U.S. Bars RBS From Managing 401(k)s in Rare Warning to Banks

  • Labor Department rejected waiver request after guilty pleas
  • Similar requests are pending for Och-Ziff, Deutsche Bank

The U.S. government has prohibited Royal Bank of Scotland Group Plc from managing 401(k) plans and other retirement funds, a decision that has little impact on its business but that could send a signal to other banks and hedge funds with criminal records.

RBS was required to seek special permission from the Labor Department to continue managing certain classes of U.S. retirement and pension money after the parent company pleaded guilty to foreign-exchange collusion and a unit admitted to interest-rate manipulation. The Labor Department rejected the bank’s waiver request in an Oct. 6 letter obtained by Bloomberg, standing by a preliminary rejection it issued last year.

An RBS representative couldn’t immediately be reached for comment. The Labor Department didn’t immediately respond to requests for comment.

RBS has already exited its U.S. pension businesses as part of a restructuring. The lack of investors affected by the decision was one of the reasons the department cited in rejecting the request. 

Awaiting Word

The Labor Department’s ruling represented a rare step for the government, which until now hasn’t knocked down big banks’ requests to continue certain lines of business after guilty pleas.

“When you say to a manager that it can no longer qualify for a very key exemption that could allow pension assets to be managed more easily, that has the potential to be extremely significant," said Andrew Oringer, a Dechert LLP lawyer who specializes in pension issues. “It’s of real concern generically whenever we see that there’s more of a possibility of an ultimate rejection by the Department of Labor."

Och-Ziff Capital Management Group may need Labor Department permission to maintain its pension business after a unit pleaded guilty last month in connection with bribery in Africa. Och-Ziff has $39.2 billion under management, about 1 percent of which would be subject to a Labor Department waiver decision, it has said. Jonathan Gasthalter, an Och-Ziff spokesman, declined to comment.

Several other big financial firms -- including UBS Group AG, Citigroup Inc., Barclays Plc and JPMorgan Chase & Co. -- are also awaiting word on whether they will receive Labor Department permission to maintain their Qualified Professional Asset Manager, or QPAM, status. That category of pensions covers 401(k) plans and corporate pensions, among other retirement plans. 

This month, the Labor Department proposed extending Deutsche Bank AG’s QPAM request to April 2017 as it considers granting a full exemption. 

Representatives of the banks declined to comment or didn’t immediately respond to requests for comment.

Fraught Reviews

Regulatory waivers have become politically fraught over the last two years, with lawmakers including Senator Elizabeth Warren, a Massachusetts Democrat, and Representative Maxine Waters, a California Democrat, pressing the Labor Department for tougher reviews of banks accused of crimes before clearing them to continue their pension-management businesses.

“We’re glad the Department of Labor is protecting our nation’s retirees by denying RBS the ‘stamp of approval’ QPAM status in the wake of RBS’ egregious criminal misconduct," Warren and Waters said in a joint e-mailed statement Wednesday. “We urge the department to fully utilize its disqualification authority” in pending bank cases, they added.

The U.S. Securities and Exchange Commission, which issues its own waivers for certain securities activities, isn’t inclined to use the process as an additional enforcement tool, SEC Chair Mary Jo White said last year.

It remains to be seen whether the Labor Department would take tough action against banks with significant asset management businesses, said Samuel Buell, a Duke University Law School professor.

“If doing it would require a bank to get out of a business that’s existentially important, I don’t expect them to do it” given the capital and jobs at stake, said Buell, a former federal prosecutor. “If it could be done symbolically without having that effect, I expect they’d do it to look tough.”

The Labor Department’s Oct. 6 letter faulted RBS for “the serious nature of the crimes and the numerous instances of fraudulent misconduct” leading to the convictions. But the department said it was unable to determine whether an exemption would protect U.S. retirement savers because the bank is no longer in the business of managing such money in the country.

The Scottish firm spun off its U.S. subsidiary, Citizens Financial Group Inc., in 2014 to boost capital. The Labor Department rejection pertains to all existing as well as future affiliates of the Edinburgh-based bank. The department told RBS that if there are “significant new facts or arguments," it can ask for its request to be reconsidered.

— With assistance by Neil Weinberg

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