Media Moves

Coverage: Bank of America settlement in jeopardy

October 27, 2014

Posted by Liz Hester

The Securities and Exchange Commission could derail Bank of America’s mortgage settlement. The internal political battle could affect the way the bank does business including how it sells shares to wealthy investors.

The Wall Street Journal story by Andrew Ackerman and Christina Rexrode had these details:

An internal disagreement within the Securities and Exchange Commission is threatening potentially lucrative revenue streams at Bank of America Corp., according to people close to the situation.

At stake is whether banks should face business restrictions after settling SEC enforcement actions.

The SEC is deadlocked on whether to allow Bank of America, which recently settled an SEC probe into flawed mortgage-backed securities, to continue selling shares in hedge funds and startups to wealthy investors. Also at issue is the company’s ability to quickly issue stocks and bonds without the speed bump of an SEC review, these people said.

The bank was restricted as a result of SEC rules that automatically make firms ineligible from such activities if they violate securities laws. Bank of America has been seeking waivers since the $136 million settlement with the SEC, which was wrapped into a $16.65 billion deal with the U.S. government.

Dave Michaels, Robert Schmidt and Keri Geiger wrote for Bloomberg News that internal politics was causing a shift in the rules:

In the Bank of America case, two Democratic commissioners are balking at granting the firm’s request for relief, said the people, who asked not to be named because SEC negotiations with companies aren’t public. SEC Chair Mary Jo White, the swing vote, isn’t participating in the discussions due to a conflict, they said. With the two Republicans on the other side, the commission is locked in a stalemate.

“Until recently, the waiver issues were never viewed as the least bit controversial,” said Jon Eisenberg, a partner at the K&L Gates LLP law firm in Washington who was previously general counsel of UBS AG’s wealth-management business in the Americas.

That has changed as the commission grapples with a highly charged political question: have regulators been too soft on Wall Street? The debate is now thrusting waivers, once an obscure and technical legal matter, into the spotlight.

How the matter is resolved could affect not only Bank of America, but whether other financial firms decide to settle investigations or go to trial, securities lawyers said. Though most cases don’t face the same deadlock, former SEC officials say increasing pressure from Capitol Hill and investor advocates to penalize banks may bog down future enforcement actions.

Bloomberg reported that companies typically seek waivers for three penalties when they settle cases:

At the SEC, there are three main penalties that banks seek waivers for when they settle cases, with the harshest a ban on managing mutual funds. Another prevents banks from raising money for private companies. The third, and most minor, takes away a privilege that allows a firm to issue its own shares or bonds without SEC approval.

For Bank of America, the biggest hold-up is over the waiver that will allow the bank to continue seeking investors for private firms, such as technology companies that haven’t yet gone public and hedge funds, the people said.

The Wall Street Journal story detailed the dispute and how it departs from the usual way the SEC works through settlements:

But the routine granting of waivers has come under criticism from the SEC’s two Democrats, Kara Stein and Luis Aguilar, who say the SEC has been too lenient on Wall Street.

That has left Bank of America in a tricky spot since SEC Chairman Mary Jo White , who has been the third “yes” vote to grant such waivers, is recused from voting on the bank’s request. Ms. White represented former Bank of America Chief Executive Kenneth Lewis in private practice before joining the commission last year.

The agency is locked in a 2-2 tie on whether to grant the waiver, with two Democrats opposed and two Republicans supporting the move. It was unclear if the agency also is deadlocked on a third waiver sought by Bank of America pertaining to its ability to manage mutual funds.

The Democrats’ concerns have upended a process in which staff have historically granted the waivers as long as the banks have taken certain “remedial” steps, such as firing employees responsible for the misconduct.

Banks and other firms are taking note of the new policies and internal debate at the SEC. Bank of America is definitely waiting to see if it will have to incur the cost of a trial, instead of settling. The shift could signal to banks that regulators are cracking down on enforcement.

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