Former Debevoise & Plimpton partner Mary Jo White is now the chair of the Securities and Exchange Commission (SEC).
But she’s having a hard time shaking her old Wall Street ways.
In a 3 to 2 decision last week, Mary Jo White joined the SEC majority and overturned the automatic disqualification of the Royal Bank of Scotland from eligibility as a Well-Known Seasoned Issuer (WKSI).
This decision did not sit well with seasoned SEC watchers like Columbia Law Professor John Coffee.
“At a time when the rest of the federal government is beginning to get tough on banks that commit crimes, the SEC is in effect saying that it will not let a little thing like a federal felony conviction inconvenience a major bank,” Coffee told Corporate Crime Reporter. “This continues a pattern of regulation by waiver that amounts to two different systems of justice — one for everyone but banks and another for banks.”
And out of left field comes a new SEC commissioner, one Kara Stein, to take on White and the SEC majority.
Here’s the background.
In January 2014, a subsidiary of RBS was criminally convicted for its conduct in manipulating the London Interbank Offered Rate (LIBOR).
The scheme profited RBS to the detriment of individuals, businesses, and governments around the globe.
Under federal securities laws and regulations, this criminal conviction automatically precluded RBS from eligibility as a Well-Known Seasoned Issuer and the attendant benefits that the rules provide to WKSI filers.
In a dissent to White’s majority, Stein said that since the inception of WKSI nearly a decade ago, the SEC had not granted a WKSI waiver for criminal misconduct.
“Last fall, that changed when the staff, through delegated authority, granted a waiver to another large issuer (UBS) despite its criminal wrongdoing,” Stein said. “Last Friday, the SEC compounded that error when it granted a waiver for another criminal wrongdoer.”
“The arguments in both instances implicate a structural problem with our policy, whether dealing with criminal or civil misconduct. They rest largely upon the notion that the triggering conduct is insignificant when considered in the context of a large financial institution with global operations.”
“I fear that the Commission’s action to waive our own automatic disqualification provisions arising from RBS’s criminal misconduct may have enshrined a new policy — that some firms are just too big to bar.”
“Over the years, Congress and the Commission have adopted numerous disqualification provisions, intended to protect investors and the markets from ‘bad actors.’”
“Yet the Commission routinely waives them. We need to step back and think broadly about what these provisions are intended to accomplish, and ask ourselves — are we achieving the intended goals? Are they being fairly applied to all firms and individuals? Large institutions should be treated no differently, neither better nor worse, than small and medium-sized issuers.”
“Sound policy arguments have been made that we need more tools to police and regulate our markets. But, we also need to ensure that we correctly and fairly utilize the tools we have. These disqualification and bad actor provisions have the potential for deterrence at large institutions that no one-time financial penalty could ever wield. Yet, we repeatedly relieve issuers of the supposedly automatic consequences of their misconduct.”
“Our website is replete with waiver after waiver for the largest financial institutions. Some large firms have received well over a dozen waivers of one sort or the other over the past several years. One large financial firm alone, in the last 10 years, has received over 22 different waivers — often making the argument that it has a ‘strong record of compliance with federal securities laws.’”
“Just last summer, the Commission adopted a bad actor provision mandated by Congress for Rule 506 offerings. Yet, we have already granted five of those waivers, all but one to large banks and broker-dealers, RBS among them.”
“Since 2010, the Commission has granted at least 30 WKSI waivers. Twenty-nine of them went to large financial institutions and broker-dealers. In many cases, these issuers are receiving their second, third, and even fourth WKSI waiver in less than four years.”
“It is true that large financial institutions may have vast operations and thousands of employees, making certain types of civil or even criminal misconduct statistically more likely. However, their size and complexity should not insulate them from the same regulatory consequences that other issuers must bear. The kind of reasoning that is used to support waivers in this context has led the Commission, by inches and degrees, to where it is today, almost reflexively granting waivers of all types, and most often to large financial institutions.”
“Last Friday’s Order exemplifies this problem. Among the many disqualification and bad actor provisions enacted by Congress and the Commission, loss of WKSI status may have the fewest ramifications.”
“Nevertheless, when, as here, a subsidiary of a large financial institution is convicted for committing a crime that helped skew the value of trillions of dollars’ worth of financial instruments and contracts worldwide, we still grant relief. Say what you will about how isolated or insignificant this conduct was within the context of the entire institution, it still managed to wreak havoc on financial markets across the globe. Yet we provide our implicit ‘Good Housekeeping Seal of Approval,’ and tell the investing public that this issuer is still deserving of reduced Commission review and subject to fewer investor protections.”
“If we are going to abrogate our own automatic disqualification provision on these facts, then we should consider discarding these disqualification and bad actor provisions entirely, along with the pretense that they have any real meaning.”
“In my view, nearly every factor in the ‘Division of Corporation Finance’s Revised Statement on Well-Known Seasoned Issuer Waivers’ weighs strongly against a waiver for RBS. The egregious nature of the misconduct weighs against a waiver. This is criminal conduct, part of a widespread scheme undertaken by multiple banks to manipulate LIBOR for profit. LIBOR affects in some way nearly every financial market across the globe — consumer and corporate loans, interest rate swaps and derivatives, mortgages, college loans, futures and options. LIBOR rigging impacted millions of American families, businesses, and communities.”
“Suffice it to say, this is egregious criminal conduct with far-reaching consequences in the United States, in the markets the Commission oversees, as well as in global financial markets. This factor weighs strongly against granting a waiver.”
“In the end, this should be simple. We have a rule that confers a special benefit to issuers that have a good track record. And we have a rule that calls for automatically rescinding that benefit when the issuer misbehaves. Here, the Commission waived that common sense rule despite egregious criminal misconduct. RBS failed to justify why we should do so. In granting this waiver, I believe the Commission has strayed from its mission, and strayed from a careful and prudent course. Accordingly, I cannot and do not support the Commission’s order.”