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An End to “Too Big to Bar?”

December 1, 2014

Are some financial institutions too big to bar? That’s what SEC Commissioner Kara Stein asked last April. She posed the question in her dissent from an order granting the Royal Bank of Scotland Group an exemption from being disqualified as a well-known seasoned issuer (“WKSI”) after a RBS subsidiary pleaded guilty to conspiring to manipulate the London Interbank Offered Rate.

According to media reports, Stein and fellow Commissioner Luis Aguilar have repeatedly dissented from orders granting waivers from WKSI and “bad actor” bars. And at least with respect to Bank of America Corp., Stein and Aguilar’s position created deadlock. According to Bidness ETC, after Bank of America agreed tGlobal Financial Systemo settle claims stemming from its mortgage-backed securities activities the SEC Commissioners were left evenly split on whether to grant waivers when Chair Mary Jo White recused herself from consideration of the question.

The time when waivers from administrative bars would be routinely and unquestionably granted appears over. Bloomberg reported the SEC and Bank of America reached an agreement on the administrative bars to which it will be subject. Under the compromise, Bank of America Corp. will be fully subject to at least one administrative bar, being prohibited from using the WKSI provisions. And although the bank’s underwriting units will not be completely prohibited under the “bad actor” provisions from participating in private offerings of securities, that provisional waiver will be reviewed after 30 months, putting the bank on a sort of “probation” which also requires monitoring by third parties. In the Matter of Bank of America, N.A. and Merrill Lynch, Pierce, Fenner & Smith, Inc., SEC Release 33-9682. See also Law 360 (subscription required).

The bank did obtain one waiver, provisionally receiving an exemption that will allow its subsidiaries to act as investment advisors. Interested parties have until December 22, 2014 to request a hearing on that exemption. Notice of Application and Temporary Order, Bank of America Mortgage Securities, Inc., SEC Release No. IC-31359.

The SEC is not alone in rethinking its approach to administrative bars. On November 14, the Labor Department announced it will hold a public hearing on January 15, 2015 to consider whether, and under what conditions, affiliates of Credit Suisse should be permitted to serve as Qualified Professional Asset Managers (“QPAM”) after Credit Suisse’s guilty plea to one count of conspiracy to engage in tax fraud. Without an exemption, Credit Suisse’s affiliates could be restricted from engaging in many commercial transactions on behalf of private pension plans and Individual Retirement Accounts.

The hearing was announced after Public Citizen, the Financial Recovery and Consulting Services Pty Ltd., and a bipartisan group of legislators requested one in response to the Labor Department’s issuance of a provisional waiver. Public Citizen’s comment letter noted that the Labor Department rules expressly name “income tax evasion” as one of the crimes that demonstrate a lack of integrity resulting in the loss of QPAM status.

Comments such as those, however, may not be enough to convince the Labor Department to invoke an administrative bar. The notice of hearing specifically provides that the Department seeks “factual evidence that will enable the Department to determine whether the proposed exemption is in the interest of, and protective of, employee benefit plans and IRAs.” And since Credit Suisse’s retirement planning and administration divisions were not implicated in the tax fraud, it’s hard to see how that hurdle might be overcome.

Nonetheless, the SEC’s insistence on imposing some, if not every administrative bar, along with the Labor Department’s holding of public hearings indicates that at least one “too big to” benefit may be at an end.

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