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Bad Actor Disqualifications Are Not Sanction Enhancements

By | February 14, 2015

SEC Commissioner Daniel M. Gallagher delivered a speech where he considered the role of bad actor disqualifications in the context of the SEC’s enforcement initiatives.  According to the Commissioner, the purpose of bad actor disqualifications can be viewed either as: (i) to reduce  the likelihood of future fraud, or (ii) to enhance the SEC’s ability to punish serious misconduct beyond the statutory and judicial limits otherwise imposed on the SEC’s enforcement remedies, which Commissioner Gallagher refers to as sanction enhancement.

Commissioner Gallagher  was referring to the practice recently followed by the SEC Enforcement Division of not allowing respondents to condition settlements on the granting of waivers for bad actor disqualifications.  The Commissioner disagrees with the practice because automatic disqualifications are, in fact, blunt tools that were intended to serve a purpose distinct from enforcement sanctions.  He believes, as do I, that automatic disqualifications are not, and were never intended to be, either remedial or punitive in nature, and therefore historically have been handled outside of the sanctioning process.  Treating the waiver consideration process like the enforcement sanctioning process effectively, and inappropriately, conflates automatic disqualifications with remedial and punitive sanctions.

The Commissioner noted if a disqualification is now a sanction, then the waivers for bad actor disqualifications must be part of the settlement negotiations.  Settlement should bring finality, and he cannot fulfill his duty as a Commissioner to cast a vote in favor of a recommendation without the ability to accurately assess what punishments will be meted out to a respondent as a consequence of his action, and whether those punishments are just given the nature of the violation.

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