## Facts

- The United States District Court for the Western District of North Carolina entered a final judgment permanently enjoining Bank of America, N.A. and Merrill Lynch, Pierce, Fenner & Smith Inc. from violating Securities Act provisions, including Sections 17(a)(2), 17(a)(3), and 5(b)(1).
- The injunction constituted a “disqualifying event” under Securities Act Rule 506(d)(1)(ii), which would have disqualified the respondents and certain related persons from relying on the Rule 506 private-offering exemption in Regulation D for a specified period absent relief.
- Before entry of the judgment, the respondents requested that the SEC, under Rule 506(d)(2)(ii), grant a waiver from the Rule 506(d) disqualification based on “good cause” and a determination that denial of the exemption was not necessary under the circumstances.
- The SEC considered the request as an administrative order focused on collateral consequences of the injunction (continued eligibility to use Rule 506), rather than the merits of the underlying enforcement allegations.
- The SEC tied any waiver to extensive conditions, including retention of an independent consultant to review Rule 506 policies and procedures across the respondents and specified subsidiaries, testing of a statistically valid random sample of Rule 506 transactions, and implementation of recommended remedial steps within set deadlines.
- The order required structured reporting (a preliminary report and a final report), certifications to the SEC staff, limits on the respondents’ ability to terminate the consultant without staff approval, and independence restrictions designed to prevent conflicts during and after the engagement.

## Issues

1. Whether the SEC should grant Bank of America, N.A. and Merrill Lynch, Pierce, Fenner & Smith Inc. a waiver under Rule 506(d)(2)(ii) from the Rule 506(d)(1)(ii) disqualification triggered by the federal court injunction.
2. If a waiver is granted, what conditions are appropriate to address the risk that gave rise to the disqualifying event and to support investor protection while permitting continued reliance on Rule 506.

## Decision

- The SEC determined that “good cause” had been shown under Rule 506(d)(2)(ii) and that, under the circumstances, it was not necessary to deny the Rule 506 exemption.
- The SEC granted the respondents a waiver from Rule 506(d)(1)(ii) disqualification for a period of 30 months resulting from entry of the judgment.
- The waiver was conditioned on detailed undertakings, including: retaining a qualified independent consultant acceptable to SEC staff; providing full access to files, records, and personnel; having the consultant conduct a comprehensive review and statistically valid transaction testing; implementing all consultant recommendations (subject to a defined process for proposing alternatives); and submitting certifications and reports to SEC staff.
- The order contemplated that, after completion of the required steps and receipt of the consultant’s final report, the respondents could apply for additional waiver relief for the remaining portion of the disqualification period not covered by the initial 30-month waiver.

## Legal Principles

- A court injunction entered in an SEC enforcement action for violations of specified Securities Act provisions can trigger automatic “bad actor” disqualification under Rule 506(d)(1)(ii) of Regulation D.
- Under Rule 506(d)(2)(ii), the SEC may grant a waiver from disqualification upon a showing of good cause if the SEC determines that, in the circumstances, it is not necessary that the exemption be denied.
- The SEC may condition a Rule 506(d) waiver on undertakings that require third-party review of Rule 506-related controls, transaction testing, timely corrective action, and reporting and certification to the SEC staff.
- The SEC may require independence safeguards for the consultant (including limits on future relationships and restrictions on termination) to support objectivity in the review and reporting process.
- A Rule 506(d) waiver may be time-limited and structured so that further relief depends on completion and verification of ordered remedial steps.

## Conclusion

The SEC issued an order granting Bank of America, N.A. and Merrill Lynch a conditional, 30-month waiver from Rule 506(d)(1)(ii) disqualification triggered by a federal injunction, finding good cause under Rule 506(d)(2)(ii) and requiring an independent consultant-led review, transaction testing, implementation of recommended corrective measures, and reporting and certifications as conditions of continued Rule 506 eligibility.


In the Matter of Bank of America, N.A. and Merrill Lynch, Pierce, Fenner & Smith, Inc., S.E.C. Rel. No. 9421 (2014)