In the News: Recent Developments

May 22, 2015

SEC Commissioner Stein Says Overlooking Bank Criminal Activity Will Lead To Further Criminal Activity

By Mark Melin (ValueWalk)

Laws and regulations are only as effective as the enforcement efforts associated with them. Securities and Exchange Commissioner Kara Stein, when looking at recent waivers given to the largest banks for criminal violations in a foreign exchange manipulation scheme, says that action taken is “largely symbolic” and could lead to further illegal behavior.

Stein: Ignoring pattern of misbehavior “poses risks to investors and the American public”

It’s not just that the banks violated the law once, she argued yesterday, it is that a pattern of behavior is being ignored. “Allowing these institutions to continue business as usual, after multiple and serious regulatory and criminal violations, poses risks to investors and the American public that are being ignored,” she said in a recent dissent after the SEC granted “waivers” to the major banks for their most recent criminal mis-adventures.

Granting a bank waivers allows them to continuing business operations in certain lucrative areas that typically bar corporations with a criminal conviction from operating. As Bloomberg’s Matt Levine noted, this safe harbor allows banks to remain “well-known seasoned issuers,” or WKSI, providing uninterrupted participation in the somewhat exclusive primary offering of securities.

Stein, a consistent law and order advocate for equal enforcement of regulations, observed that “in the face of the FX criminal action,” a majority of the Commission pardoned bank criminal behavior yet again. This will be the 23rd time the SEC has granted waivers to the five banks who admitted criminal guilt in the past nine years. For UBS AG (NYSE:UBS) this is the seventh waiver since 2008, JPMorgan Chase & Co. (NYSE:JPM) is on strike six while RBS and Barclays PLC (NYSE:BCS) (LON:BARC) have each been given three previous waivers in the recent past.

Not one-off incidents, and those who profit from criminal activity keep their bonuses

“These are not one-off incidents,” Joseph Fichera, CEO of Saber Partners, said in a Wall Street Unfiltered interview to be broadcast next week. He noted the board of directors at major banks seem to treat the criminal incidents as isolated, non-recurring items, but in fact they are much more. “To the banks this is similar to paying a fine — like a parking ticket or speeding ticket.”

Fichera has been speaking with New York Federal Reserve President William Dudley and outlined a proposal to handle big bank misconduct in a New York Times opinion piece that received praise in The Wall Street Journal from former Fed Vice Chairman Alan Blinder. The plan ensures that losses from criminal fines are pushed onto the P&L statements of those business managers whose divisions profited from the criminal activity. “Banking has changed,” he said, observations that come from working deep inside investment banking and watching it change over the past decade. “You’ll never make the penalty big enough to discourage repeat behavior. We need new tools to bolster financial penalties and it has to be something easily understood and to implement…and that’s the point system.” Fichera advocates a system where bank criminal wrongdoing accumulates negative points. Once a bank reaches a certain point level, they no longer receive waivers for their criminal activity, much like a driver losing a license for repeat offenses. “Let the market take care of the problem.”

Speaking at The Big Picture conference in New York yesterday, former regulator and senior fellow at the New York University School of Law Neil Barofsky said the problem was not the law itself, but the regulators enforcing the law. “We need to break up the banks…[but] we need to do something fundamental on our regulator side […] There’s a big pot of gold at the end of the Wall Street rainbow as you go through the revolving door,” the author of Bailout said. “I think they should use a meat cleaver not a scalpel” to solve the problem.

Stein: SEC has the tools and responsibility to enforce the law “yet we refuse to use them”

Stein concurs on the issue of continual misbehavior that goes unpunished. “It is troubling enough to consistently grant waivers for criminal misconduct. It is an order of magnitude more troubling to refuse to enforce our own explicit requirements for such waivers,” she said, noting the SEC has the tools and responsibility to enforce the law. “Repeated criminal misconduct should lead to revocations of prior waivers, not the granting of a whole new set of waivers. We have the tools… and the responsibility… to create meaningful cultural shifts, yet we refuse to use them.”

It is perplexing to many inside the financial services industry why “a few bad apples” are repeatedly allowed to soil the reputation and integrity of major banks and their employees, most of whom follow the rules, as well as giving the entire financial services industry a black eye. Stein took it a step further, saying that issuing such waivers might encourage similar behavior in the future. “I am troubled by repeated instances of noncompliance at these global financial institutions, which may be indicative of a continuing culture that does not adequately support legal and ethical behavior.” She said the SEC issuing yet another waiver was equal “to (removing) the consequences of a criminal conviction, consequences that may actually positively contribute to a firm’s compliance and conduct going forward.”

Read Stein’s full statement here

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