WASHINGTON, April 29 (Reuters) - U.S. Securities and Exchange Commission member Daniel Gallagher on Tuesday waded into a contentious debate at the agency over how it grants certain regulatory waivers to public companies that break the law.
In a statement, the Republican SEC commissioner sharply criticized some language that was quietly added on April 24 to a policy governing how the SEC doles out waivers to companies with criminal convictions or civil fraud liability.
Such waivers permit companies to retain their regulatory status as a "well-known seasoned issuer", or WKSI - a tag that allows companies to raise money immediately through securities offerings without having to wait for SEC approval first.
The updated policy raises the bar for companies with criminal convictions or intentional fraud liability to demonstrate "good cause" for why the SEC should grant them a waiver to retain their WKSI status.
In his statement, Gallagher called this change "troubling" because it takes a "punishment-based" approach that could strip a company of its WKSI status, even if the underlying bad conduct did not affect the company's financial statements.
"Refusing to grant a waiver is not a step that we should take lightly," he wrote.
The SEC's new policy came about in the wake of a internal dispute among the SEC's five commissioners over whether to grant a special WKSI waiver to the Royal Bank of Scotland Group Plc .
On Monday, Gallagher's Democratic colleague, Kara Stein, issued a statement lambasting the SEC for giving the bank the waiver, even though one of its units previously pleaded guilty to charges related to manipulation of the Libor benchmark interest rate.
The waiver was approved in a narrow 3-2 vote, with Stein and SEC Democratic Commissioner Luis Aguilar dissenting.
In her public dissent, Stein said she was dismayed that the SEC routinely grants waivers to big banks that are repeat offenders, issuing at least 30 WKSI waivers since 2010.
"I fear that the Commission's action to waive our own automatic disqualification provisions arising from RBS's criminal misconduct may have enshrined a new policy - that some firms are just too big to bar," Stein wrote on Monday.
Gallagher's statement did not specifically cite her dissent, but its content appeared to counter many of her claims.
In it, he questioned the idea of revoking WKSI waivers to punish bad actors, noting that the criminal and civil enforcement process is meant to address the underlying misconduct.
"The question of whether to grant a WKSI waiver is, or at least used to be, a dispassionate analysis, undertaken by the technical experts in the Division of Corporation Finance, separate and apart from the enforcement process," he said.
He also said it raises constitutional due process concerns because automatically revoking a company's WKSI status would not afford them a chance to contest the decision in the agency's administrative court.
"We must have a robust waiver program to appropriately distinguish between cases when disqualification is and is not justified. Disqualification is justified...in circumstances where the issuer's financial reporting cannot be trusted," he added.
The debate over how the agency should review WKSI waivers is starting to spill over onto Capitol Hill.
Already, Massachusetts Democratic Senator Elizabeth Warren has weighed in on the matter, saying in a statement that granting automatic WKSI waivers to lawbreakers "sends a dangerous signal."
"Big corporations should not get special treatment when they break the law, and the SEC needs to learn from its past failures in oversight," Warren added.
In addition, SEC Chair Mary Jo White was questioned about the WKSI waiver spat during a hearing before a U.S. House of Representatives panel on Tuesday.
White declined to specifically comment on the RBS decision, but told lawmakers that the SEC applies policies concerning WKSI waivers "faithfully and vigorously."
SEC spokesman John Nester declined to comment specifically on Gallagher's remarks, which were issued after the hearing concluded. (Reporting by Sarah N. Lynch; Editing by Ken Wills)