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U.S. Securities and Exchange Commission

PLEASE NOTE THIS POLICY STATEMENT HAS BEEN SUPERSEDED BY http://www.sec.gov/divisions/corpfin/guidance/wksi-waivers-interp-031214.htm

Division of Corporation Finance

Statement on Well-Known Seasoned Issuer Waivers

July 8, 2011

Background

In 2005’s Securities Offering Reform release,1 the Commission adopted various modifications to the registration, communications and offering processes under the Securities Act, including creating a new category of issuer – the “well-known seasoned issuer” (“WKSI”)2 – for the most widely followed issuers representing the most significant amount of capital raised and traded in the U.S. WKSIs benefit to the greatest degree from the communications and registration flexibilities provided in Securities Offering Reform. Most notably, WKSIs can register their securities offerings on shelf registration statements that become effective automatically upon filing. As a result, the Division does not have the opportunity to review or comment on these registration statements before sales are made.

Issuers that have violated the anti-fraud provisions of the federal securities laws, or that are the subject of a judicial or administrative decree or order (including a settled claim or order) prohibiting certain conduct or activities regarding the anti-fraud provisions of the federal securities laws, become “ineligible issuers” and therefore do not have WKSI status for three years.3 In determining to exclude these issuers from WKSI status, the Commission viewed them as having disclosure that would be less reliable than the disclosure of other issuers and thus “unsuited for short-form registration or ineligible for disclosure-related relief.”4

Under Securities Act Rule 405, the Commission may grant waivers of ineligible issuer status “upon a showing of good cause, that it is not necessary under the circumstances that the issuer be considered an ineligible issuer.” Authority to grant waivers from ineligible issuer status has been delegated by the Commission to the Director of the Division of Corporation Finance.5

We are issuing this statement in order to provide guidance on what constitutes “a showing of good cause” for purposes of an ineligible issuer waiver request, in order to provide clarity, consistency and greater certainty in how we will exercise our delegated waiver authority. This statement outlines the framework we will follow in considering whether to grant an ineligible issuer waiver.

Framework for Determining Waivers

We will consider the factors outlined below when we evaluate the appropriateness of granting a waiver from ineligible issuer status. A waiver, which could include conditions or undertakings, may be granted if a review of all of the facts and circumstances in light of the factors outlined below leads us to conclude that granting a waiver would be consistent with the public interest and the protection of investors.

Nature of the Anti-fraud Violation

In determining whether a waiver should be granted, we will consider two threshold factors relating to the nature of the anti-fraud violation: first, whether the anti-fraud violation stems from the issuer’s own disclosures about itself; and second, whether the anti-fraud violation is scienter based.6 Our focus is on the reliability of the issuer’s current and future disclosures. If the anti-fraud violation does not involve the issuer’s own disclosures – for example, the issuer is a broker-dealer, and the anti-fraud violation stems from its broker-dealer activity, not from material misstatements or omissions in its own filings – then it may be less likely to cast doubt on the reliability of the issuer’s current and future disclosures. In this case, a waiver request would likely be granted, even if the anti-fraud violation is scienter-based.7

On the other hand, if the anti-fraud violation involves the issuer’s own disclosures, then it more directly raises questions about the reliability of the issuer’s current and future disclosures. In addition, if the issuer’s conduct in making material misstatements or omissions was intentional or reckless, then the likelihood of its future disclosures not being reliable may be greater than if the issuer’s conduct was not intentional or reckless. Consequently, absent exceptional circumstances, a waiver request involving an anti-fraud violation that is scienter based and stems from the issuer’s own disclosures would likely not be granted. If the anti-fraud violation is not scienter based, then we will consider the request in light of the following additional factors.

Non-Scienter Based Anti-fraud Violation Involving Issuer Disclosure

If the anti-fraud violation is not scienter based and stems from the issuer’s own disclosures, then we will consider factors such as those outlined below in deciding whether to grant the waiver. No single factor is determinative.

