HFSC Examines the Settlement Practices of US Financial Regulators
AT TODAY’S HOUSE FINANCIAL SERVICES COMMITTEE HEARING, lawmakers discussed the settlement practices of the U.S. financial regulators. Chairman Spencer Bachus (R-Ala.) said neither admit nor deny settlements avoid the costly expense and uncertainty inherent to lengthy trial proceedings. In addition, such a policy allows harmed investors to receive proceeds from a settlement much faster than a long, drawn-out court case.
Turning to the Securities and Exchange Commission (SEC) v. Citigroup case, which could potentially affect regulators’ use of neither admit nor deny settlements, Bachus said “on balance, the appellate court’s analysis was the correct one. A policy that requires judges to micromanage federal agencies’ enforcement authority and requiring the government to engage in lengthy and expensive trials would not serve the bests interests of taxpayers or investors.”
Bachus added that it “makes more sense to leave the judgment of whether to try a case or attempt to settle largely to the agency’s discretion rather than shifting that responsibility to federal judges.”
Rep. Maxine Waters (D-Calif.) said she was concerned with the “frequent use” of the neither admit nor deny settlements. She said “settlements should never be viewed as another cost of doing business… When no wrongdoing is admitted, it encourages repeat offenses.” She also told the panel she understands the SEC is constrained and “outgunned in terms of resources,” adding “I will continue to fight for the SEC to have the resources it needs.”
Waters also stated her concern with market service and consent orders which the Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board entered into with 14 banks. “I am eagerly anticipating the results of a [Government Accountability Office] study that I requested on this topic,” she said.
Rep. Carolyn Maloney (D-N.Y.) believed an admission of guilt is more likely to be a deterrent and is sympathetic to Judge Jed Rakoff’s view in the SEC v. Citigroup case. Turning to the SEC’s budget, Maloney said it is “not enough to fund lengthy legal battles” and settlements “offer the only available route for the SEC to take.”
Rep. Robert Dold (R-Ill.) said “a legal standard that requires wrongdoing admissions from defendants as a condition of settling regulatory proceedings will diminish the number of settlements to something very close to zero.”
Panel I Testimony
The witnesses on panel one included Scott Alvarez, General Counsel of the Board of Governors of the Federal Reserve System; Robert Khuzami, Director of the Division of Enforcement at the SEC; Richard Osterman, Deputy General Counsel of the Litigation and Resolutions Branch at the Federal Deposit Insurance Corporation (FDIC); and Daniel Stipano, Deputy Chief Counsel at the OCC.
In their testimonies, the witnesses described the enforcement tools within their respective agencies and the processes for carrying out various enforcement actions.
Alvarez said “the vast majority of enforcement actions are resolved upon consent.” In addition, Alvarez said “it has not been our practice to require formal admissions of misconduct” as this “would have deleterious effects on our supervisory efforts” by impeding and delaying corrective action and potentially harming the financial institution and market. Over the last decade, only 11 of the roughly 1,000 enforcement actions were not resolved by consent.
Khuzami said “the fact is that requiring admissions as a condition of settlement would likely result in longer delays before victims are compensated, dilution of the deterrent impact of sanctions imposed because of the passage of time, and the expenditure of significant SEC resources that could instead be spent stopping the next fraud.”
Turning to the SEC v. Citigroup case, Khuzami said it is “not clear what an admission would add and whether it would be worth the cost of delay and resources.”
In cases arising out of the financial crisis, Khuzami said the SEC has filed actions against 102 individuals and entities, naming 55 CEOs, CFOs, and other senior corporate officers, and obtained orders for $2 billion.
Osterman said the vast majority of FDIC’s cases are solved through settlements without admission of liability. Requiring this policy “may have the unintended consequence of frustrating its goals,” delaying prompt relief and corrective action, he said.
Stipano said prompt and effective action “is critical.” In the vast majority of cases, Stipano said OCC actions are resolved by consent, adding “permitting the bank of individual to neither admit nor deny wrongdoing allows the OCC to get an enforceable order in place at an early stage of the proceeding, and encourages compliance with the enforcement action and immediate correction of any deficiencies that need to be addressed.”
