Delamaide: Making SEC tackle 'bad actors'

WASHINGTON — There are probably a lot of small-time criminals who would like to have a judge as understanding as the nation's top securities regulator, Mary Jo White.

The chair of the Securities and Exchange Commission is hesitant to judge someone as a "bad actor" just because they consistently violate the law.

Under fire from lawmakers and some of her fellow commissioners at the SEC, White has defended the regulator's decision to grant waivers on certain automatic penalties to financial firms even though they pay billions of dollars in fines to settle repeated instances of wrongdoing.

In a speech at Georgetown University earlier this month, she argued somewhat counterintuitively that these automatic penalties, including disqualification from certain ways of raising money, should not be seen as "enforcement remedies."

"Very often, the misconduct at issue in the enforcement case involves a relatively limited number of a firm's employees or a specific business line, and is wholly unrelated to the activities that would be the subject of the disqualification," White said in her speech.

This narrow view of how penalties work seems to be at odds with a consistent pattern of "bad actor" behavior like that racked up, for instance, by Oppenheimer & Co.

In a dissenting statement on a 3-2 vote in January granting a waiver to Oppenheimer after it was fined in connection with anti-money laundering failures, commissioners Kara Stein and Luis Aguilar noted that the firm's 30 regulatory actions over a 10-year period indicate "a wholly failed compliance culture."

"It is difficult to conceive of a better justification for the bad actor disqualification," the two Democratic commissioners wrote, "or a better reason to act with great care and caution in analyzing whether 'good cause' may exist to waive this automatic disqualification."

White's readiness to vote in favor of waivers led Stein last year to make a rare public criticism of her agency and its leadership over a waiver for the Royal Bank of Scotland after its criminal conviction in connection with rigging the international benchmark interest rate LIBOR.

Now, California congresswoman Maxine Waters, the top Democrat on the House Financial Services Committee, is introducing legislation to make this waiver process more transparent and accountable, and to allow for public input.

"I have been disappointed with the seemingly reflexive granting of waivers to bad actors, which can enshrine a policy of 'too-big-to-bar,'" Waters said in a statement announcing the legislation this week. "For large financial institutions, fines are often a mere cost of doing business, and waiving disqualification provisions allow bad actors to continue to operate in the marketplace undeterred."

It's not as if these penalties would shut down the firms, strip away their banking licenses, or otherwise pose an existential threat.

But they can make life harder for the firms, inhibit their ability to do business freely, and cut into profits. In short, the disqualifications can make them hurt in a way that even a very large fine does not.

Depending on the seriousness of the infraction, these include the fairly mild prohibition on issuing their own securities without getting authorization each time from the SEC, a privilege granted to "well-known seasoned issuers." This makes it cumbersome to sell securities and is more an inconvenience than anything else.

More serious is a bar to selling securities in private placements, a common practice that is largely free from registration requirements. Most serious is a ban on managing mutual funds, a very profitable line of business for many banks.

Similar regulations governing management of pension fund assets at the Department of Labor led to a public hearing in January when Credit Suisse sought a waiver from an automatic bar on conducting that business after it pleaded guilty to a felony count of aiding Americans evade taxes.

The Labor Department in November granted a temporary, one-year waiver pending the hearing and public comment due by the beginning of March, and must now decide whether to make the waiver permanent.

The Waters bill would call for the SEC to allow the same type of notice and comment period for waivers on bad actor disqualifications, and the possibility of requesting a hearing. Waivers would have to be decided in every case by a vote of the five commissioners, and not delegated to the staff, as has often happened in the past.

When White appeared on Tuesday before the Financial Services Committee to testify on the SEC budget, Waters asked her about the waivers.

White referred to her speech earlier in the month and defended SEC review of waiver requests as a "very robust process" and not automatic at all.

Bank critics, however, when they see a pattern of violations at JP Morgan Chase, Bank of America, Royal Bank of Scotland, Credit Suisse and other major banks, feel that these institutions have, as New York Federal Reserve President William Dudley has said, an "apparent lack of respect for the law" and a fundamental problem with their culture of compliance.

Does it really matter if it was one set of employees at Credit Suisse violating the law on tax evasion and another group managing pension fund assets? Investor money could well be at risk if the institution feels it can repeatedly be a bad actor and not feel any pain.

In any case, there is growing pressure on White's SEC not to let wrongdoers off the hook so easily.

Business columnist Darrell Delamaide has reported on business and economics from New York, Paris, Berlin and Washington for Dow Jones news service, Barron's, Institutional Investor and Bloomberg News service, among others. He is the author of four books, including the financial thriller Gold.