Senator Sherrod Brown (D-OH), Chair of the Banking Subcommittee on Financial Institutions, urged the SEC to revoke privileges that provide exemptions from securities law and regulations to financial institutions subject to civil or criminal settlements or enforcement actions. These exemptions allow large financial institutions to act as investment advisors to mutual funds, and obtain the privileges of well-known seasoned issuer status, such as the use of shelf registration. In a letter to SEC Chair Mary Jo White, Senator Brown asked if the SEC has written policies and procedures guiding its decisions to grant waivers and what steps the Commission taken to ensure uniformity and consistency in the decision to approve or deny a request for a waiver.
He also asks the Chair if she, after more than a year in that position, has examined the policies and decisions surrounding waivers of securities laws and regulations and, if so, what determinations she has made about the appropriateness of the SEC’s policies. He further wants to know what changes, if any, have been made or intend to be taken and, if none have, why not. The Senator also requests a complete list of the waiver provisions available to financial institutions under U.S. securities law and regulations. While he looks forward to a response from Chair White, Senator Brown put no time deadline on his requests for information.
He is very troubled that for more than a decade, the three largest U.S.financial institutions had a total of 27 fraud cases brought against them and received 86 waivers. Of the three, only one had any of its privileges revoked. He noted that in April of 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 after reaching a settlement involving criminal liability for manipulating the London Interbank Offering Rate (LIBOR).
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 financial 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.
SEC Commissioner Kara Stein questioned the SEC’s April decision to grant the WKSI waiver. Senator Brown shares the Commissioner’s fear that the SEC’s waiver in this recent, LIBOR-related case may have enshrined a new policy that some firms are too big to bar. However, he does not believe that this policy is new, adding that it appears that these recent actions are an outgrowth of a policy that has existed for some time.
In his view, these recent decisions imply that the SEC’s policy appears to make waivers the rule rather than the exception. He urged the SEC to 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.