Panel I Q&A
The witnesses on the first panel defended the neither admit nor deny policy and reiterated points made in their respective testimonies that without it, protracted litigation would cause lengthy delays in compensating harmed investors, and would stall corrective actions that would protect the institution and the marketplace.
In response to questions from Dold, panelists reiterated that a substantial portion of their cases are settled before trial and if a policy was put in place that required institutions and individuals to admit wrongdoing, the number of settlement agreements would fall significantly. Panelists said such a policy would lead to lengthy delays, would require agencies to request more staff to work on additional litigation matters and would lead to decreased settlement payments to harmed investors.
Rep. Blaine Luetkemeyer (R-Mo.) asked whether the witnesses believed they had enough tools to “go after the bad guys.” All of the panelists said they did.
Bachus asked Khuzami to detail the factors behind an SEC decision to settle an enforcement action. Khuzami said it comes down to the question of “can we get everything we can reasonably hope to get,” if we had gone to trial. If that standard is not met, only then will the SEC prepare to go to trial, Khuzami said. He added, “we’re fully prepared to litigate and we’re doing more of it.”
Referring to recent news reports, Garret focused on money market funds and asked Alvarez whether the Federal Reserve, through FSOC, would step in for the SEC, if the SEC fails to act, “and exert its authority over the industry individually, or designate the entire industry as systemically important.” He added that “regulating money market funds would be one way to put money market funds effectively out of business and then have the funds in that segment of the economy flow from them… to the banking institutions, which would be a way for them to backfill some of the banks that are out there, which would be a way to provide for additional capital for them to make them more safe and sound, which is what you’ve been saying, rightly so, is the responsibility of the Fed.” He asked Alvarez if that is the approach the Federal Reserve takes to regulation.
Alvarez said the FSOC has made it clear that money market funds are an “area that requires attention.” He added that the SEC is moving forward on taking steps to improve the safety soundness, and strength of money market mutual funds. “We all await the SEC’s action on that. That is as far as the Federal Reserve has made any statement or participation at this point,” he said.
Outside of Dodd-Frank, Garrett also asked Alvarez about the premium capture cash reserve account (PCCRA). Specifically, Garrett said if implemented, it would put capital on the sideline and freeze up the securitization markets, “which are already frozen,” in addition to keeping the federal government on the hook as far as providing financing for the housing marketplace. After referencing two letters authored by Bachus and Garrett, which were sent to the Federal Reserve on this issue, Garrett asked Alvarez whether the Federal Reserve has done a cost-benefit analysis on the issue.
Alvarez said “we are in the process of doing an analysis” and “we are working on this as best we can.” There is currently no estimate on when the analysis will be completed, but Alvarez expects it to be released before the rule comes out.
Rep. Bill Posey (R-Fla.) was the only Republican to really distinguish himself from the rest of the Republican lawmakers in attendance. Posey said a “minor fine” is unlikely to change behavior. “I don’t see anybody going to jail. All the criminal activity we have seen from Wall Street, I just see a real lack of accountability and prosecution.” He asked the panel to submit how many referrals to the Department of Justice each regulatory agency has made concerning criminal prosecutions for wrongdoing, how many convictions have occurred, how many stipulated settlements have been entered into and the amounts of those settlements and damages that each settlement was pertaining to.
He also asked the panel whether they have investigated compensation committees who have awarded multi-million dollar bonuses to those “at the helm of a sinking ship.” Further, Posey said “I want to see wrongdoers go to prison… and it’s an obligation of yours to see that this happens” in order to change current behavior.
A number of Democrat lawmakers touched on the budget cuts to the various financial regulatory agencies. In response to a question from Maloney on whether the SEC would be able to initiate more action if the agency had independent funding authority, Khuzami said such authority “would help us greatly,” allowing the SEC to investigate and litigate more and hire additional trial lawyers.
In response to a follow up question, Khuzami stated his support for SEC Chairman Mary Schapiro’s comments that the SEC be given the legislative authority to increase its penalties on individuals and firms, adding “those remedies would help us a great deal.”
