Sen. Brown Urges SEC Chair to Stop Granting Waivers From Securities Law to Banks With Civil or Criminal Settlements or Enforcement Actions

Brown Joins Sitting SEC Commissioner in Questioning if Certain Institutions are “Too Big to Bar” At Her Confirmation Hearing, Brown Pressed SEC Chair Mary Jo White on Practice of Granting Waivers to Financial Institutions with Civil or Criminal Settlements or Enforcement Actions; Since Then, SEC Continues to Grant Waivers, Failing to Revoke Privileges Even from a Bank that Pleaded Guilty of Criminal Wrongdoing

WASHINGTON, D.C. –U.S. Sen. Sherrod Brown, chairman of the Banking Subcommittee on Financial Institutions and Consumer Protection, today urged the Securities and Exchange Commission (SEC) to revoke privileges – that provide exemptions from securities law – to financial institutions subject to civil or criminal settlements or enforcement actions. Brown raised this issue during SEC Chair Mary Jo White’s confirmation hearing and she promised to examine it. Since then, the SEC has continued to allow financial institutions – even one that pleaded guilty of criminal wrongdoing – to maintain privileges. These exemptions from securities law allow large financial institutions to act as investment advisors to mutual funds, and serve as well-known issuers of securities, among other privileges.

“These recent decisions imply that the SEC’s policy appears to make waivers the rule rather than the exception,” Brown wrote in a letter to White. “I hope that the SEC will reconsider and revise a process that has now been questioned by the public, lawmakers, and a sitting SEC Commissioner. Removing privileges enjoyed by large firms will promote better behavior, increase accountability, and demonstrate to the financial markets that certain firms do not enjoy special treatment by virtue of their size.”

Brown cited two waivers granted to foreign banks, including one to a bank that reached a settlement involving criminal liability for manipulating the London Interbank Offering Rate (LIBOR) and another to a foreign bank that entered into a plea agreement stemming from criminal charges of conspiracy to commit tax fraud. The same day that the agreement was announced, the SEC granted the institution two waivers. Brown questioned whether the size of these institutions – banks with $2.8 trillion and nearly $1 trillion in assets, respectively – made them “Too Big to Bar,” a question first raised by one of SEC’s own commissioners, Kara Stein.

A full copy of Brown’s letter to White can be found below: 

June 13, 2014

The Honorable Mary Jo White

Chair

Securities and Exchange Commission

100 F Street, N.E.

Washington, D.C.  20549

Dear Chair White:

As you know, the Securities and Exchange Commission’s (SEC) failure to revoke exemptions from certain securities laws and regulations from financial institutions subject to civil or criminal settlements or enforcement actions has been at issue for years. According to one report, for more than a decade, the three largest U.S. banks had a total of 27 fraud cases brought against them and received 86 waivers.[1] Of the three banks, only one had any of its privileges revoked.

These troubling reports prompted me to ask your views on this matter as part of your March 2013 nomination hearing. For your convenience, I have attached that question and your response, i.e., that you would “examine the issue[.]” I am concerned that the SEC’s policy appears to have regressed since then, as evidenced by waivers that the SEC granted in two recent high-profile cases.

In April 2014, the SEC granted a foreign bank, with more than $2.8 trillion in total assets, a waiver to continue operating as a Well-Known Seasoned Issuer (WKSI) after reaching a settlement involving criminal liability for manipulating the London Interbank Offering Rate (LIBOR).[2] Then, in early May, a foreign bank with nearly $1 trillion in assets entered into a plea agreement stemming from criminal charges of conspiracy to commit tax fraud. The same day that the agreement was announced, the SEC granted the institution two waivers allowing it to temporarily continue serving as an investment adviser under section 9(a) of the Investment Company Act, and allowing its existing funds to retain an exemption under Rule 506 of Regulation D.[3] While the SEC has yet to waive other provisions of law, [4] it appears likely that this institution, which has admitted to a criminal violation, could be granted such additional waivers as a matter of course.

