A final piece of Bank of America Corp.’s record $16.7 billion toxic-mortgage settlement is being held up by an internal fight at the U.S. Securities and Exchange Commission, said four people familiar with the case.
The agreement with the bank, announced in August, has stalled as the agency’s commissioners wage a behind-the-scenes battle over waiving a series of additional sanctions that will kick in when the settlement is entered in court. Getting a pass on the penalties, which can affect a lender’s asset-management business and ability to raise capital easily, had once been routine. It’s now a flashpoint, according to the people.
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.
The debate over waivers isn’t limited to the SEC. At the Labor Department, Secretary Thomas Perez faces calls from Democratic lawmakers to scrutinize whether Credit Suisse Group AG deserves relief it needs to keep managing pension-fund assets after pleading guilty to helping Americans evade taxes.
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.
“It seems to me it would be important for them to have that waiver,” said Richard A. Kline, a law partner at Goodwin Procter LLP in Menlo Park, California. When fast-growing companies are seeking to raise money from institutions, “there are often banks that will lead some of those private placements,” he said.
Lawrence Grayson, a spokesman for Charlotte, North Carolina-based Bank of America, declined to comment.
Proponents of issuing waivers say the exemptions are needed, because the punishments behind them are blunt instruments created for egregious frauds, mainly by small-time schemers and boiler-room operators. Penalties kick in automatically when a judge approves a settlement, making it necessary for a company to arrange for an exemption beforehand.
By granting waivers, the SEC is “exercising discretion to make sure that the market still functions and that all sorts of good people don’t get thrown under the bus because of the bad actions of others,” said Paul Atkins, a former SEC commissioner who’s now the chief executive officer of consulting firm Patomak Global Partners.
Banks have historically sought relief from the extra punishments by arguing that the sanctions are severe, too broad, and target units that had nothing to do with the fraud.
Bank of America’s settlement with the Justice Department, SEC, other agencies and a handful of states resolved allegations that it sold shoddy mortgage securities without disclosing all the risks to investors. Most of the alleged wrongdoing involved Merrill Lynch and Countrywide Financial, companies Bank of America bought.
The wrangling at the SEC is holding up just its portion of the settlement.
The uprising over waivers has been led by SEC Commissioner Kara Stein and her fellow Democrat Luis Aguilar, who argue that additional sanctions are sometimes justified, especially for banks that get in trouble again and again.
“The commission and its staff should not be in the business of rubber-stamping and approving all waiver applications simply because a request is made,” Aguilar said.
In April, he and Stein voted against the commission’s decision to approve a waiver for Royal Bank of Scotland Group Plc after one of its subsidiaries pleaded guilty to rigging benchmark interest rates. Stein went public with her dissent, questioning whether the SEC’s action had “enshrined a new policy, that some firms are just too big to bar.”
She and Aguilar also successfully pushed SEC Chair White to devise new written policies on waivers, which aren’t granted in every case. Credit Suisse and Citigroup Inc., for example, didn’t get exemptions in recent years.
Withholding relief can be a “very powerful” deterrent for bank misconduct, said Stein, who since joining the SEC in August 2013 has voted against five waivers that were all granted by the agency.
“Firms need to understand there are consequences to criminal behavior and bad actions,” she said in an interview.
As part of their campaign, Aguilar and Stein demanded that the power to grant waivers, long delegated to the SEC staff, return to the agency’s five commissioners for a number of cases.
The Bank of America settlement is in limbo because the commissioners signed off on the settlement without considering all of the waivers.
Republican Commissioner Daniel Gallagher is now re-evaluating whether he can vote to approve settlements without knowing the status of waivers, he said in an interview.
“All waivers should be handled by the professional staff in a dispassionate way,” he added.
Stein, Gallagher and Aguilar all declined to comment on the Bank of America case. Republican Commissioner Michael Piwowar declined to comment, as did White, who represented ex-Bank of America CEO Kenneth D. Lewis when she was a private attorney.
While Bank of America is expected to receive the waiver it needs from the SEC to keep managing mutual funds, White’s recusal makes it unlikely that the bank will escape all the additional sanctions, the people familiar with the case said.
There is an emerging consensus that the bank will lose its ability to bypass SEC review when raising capital, the people said. It’s not clear when or how the impasse over the waiver that the bank needs to raise money for private companies will be resolved, according to the people.
As negotiations continue, the SEC and the bank asked a federal court in North Carolina earlier this month to delay signing off on the accord.
“Unfortunately, the process of finalizing the settlement has taken longer than the parties anticipated, though the agreement to settle is not at issue,” the two sides wrote in a joint filing.