Waters questioned Khuzami on whether the Residential Mortgage-Backed Securities Working Group had enough resources to carry out its mission and whether he was concerned that the task force has yet to appoint an executive director, and when could the Committee expect an announcement of an appointment. She added, “we anxiously await what they’re going to be able to accomplish.”
Khuzami said “we have a significant amount of resources” and pointed to the fact that five agencies make up and contribute to the task force. Khuzami also said the working group is preparing a draft to respond to Waters’ letter inquiring about the new working group. He also said most of the investigative work was not being conducted by the task force, itself, but from within the agencies that make up the task force.
Rep. Brad Miller (D-N.C.) asked Khuzami whether anyone at the SEC has been able to review the settlements the SEC has entered into, noting the Federal Housing Finance Agency’s (FHFA) critical report on how the settlement between Freddie Mac and Bank of America “was settled too cheaply and for the wrong reasons.”
Khuzami said the SEC currently has a vacant inspectors general position. He said there has not been an overall review of the settlements, but noted that there is a “great deal” of scrutiny and review of each settlement.
Panel II Testimony
In his testimony, William Galvin, Secretary of the Commonwealth of Massachusetts, said permitting a firm “to enter into a settlement where it pays a fine, but neither admits or denies that it has done anything wrong, permits that firm to avoid basic culpability for its actions.” He added, “if we intend to reform the worst practices in the financial industry, then the firms that have violated the law must acknowledge that what they have done is wrong.”
Regarding the SEC v. Citigroup case, Galvin said as an executive agency “the SEC must be able to decide which matters to investigate, which cases to litigate, which charges to bring, and the terms of any settlements.”
In his testimony, Richard Painter, Professor of Law at the University of Minnesota Law School, said he agrees with the Second Circuit’s opinion in the SEC v. Citigroup case, saying the SEC “needs discretion to decide how limited enforcement resources should be used in a way that maximizes investor protection” and “federal courts should not define the way the SEC litigates and settles cases.”
Painter also said “for the SEC to litigate and lose a case with potential weaknesses can wreak havoc on the enforcement regime. The outcome may encourage wrongdoing by others who will see the S.E.C.’s loss as an opportunity to violate the same or related provisions of law with apparent impunity.”
In his testimony, Kenneth Rosen, Professor of Law at the University of Alabama School of Law, discussed the flexibility behind the SEC’s current use of the neither admit nor deny policy and the SEC v. Citigroup case. Rosen also said the time is now “for a comprehensive and vigorous dialogue on issues like limited resource allocation prioritization as it relates to enforcement.” As financial instruments and markets become more complex, Rosen said coordination amongst all levels of government drawn into the battle against financial irregularities “will be critical.”
Panel II Q&A
Rep. Barney Frank (D-Mass.) asked if it would be beneficial for the SEC to bring forward a large, and potentially expensive, case that the agency is confident it could win in order to set an example that the agency is willing to pursue wrongdoings no matter the cost.
The panelists agreed that the SEC should pursue strong cases and suggested the SEC be able to retain some of the revenue it collects from settlements.
Frank cautioned against this approach, noting his concern about the incentives that may derive from authorizing an enforcement agency with the ability to levy fines and then spend those fines.
Frank noted provisions in the Dodd-Frank Act that require all financial regulators to ensure compensation procedures and practices include claw back measures. He wondered whether regulators can use this authority to ensure firms include claw back provisions in their compensation packages that require individuals who are responsible for a large firm to pay for some of that loss.
For more on the hearing, please click here.
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AT TODAY’S HOUSE FINANCIAL SERVICES COMMITTEE HEARING, lawmakers discussed the settlement practices of the U.S. financial regulators. Chairman Spencer Bachus (R-Ala.) said neither admit nor deny settlements avoid the costly expense and uncertainty inherent to lengthy trial proceedings. In addition, such a policy allows harmed investors to receive proceeds from a settlement much faster than a long, drawn-out court case.
