U.S. Securities & Exchange Commission
SEC Seal
Home | Previous Page
U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Opening Statement at SEC Open Meeting: Item 1 — Felons and Bad Actors


Chairman Mary L. Schapiro

U.S. Securities and Exchange Commission

Washington, D.C.
May 25, 2011

Good morning. This is an Open Meeting of the Securities and Exchange Commission on May 25, 2011.

Today, the Commission will consider two actions.

First, we will consider proposing a rule that would deny certain securities offerings from qualifying for an exemption from registration if the offerings involve certain “felons and other bad actors.”

And second, we will consider adopting a rule to create a whistleblower program that would reward individuals who provide the agency with high-quality tips leading to successful enforcement actions.

Both sets of rules are required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

* * *

We begin with the “bad actor” rule — a rule that would deny securities offerings the benefit of one of the most commonly used exemptions from SEC registration if a felon or other bad actor is involved in the offering.

To understand the rule, one first must appreciate that federal law generally requires securities offerings to be registered with the SEC — unless of course an exemption is available.

Regulation D of the Securities Act of 1933 provides three exemptive rules that a company can use to avoid having to register an offering.

The most widely used provision of Regulation D is Rule 506. More than 90 percent of all offerings made under Regulation D are done under that rule.

If an offering qualifies for Rule 506, issuers can raise an unlimited amount of capital from an unlimited number of “accredited investors” and up to 35 non-accredited investors.

Section 926 of the Dodd-Frank Act requires the Commission to adopt rules that would make this safe harbor unavailable if a “felon and other ‘bad actor’” is involved in the offering.

When the section was added, Senator Dodd noted that the disqualification provision would “reduce the danger of fraud in private placements,” and expressed his belief that it would “protect investors from … unscrupulous persons while encouraging capital formation.” One important consequence of this change is that private offerings that include felons and other bad actors would no longer automatically qualify for state securities law preemption.

The proposal before us would advance these goals by implementing the requirements of the Act in a balanced and tailored way.

The proposed rule would apply to a wide swath of persons, including issuers; directors and officers of the issuer; and, placement agents. Bad actor disqualification would apply if any of them has been convicted of — or is subject to court or administrative sanctions for — securities fraud or other specified violations.

Meredith Cross and her Division of Corporation Finance staff will speak in greater detail about the proposed rule, but I would like to address one important aspect. Under the proposal, the new rules would take account of all disqualifying events, regardless of whether they occurred before or after the new rules come into effect.

I believe that taking into account disqualifying events that occurred prior to the effective date of the new rules fulfills Congress’ mandate to protect investors from felons and other bad actors. Nonetheless, I recognize that there may be concerns about the effects of applying the proposed rules to pre-existing convictions and sanctions.

That is why we are seeking comment on this approach.

We also are seeking comment on whether, and if so how, we should make these “bad actor” provisions uniform with the “bad actor” provisions contained in other Securities Act exemptions.

Further, we are seeking comment on whether to extend the proposed bad actor provision to all offerings under Regulation D, not just those under Rule 506.

Through such uniformity, we could potentially make our exemptive rules easier to understand and apply.

At the same time, we are mindful of the need to consider the relative costs and benefits of such an approach. For that reason, we are also very interested in public comment on the many questions posed in the release on this topic.

Before I turn to Meredith Cross, the Director of the Division of Corporation Finance, I would like to thank her and other staff including Lona Nallengara, Mauri Osheroff, Gerry Laporte, Karen Wiedemann, Johanna Losert and Jennifer Zepralka from the Division of Corporation Finance for their hard work in preparing the recommendations before us.

I also appreciate the contributions from Rich Levine, David Fredrickson and Bob Bagnall from the Office of the General Counsel; Emre Carr, Scott Bauguess and Ayla Kayhan from the Division of Risk, Strategy, and Financial Innovation; Hunter Jones, Barbara Chretien-Dar, Amy Miller and Martin Kimel from the Division of Investment Management; Lourdes Gonzalez, Daniel Fisher and Robert Cushmac from the Division of Trading and Markets; and Charlotte Buford and Laurita Finch from the Division of Enforcement.

And thank you to my colleagues on the Commission and to our counsels.

Now, I turn the meeting over to Meredith to hear more about the Division’s recommendations.



Modified: 05/25/2011