Tags: Lynch | Higgins | SEC | waiver

House Financial Services Subcommittee Oversees SEC's Corporation Finance — Part II

By    |   Thursday, 31 Jul 2014 08:19 AM

As obtuse and unforthcoming as Keith Higgins, director of the Division of Corporation Finance at the Securities and Exchange Commission (SEC), was during his appearance before the House Financial Services Committee's Subcommittee on Capital Markets and Government Sponsored Enterprises on July 24, at an often contentious oversight hearing chaired by Rep. Scott Garrett, R-N.J., he was helpful and enlightening in response to a tough line of questions from Rep. Stephen Lynch, D-Mass., one of the best-prepared members of the committee on any occasion.

The result was a classic exchange that could be the subject of fruitful study by securities law classes the world over.

The courtly Lynch nearly always begins his questioning by thanking the witness for appearing and helping the committee with its work, and he did it on this occasion. He then asked about an obscure issue — the SEC's policy on granting waivers on sanctions that would otherwise be "automatically" imposed on companies that the so-called Bad Actor rules could disqualify issuers from using the shelf-registration provisions, which are intended to cut red tape for issuers deemed to be "well-known seasoned issuers" (WKSIs — pronounced "wicksies").

Lynch noted that 30 companies have received such waivers since 2010, and 29 of them have been very large financial institutions and broker-dealers. He cited the case of Royal Bank of Scotland, which was accused of manipulating the LIBOR benchmark interest rate, which he charged "affects $350 trillion in derivatives, harming millions of Americans." One of the SEC's Commissioners, Kara Stein, dissented in the granting of the waiver. Normally these waivers are granted by Higgins' division without any consideration by the Commission.

Lynch added that 22 waivers went to a single company. He suggested that RBS should have been subjected to the sanction rather than granted a waiver. In his courtly manner, he invited Higgins to "persuade me that I'm wrong here."

What is classic about Higgins' response is that first he assured the congressman, using Orwellian language, that the sanction is "automatic." (Of course, if it's "automatic," why is it waived.) He argued that the issuer has already been punished by paying a fine, and a waiver of the WKSI sanction can be granted "for good cause shown."

Lynch objected, "So you pay your way out of it. It's being paid by the investors."

Higgins suggested that the violation might have been unrelated to the quality of disclosure by the issuer. Lynch countered that when there are multiple violations, "at some point it becomes a pattern or practice."

Higgins proceeded to describe the process by which a company obtains a waiver by a process of interaction with the SEC staff.

One can discern that this process is highly lawyered, a fact demonstrated when Rep. Randy Hultgren, R-Ill., came to the defense of the convoluted, disturbing process Higgins described.

As theater the hearing deserves at least 3 gavels.

(Archived video, the staff memorandum and witness testimony can be found here.)

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Robert-Feinberg
As obtuse and unforthcoming as Keith Higgins, director of the SEC's Division of Corporation Finance, was during his appearance before the House Financial Services Committee's Subcommittee on Capital Markets and Government Sponsored Enterprises, he was helpful and enlightening.
Lynch, Higgins, SEC, waiver
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2014-19-31
Thursday, 31 Jul 2014 08:19 AM
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