  • Remedial Steps Taken by the Issuer. We will consider the remedial measures the issuer has taken to prevent a recurrence of the misconduct, including changes in key personnel, undertakings specifically designed to prevent future fraudulent disclosures, improvements to internal controls and disclosure controls and procedures and disclosures about those improvements. The effectiveness of these actions would help support a conclusion that, despite past violations, the issuer’s disclosures to the markets would be more likely to be reliable in the future.
  • Pervasiveness and Timing of the Misconduct. We will look at the seriousness and pervasiveness of the misconduct by the issuer and its officers, directors and employees, including the culpability of individuals and the age of the misconduct. Fraudulent conduct and disclosures resulting from the actions of a few individuals not in positions of authority or leadership could create fewer questions about the reliability of an issuer’s future disclosures than a pattern or history of misconduct by senior management or a culture or tone at the top demonstrating a lack of commitment to good disclosure. Changes in personnel would also be relevant to this factor. Likewise, older misconduct could create fewer questions about the reliability of an issuer’s future disclosures than more recent misconduct.
  • Impact on the Issuer If the Waiver Request Is Denied. We will weigh the severity of the impact on the issuer if the waiver request is denied against the facts and circumstances of the anti-fraud violation to assess whether the loss of WKSI status would be a disproportionate hardship in light of the nature of the issuer’s misconduct. We will also look at whether the issuer’s loss of WKSI status could have harmful effects for the markets as a whole, in light of the issuer’s significance to the markets and its connectedness to other market participants, in considering whether a waiver would be consistent with the public interest and the protection of investors.

1 See Securities Offering Reform, Securities Act Release No. 8591 (Aug. 3, 2005) [70 FR 44721] (“Securities Offering Reform Release”).

2 Under Securities Act Rule 405, a WKSI is an issuer that meets the registrant requirements of Form S-3 or Form F-3 and either: (1) “as of a date within 60 days of determination date, has a worldwide market value of its outstanding voting and non-voting common equity held by non-affiliates of $700 million or more”; or (2) “as of a date within 60 days of the determination date, has issued in the last three years at least $1 billion aggregate principal amount of non-convertible securities, other than common equity, in primary offerings for cash, not exchange, registered under the [Securities] Act.” In addition, as discussed below, the issuer may not be an ineligible issuer.

3 See Securities Act Rule 405.

4 See Securities Offering Reform Release, 70 FR at 44746.

5 See Rule 30-1(a)(10) of the Rules of Organization and Program Management Governing Delegations of Authority to the Director of the Division of Corporation Finance [17 CFR 200.30-1].

6 The Supreme Court has defined “scienter” as “a mental state embracing intent to deceive, manipulate, or defraud.” See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 n. 2 (1976). In addition, “Every Court of Appeals that has considered the issue has held that a plaintiff may meet the scienter requirement by showing that the defendant acted intentionally or recklessly, though the Circuits differ on the degree of recklessness required.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 319 n.3 (2007) (citing Ottmann v. Hanger Orthopedic Group, Inc., 353 F.3d 338, 343 (4th Cir. 2003) (collecting cases)). Some of the anti-fraud provisions of the federal securities laws are scienter based, including, without limitation: Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; Section 17(a)(1) of the Securities Act; Section 15(c)(1) of the Exchange Act; and Section 206(1) of the Advisers Act. Other anti-fraud provisions of the federal securities law are non-scienter based, including, without limitation: Sections 17(a)(2) and (3) of the Securities Act; Section 14(a) of the Exchange Act and Rule 14a-9 thereunder; Sections 206(2) and 206(4) of the Advisers Act; and Section 34(b) of Investment Company Act.

7 In the past, we have granted ineligible issuer waivers if the anti-fraud violation is not based on the issuer’s own disclosures. See, e.g., Regions Financial Corp. (Sept. 24, 2010), Goldman Sachs Group, Inc. (July 23, 2010) and First Southwest Co. (May 27, 2008). We note that the Commission has similarly granted waivers from the exclusions to the safe-harbor protections for forward-looking statements in Section 27A of the Securities Act and Section 21E of the Exchange Act in cases where the underlying anti-fraud violation is not based on the issuer’s own disclosures. See, e.g., J.P. Morgan Securities Inc., Release No. 33-9080 (Nov. 4, 2009), Investools, Inc., Release No. 33-9090 (Dec. 10, 2009) and Goldman, Sachs & Co., Release No. 33-9130 (July 22, 2010).

 

http://www.sec.gov/divisions/corpfin/guidance/wksi-waivers-interp.htm


Modified: 07/08/2011