This SEC Rule Makes No Sense for Big Banks

The automatic bar from private placements is a wild non sequitur.

Getting away with murder? Come on.

Photographer: Stefan Wermuth
This post originally appeared in Money Stuff.

The Securities and Exchange Commission has some rules that provide that, if you do certain sorts of bad stuff, you can no longer do certain sorts of private placements of securities either for yourself or for your customers. There is an obvious intuitive appeal to these rules: Serial securities hucksters often make use of private placements to stay below the SEC's radar, and the SEC wants to keep known hucksters -- the rule calls them "bad actors" -- out of those markets.

But the rules make no real sense for big banks. Sometimes a few employees in a big bank's, say, metals-trading division will do some bad stuff. For instance they might enter spoof orders to buy platinum that they don't really intend to buy. That is bad and they should stop and the bank should pay big fines and whatever. Maybe, if you are very tough, you might think that the bank should be banned from trading platinum for a while, or forever, or that it should be banned from trading metals generally. Maybe you are so tough that you think the bank's trading culture is irreparably broken and it should be banned from trading forever. 

But that never really happens, and the rules don't provide an easy way to make it happen. Instead, there is an automatic bar from private placements. But the people who do the private placements sit really far away from the people who do the platinum trading, and the metals trading, and the trading generally, and they never talk to each other. And it would obviously be silly to catch some metals traders spoofing, to fine their bank millions of dollars, and then to say "okay sure you can keep trading metals but you are banned from doing private placements of stock." That doesn't protect investors in private placements, it doesn't protect investors in metals market, it doesn't deter bad conduct by the metals traders, and it just generally has nothing to do with anything.

And so in fact the SEC usually waives these automatic bars when big banks get caught doing bad things that have nothing to do with their private placements business. And then inevitably there is some gnashing of teeth and complaining that The Banksters Are Getting Away With Murder, and I write about it in sadness and perplexity. And here we go again:

On Monday, the Commodity Futures Trading Commission reached settlements with Deutsche Bank, HSBC and UBS Group for a type of market manipulation called spoofing. The banks collectively paid just under $47 million to settle the civil charges without admitting or denying any wrongdoing.

But while the commission and Justice Department trumpeted their crackdown on market manipulation, the settlements included language that gave all three banks an automatic waiver from the bad actor rule — drawing sharp criticism from one Securities and Exchange commissioner, a Democrat.

“I am extremely disappointed by the C.F.T.C.’s actions in this case,” the commissioner, Kara Stein, said on Thursday. “They did not consult with the S.E.C. before injecting themselves into securities markets in which they have little or no expertise. The implications of the C.F.T.C.’s actions are deeply troubling and may put U.S. investors at risk.”

Nope, that is wrong, spoofing by some Deutsche Bank metals traders won't put investors in Deutsche-Bank-run private placements at risk. More: If the automatic bar rules did not exist, there is absolutely no chance at all that Kara Stein would look at Monday's CFTC orders and say "you know the first thing we need to do is to ban these three banks from advising on private placements." Why would such a wild non sequitur occur to anyone?

Well, because the automatic bar is there. So the burden is not to explain why metals spoofing should lead to a private-placement ban, but to explain why it shouldn't. That is easy enough to explain, but you can always find objectors. But of course our financial markets are now in a Trumpian deregulatory phase, in which there is no God and everything is permitted. Perhaps the SEC will just get rid of the automatic bars -- or make them opt-in rather than opt-out -- so that I can stop writing about them.

If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Thanks! 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Matt Levine at

    To contact the editor responsible for this story:
    James Greiff at

    Before it's here, it's on the Bloomberg Terminal.