Since Kara Stein became a commissioner on the SEC, we’ve heard a lot about the agency’s waiver policy. Basically, if a financial institution commits a crime, the SEC has a series of automatic penalties that are “automatic” in name only, because the agency routinely waives the penalties. Stein’s outcry at this turn of events always makes people like Matt Levine, in his usual role of intentionally missing the point, completely befuddled, because the punishments wouldn’t fit the crimes, and banks would lose access to entire lines of business for some unrelated transgression, and that just wouldn’t be fair, now would it?
The point, of course, is that automatic penalties are either automatic or not. If the punishment of banning institutions from managing mutual funds or working with private companies to find investors, or forcing SEC approval for any stocks or bonds that the firm issues on its own behalf, is simply too harsh as a consequence of committing a crime, then the SEC can go ahead and eliminate the automatic trigger. But having them in place, and then routinely waiving them, makes a mockery of any sort of accountability whatsoever. I personally believe that having these penalties in place are a solid way to ensure compliance across business lines, with the only threat that matters – a threat to the pocketbook – in reserve. If it would be too costly for banks to break the law, well maybe they’ll be a little more careful. But I would rather just eliminate the penalties altogether than have the SEC bow and scrape to ensure that committing fraud doesn’t lead to anything bad happening to the perpetrator.
Another negative element of this policy is that the only accountable figures at the SEC, the commissioners selected by the President and confirmed by the Senate, typically don’t make the decisions on whether or not to grant the waivers. SEC staff often makes the call without the commissioners’ knowledge; occasionally they will get an up-or-down vote. In addition the public doesn’t get to know why these waivers are granted or even that they were granted at all.
Transparency is the second-order solution to actually reforming the policy, and outgoing commissioner Luis Aguilar is proposing the former as a solution. Here’s his idea:
Suggesting two sets of enhancements, Aguilar said staffers could be required to provide commissioners with regular lists of waiver requests explaining whether the waivers were approved or denied and why.
He also called for the establishment of a website where the public could see all waiver requests and their progress, including final actions.
He applauded the commission’s vital step last year allowing conditional waivers that firms could use for activities prohibited in an enforcement actions with limitations.
He said conditional waivers are welcome because many requests are for violations that are not severe. (Such waivers could be likened to those with drunken driving convictions not being allowed to drive at certain times of night.)
“My own review of many waiver applications indicates that waivers do not always fit neatly into ‘grant’ or ‘deny’ buckets, but often times fall somewhere in between,” Aguilar said.
Certainly adding a public element to this broken process would be a step forward, one that keeps commissioners informed as well as citizens. I could see campaigns created with this data. Take Citigroup, who a couple weeks back received two more waivers, this one related to settlements totaling $195 million for defrauding hedge funds. As Better Markets CEO Dennis Kelleher pointed out, the waivers were issued the same day as the settlement, which under Aguilar’s system would be disallowed; it would violate the public nature of the process. The orders were issued without explanation, was put in a hard-to-reach section of the SEC website, and only the names of the supporters and objectors to the waivers were given, not their rationale. “The SEC’s waiver process is broken and has become a meaningless rubber stamp process,” Kelleher concluded.
In addition, this is the sixth time that Citigroup has been disqualified under the “well-known seasoned issuer” statute since 2006; five times they received waivers (Citi actually was disqualified from 2010-2013; somehow they managed to stay in business despite the terrible burden of having to ask the SEC for approval for stock sales). Here’s what Kara Stein had to say after the fifth such disqualification, which happened over the guilty pleas in the LIBOR scandal:
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. It is not sufficient to look at each waiver request in a vacuum […]
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. This type of recidivism and 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 with the tools the responsibility, to empower those at the top of these institutions to create meaningful cultural shifts, yet we refuse to use them.
In conclusion, 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. Further, I am concerned that the latest series of actions has effectively rendered criminal convictions of financial institutions largely symbolic. Firms and institutions increasingly rely on the Commission’s repeated issuance of waivers to remove the consequences of a criminal conviction, consequences that may actually positively contribute to a firm’s compliance and conduct going forward.
Yes, that’s the entire point. The SEC shouldn’t be doing this at all, but if they must, let them do it out in the open, accountable to everyone in real time.
What’s interesting about Aguilar bringing up this policy change is that he actually approved the Citi waivers a couple weeks back, and because Republican Michael Piwowar opposed them, his vote was consequential. The waivers would not have happened without him. So this move toward disclosure is nice, if inadequate, but Aguilar is showing the industry in his final days more that he can be a good soldier (and a solid pickup for an executive position) than anything.
Nevertheless, as a decent first step, Aguilar’s idea should be supported. Down the road, the SEC shouldn’t be obligated to do banks a favor when they make mistakes. But if they do we should at least know about it.