steps, if any, that have been taken and how they relate specifically to the issuer’s ability to produce reliable disclosures. Finally, Corp Fin will consider whether the issuer’s loss of WKSI status would be disproportionate to the conduct and how such loss would affect the markets as a whole.