Senator Urges SEC to Stop Granting Waivers from Securities Laws for Certain Issuers (with Lofchie Comment)

Senator Sherrod Brown (D-OH), Chair of the Banking Subcommittee on Financial Institutions and Consumer Protection, sent a letter to SEC Chair White urging the SEC to stop granting exemptions from certain securities laws to financial institutions subject to civil or criminal settlements or enforcement actions. Under the exemptions, financial institutions with civil or criminal settlements or enforcement are able to maintain certain "privileges" through waivers, which include acting as investment advisors to mutual funds and serving as well-known seasoned issuers of securities.

Senator Brown raised concerns previously regarding the SEC's failure to revoke privileges from large financial institutions during the March 2013 nomination hearing for Chair White. When asked about this during the hearing, Chair White stated that she would "examine the issue." Senator Brown commented that, in light of two recent "high-profile" exemptions granted to foreign banks, "the SEC's policy appears to have regressed," and explained that the recent decisions implied that the SEC's policy makes waivers the rule instead of the exception. He also noted that, as recently as May 2014, the SEC granted three waivers to foreign financial institutions after criminal proceedings regarding LIBOR and conspiracy to commit tax fraud.

Senator Brown asked Chair White to provide information and responses to questions regarding the SEC's practices and procedures related to the waivers, including the following:

• Can you provide a complete list of the waiver provisions available to financial institutions under U.S. securities law?
• Does the SEC have written policies and procedures guiding its decisions to grant waivers for each provision? What steps has the SEC taken to ensure uniformity and consistency in the decision to approve or deny a request for a waiver?
• Having been SEC Chair for more than a year, have you examined the policies and decisions surrounding waivers of securities laws? If so, what determinations have you made about the appropriateness of the SEC's policies? What changes, if any, have you made or do you intend to make? If you have not or do not intend to make any changes to the waiver process, then why not?

Lofchie Comment: To take a contrary view, it seems that the SEC grants most waivers based on equitable considerations and because the penalties required by U.S. financial regulations are otherwise too harsh. It makes little sense to devastate large financial institutions in order to punish the crimes of individuals or limited groups of individuals if the crime has had limited impact. If they commit crimes, then it would be much fairer to send those individuals to jail, or to attempt to do so, rather than to shut down financial institutions affecting large numbers of employees.There are serious long term consequences to the economy in a political environment that maintains that the financial industry must be punished constantly and no degree of punishment is sufficient. Small financial institutions will not be able to pay the ever-growing cost of regulations. Large financial institutions are vulnerable to huge sanctions and to being shut down as punishment for the misbehavior of individual employees. Despite all the witticisms about the phrase "too big to jail," the risk that the government will destroy these institutions is not a trivial one. If draconian sanctions are to be made tougher still, then how many firms can we expect to be shut down, how many jobs lost and how damaged the economy?

See: Senator Brown's Letter.Related news: Commissioner Gallagher Delivers Remarks Regarding Revised SEC Statement on WKSI Waivers (with Lofchie Comment) (April 30, 2014); SEC Division of Corporate Finance Issues Revised Statement on Well-Known Seasoned Issuer Waivers (April 24, 2014); SEC Issues Revised Statement for Well-Known Seasoned Issuer Waivers (with Lofchie Comment)(March 21, 2014).