Turning to the Securities and Exchange Commission (SEC) v. Citigroup case, which could potentially affect regulators’ use of neither admit nor deny settlements, Bachus said “on balance, the appellate court’s analysis was the correct one. A policy that requires judges to micromanage federal agencies’ enforcement authority and requiring the government to engage in lengthy and expensive trials would not serve the bests interests of taxpayers or investors.”
Bachus added that it “makes more sense to leave the judgment of whether to try a case or attempt to settle largely to the agency’s discretion rather than shifting that responsibility to federal judges.”
Rep. Maxine Waters (D-Calif.) said she was concerned with the “frequent use” of the neither admit nor deny settlements. She said “settlements should never be viewed as another cost of doing business… When no wrongdoing is admitted, it encourages repeat offenses.” She also told the panel she understands the SEC is constrained and “outgunned in terms of resources,” adding “I will continue to fight for the SEC to have the resources it needs.”
Waters also stated her concern with market service and consent orders which the Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board entered into with 14 banks. “I am eagerly anticipating the results of a [Government Accountability Office] study that I requested on this topic,” she said.
Rep. Carolyn Maloney (D-N.Y.) believed an admission of guilt is more likely to be a deterrent and is sympathetic to Judge Jed Rakoff’s view in the SEC v. Citigroup case. Turning to the SEC’s budget, Maloney said it is “not enough to fund lengthy legal battles” and settlements “offer the only available route for the SEC to take.”
Rep. Robert Dold (R-Ill.) said “a legal standard that requires wrongdoing admissions from defendants as a condition of settling regulatory proceedings will diminish the number of settlements to something very close to zero.”
Panel I Testimony
The witnesses on panel one included Scott Alvarez, General Counsel of the Board of Governors of the Federal Reserve System; Robert Khuzami, Director of the Division of Enforcement at the SEC; Richard Osterman, Deputy General Counsel of the Litigation and Resolutions Branch at the Federal Deposit Insurance Corporation (FDIC); and Daniel Stipano, Deputy Chief Counsel at the OCC.
In their testimonies, the witnesses described the enforcement tools within their respective agencies and the processes for carrying out various enforcement actions.
Alvarez said “the vast majority of enforcement actions are resolved upon consent.” In addition, Alvarez said “it has not been our practice to require formal admissions of misconduct” as this “would have deleterious effects on our supervisory efforts” by impeding and delaying corrective action and potentially harming the financial institution and market. Over the last decade, only 11 of the roughly 1,000 enforcement actions were not resolved by consent.
Khuzami said “the fact is that requiring admissions as a condition of settlement would likely result in longer delays before victims are compensated, dilution of the deterrent impact of sanctions imposed because of the passage of time, and the expenditure of significant SEC resources that could instead be spent stopping the next fraud.”
Turning to the SEC v. Citigroup case, Khuzami said it is “not clear what an admission would add and whether it would be worth the cost of delay and resources.”
In cases arising out of the financial crisis, Khuzami said the SEC has filed actions against 102 individuals and entities, naming 55 CEOs, CFOs, and other senior corporate officers, and obtained orders for $2 billion.
Osterman said the vast majority of FDIC’s cases are solved through settlements without admission of liability. Requiring this policy “may have the unintended consequence of frustrating its goals,” delaying prompt relief and corrective action, he said.
Stipano said prompt and effective action “is critical.” In the vast majority of cases, Stipano said OCC actions are resolved by consent, adding “permitting the bank of individual to neither admit nor deny wrongdoing allows the OCC to get an enforceable order in place at an early stage of the proceeding, and encourages compliance with the enforcement action and immediate correction of any deficiencies that need to be addressed.”
Panel I Q&A
The witnesses on the first panel defended the neither admit nor deny policy and reiterated points made in their respective testimonies that without it, protracted litigation would cause lengthy delays in compensating harmed investors, and would stall corrective actions that would protect the institution and the marketplace.
In response to questions from Dold, panelists reiterated that a substantial portion of their cases are settled before trial and if a policy was put in place that required institutions and individuals to admit wrongdoing, the number of settlement agreements would fall significantly. Panelists said such a policy would lead to lengthy delays, would require agencies to request more staff to work on additional litigation matters and would lead to decreased settlement payments to harmed investors.
