SEC issues statement on WKSI waivers

By Cydney Posner

The SEC has just posted a statement providing guidance to WKSIs that have become "ineligible issuers" on what constitutes "a showing of good cause" for purposes of obtaining a waiver of ineligible issuer status. WKSI status conveys a number of advantages, such as automatic effectiveness of shelf registrations without prior SEC review. 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. Under Rule 405, the SEC 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."

Because the SEC's focus is on the reliability of the issuer's current and future disclosures, the SEC will consider two threshold matters at the outset in evaluating the appropriateness of granting a waiver. First, does the violation involve the issuer's own disclosures about itself (more likely to cast doubt on the issuer's reliability)? Second, is the violation scienter-based? If the anti-fraud violation does not involve the issuer's own disclosures, "a waiver request would likely be granted, even if the anti-fraud violation is scienter-based." On the other hand, 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 stems from issuer disclosures but is not scienter-based, the SEC will consider the following additional factors:

• Remedial steps taken by the issuer to prevent a recurrence of the misconduct, such as 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.
• Seriousness, pervasiveness and timing of the misconduct, such as the culpability of individuals and the age of the misconduct, level of authority of culpable individuals, patterns of misconduct, culture or tone at the top demonstrating a lack of commitment to good disclosure and changes in personnel.
• Impact on the issuer If the waiver request Is denied, such as whether the loss of WKSI status would be a disproportionate hardship in light of the nature of the issuer's misconduct and 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.

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