Settlement waives rule for 3 banks

Posted: February 3, 2018 at 1:46 a.m.

Three big banks were punished for market manipulation this week -- and tucked into the punishment was a single sentence that could pay big dividends for the banking industry.

Under the 2010 Dodd-Frank financial regulation law, banks that violate financial rules are disqualified from access to a streamlined process for certain types of business they conduct, unless they receive a waiver from federal regulators.

That provision, known as the bad actor rule, was created to make legal settlements with regulators riskier and more financially painful for banks -- an incentive for them to avoid the conduct that precipitates such settlements.

On Monday, the Commodity Futures Trading Commission reached settlements with Deutsche Bank, HSBC and UBS Group for a type of market manipulation called spoofing. The banks collectively paid just under $47 million to settle the civil charges without admitting or denying any wrongdoing.

But while the commission and Justice Department trumpeted their crackdown on market manipulation, the settlements included language that gave all three banks an automatic waiver from the bad actor rule -- drawing sharp criticism from one Securities and Exchange commissioner, a Democrat.

"I am extremely disappointed by the [Commodity Futures Trading Commission's] actions in this case," the commissioner, Kara Stein, said Thursday. "They did not consult with the SEC before injecting themselves into securities markets in which they have little or no expertise. The implications of the [commission's] actions are deeply troubling and may put U.S. investors at risk."

Erica Elliott Richardson, a spokesman for the commission, said granting the waivers lets the agency reach settlements with the banks more quickly. Otherwise, she said, the banks would have wanted to apply for waivers from the bad actor rule before finalizing and announcing the settlement agreements.

Industry observers said the automatic waiver is one of the latest efforts by President Donald Trump's administration to soften regulations on Wall Street.

J.W. Verret, a professor at George Mason University's law school, said the commission's move relieved banks of a burden they never should have faced in the first place.

"Outside of the partisan back and forth and outside of the cheap rhetoric about this issue, the reality is it's very difficult to apply criminal and civil liability concepts for individuals to large multinational institutions," he said. "That's what underlies this whole controversy."

Either way, the change is expected to benefit Wall Street.

"It's very positive for the banks," said Therese Doherty of Mintz Levin, a lawyer who represents financial institutions in regulatory matters.

Representatives of HSBC, Deutsche Bank and UBS declined to comment.

The Securities and Exchange Commission oversees the sale of securities like stocks and bonds. A long-standing rule permits well-known sellers, like the large banks, to bypass an enormous amount of paperwork that normally would be required for new securities sales.

Under the Dodd-Frank law, banks that commit crimes or are punished by regulators for knowingly engaging in misconduct stand to lose the privilege of bypassing the paperwork. The extra work can cost millions of dollars and delay new securities offerings for months or even years, stymieing their clients' attempts to raise money by issuing stocks or bonds.

They can avoid that fate by applying for a waiver from the SEC. Regulators generally agree that the SEC should grant such waivers liberally, because the alternative -- handcuffing the world's biggest banks -- could have a detrimental impact on their large corporate clients, which employ hundreds of thousands of people and generate crucial economic activity.

The waivers used to be granted automatically. But in mid-2015, the commodities trading commission ended the practice. The decision followed public criticism from Stein and Sen. Elizabeth Warren, D-Mass., a leading advocate for tougher regulation of Wall Street, who said the automatic waivers were an unwarranted sop to badly behaving banks.

That change wasn't catastrophic for the banks. It simply meant they had to apply to the SEC for the waivers -- which were always granted.

In December 2016, for example, Goldman Sachs Group agreed to pay $120 million to settle a Commodity Futures Trading Commission case over manipulation of a derivatives benchmark. The agency did not grant an automatic bad actor waiver as part of the settlement. Instead, Goldman had to go to the SEC. The bank's lawyers told the commission that it would be "extremely harmful" to the bank if its market privileges were revoked. The SEC granted Goldman's request for a waiver.

Elliott Richardson said forcing banks to wait for waivers had kept the commission from finalizing settlement agreements. "The SEC's waiver process has taken up to nine months," she said.

Business on 02/03/2018