SEC Commissioner Kara Stein questioned the SEC’s April decision to grant the WKSI waiver. I share Commissioner Stein’s fear that the SEC’s waiver in this recent, LIBOR-related case “may have enshrined a new policy—that some firms are just too big to bar.” However, I do not believe that this policy is new—indeed, it appears that these recent actions are an outgrowth of a policy that has existed for some time.

I request that you provide responses to the following questions about the SEC’s practices and procedures related to waivers of securities laws for certain issuers:

  1. Please provide a complete list of the waiver provisions available to financial institutions under U.S. securities law.
  2. Does the SEC have written policies and procedures guiding its decisions to grant waivers for each provision? What steps has the SEC taken to ensure uniformity and consistency in the decision to approve or deny a request for a waiver?
  3.  Having been SEC Chair for more than a year, have you examined the policies and decisions surrounding waivers of securities laws? If so, what determinations have you made about the appropriateness of the SEC’s policies? What changes, if any, have you made or do you intend to make? If you have not or do not intend to make any changes to the waiver process, why not?

These recent decisions imply that the SEC’s policy appears to make waivers the rule rather than the exception. I hope that the SEC will reconsider and revise a process that has now been questioned by the public, lawmakers, and a sitting SEC Commissioner. Removing privileges enjoyed by large firms will promote better behavior, increase accountability, and demonstrate to the financial markets that certain firms do not enjoy special treatment by virtue of their size.

Thank you for considering my views on this matter and I look forward to your response.

Sincerely,


Sherrod Brown

United States Senator


Enclosure

 

Cc: The Honorable Luis Aguilar

The Honorable Daniel Gallagher

The Honorable Kara Stein

The Honorable Michael Piwowar

###



[1] See Edward Wyatt, S.E.C. Is Avoiding Tough Sanctions for Large Banks, N.Y. Times, Feb. 3, 2012 available at http://www.nytimes.com/2012/02/03/business/sec-is-avoiding-tough-sanctions-for-large-banks.html.

[2] See Order Under Rule 405 of the Securities Act of 1933, Granting a Waiver From Being an Ineligible Issuer, In the Matter of Royal Bank of Scotland Group, plc, Apr. 25, 2014; http://www.sec.gov/rules/other/2014/33-9578.pdf. Notably, SEC Commissioner Kara Stein observed that, for the first time, three banks have been given WKSI waivers after being found criminally liable for violations of U.S. securities laws.

[3] See Temporary Order and Notice of Application For a Permanent Order Under Section 9(C) of the Investment Company Act of 1940, Credit Suisse Asset Management, LLC, et al., May 19, 2014 available at http://www.sec.gov/rules/other/2014/ic-31051.pdf; see also Order Under Rule 506(D) of the Securities Act of 1933 Granting a Waiver of the Rule 506(D)(1)(I) Disqualification Provision, In the Matter of Certain Current Funds, Third Party Issuers and Portfolio Companies affiliated with Credit Suisse AG, May 19, 2014 available at http://www.sec.gov/rules/other/2014/33-9589.pdf. The latter waiver is particularly troubling both because Congress recently required the SEC to disqualify “bad actors” from Regulation D offerings, see P.L. No. 111-203 at §926 (2010), and because the Jumpstart Our Business Startups (JOBS) Act recently expanded the ability of funds to engage in general solicitation under Regulation D, see P.L. No. 112-106 at § 201 (2012). This waiver appears to be inconsistent with Congress’s actions in 2010, and to leave more investors vulnerable as a result of the changes made in 2012.

[4] Although Commissioner Stein’s recent statement identifies seven examples of provisions of law under which waivers can be claimed, I am not aware of any exhaustive list of such provisions. See Commissioner Kara M. Stein, Dissenting Statement in the Matter of The Royal Bank of Scotland Group, plc, Regarding Order Under Rule 405 of the Securities Act of 1933, Granting a Waiver From Being an Ineligible Issuer, Apr. 28, 2014 at n.6, available at http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370541670244#_ftn6

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