Rep. Blaine Luetkemeyer (R-Mo.) asked whether the witnesses believed they had enough tools to “go after the bad guys.” All of the panelists said they did.
Bachus asked Khuzami to detail the factors behind an SEC decision to settle an enforcement action. Khuzami said it comes down to the question of “can we get everything we can reasonably hope to get,” if we had gone to trial. If that standard is not met, only then will the SEC prepare to go to trial, Khuzami said. He added, “we’re fully prepared to litigate and we’re doing more of it.”
Referring to recent news reports, Garret focused on money market funds and asked Alvarez whether the Federal Reserve, through FSOC, would step in for the SEC, if the SEC fails to act, “and exert its authority over the industry individually, or designate the entire industry as systemically important.” He added that “regulating money market funds would be one way to put money market funds effectively out of business and then have the funds in that segment of the economy flow from them… to the banking institutions, which would be a way for them to backfill some of the banks that are out there, which would be a way to provide for additional capital for them to make them more safe and sound, which is what you’ve been saying, rightly so, is the responsibility of the Fed.” He asked Alvarez if that is the approach the Federal Reserve takes to regulation.
Alvarez said the FSOC has made it clear that money market funds are an “area that requires attention.” He added that the SEC is moving forward on taking steps to improve the safety soundness, and strength of money market mutual funds. “We all await the SEC’s action on that. That is as far as the Federal Reserve has made any statement or participation at this point,” he said.
Outside of Dodd-Frank, Garrett also asked Alvarez about the premium capture cash reserve account (PCCRA). Specifically, Garrett said if implemented, it would put capital on the sideline and freeze up the securitization markets, “which are already frozen,” in addition to keeping the federal government on the hook as far as providing financing for the housing marketplace. After referencing two letters authored by Bachus and Garrett, which were sent to the Federal Reserve on this issue, Garrett asked Alvarez whether the Federal Reserve has done a cost-benefit analysis on the issue.
Alvarez said “we are in the process of doing an analysis” and “we are working on this as best we can.” There is currently no estimate on when the analysis will be completed, but Alvarez expects it to be released before the rule comes out.
Rep. Bill Posey (R-Fla.) was the only Republican to really distinguish himself from the rest of the Republican lawmakers in attendance. Posey said a “minor fine” is unlikely to change behavior. “I don’t see anybody going to jail. All the criminal activity we have seen from Wall Street, I just see a real lack of accountability and prosecution.” He asked the panel to submit how many referrals to the Department of Justice each regulatory agency has made concerning criminal prosecutions for wrongdoing, how many convictions have occurred, how many stipulated settlements have been entered into and the amounts of those settlements and damages that each settlement was pertaining to.
He also asked the panel whether they have investigated compensation committees who have awarded multi-million dollar bonuses to those “at the helm of a sinking ship.” Further, Posey said “I want to see wrongdoers go to prison… and it’s an obligation of yours to see that this happens” in order to change current behavior.
A number of Democrat lawmakers touched on the budget cuts to the various financial regulatory agencies. In response to a question from Maloney on whether the SEC would be able to initiate more action if the agency had independent funding authority, Khuzami said such authority “would help us greatly,” allowing the SEC to investigate and litigate more and hire additional trial lawyers.
In response to a follow up question, Khuzami stated his support for SEC Chairman Mary Schapiro’s comments that the SEC be given the legislative authority to increase its penalties on individuals and firms, adding “those remedies would help us a great deal.”
Waters questioned Khuzami on whether the Residential Mortgage-Backed Securities Working Group had enough resources to carry out its mission and whether he was concerned that the task force has yet to appoint an executive director, and when could the Committee expect an announcement of an appointment. She added, “we anxiously await what they’re going to be able to accomplish.”
Khuzami said “we have a significant amount of resources” and pointed to the fact that five agencies make up and contribute to the task force. Khuzami also said the working group is preparing a draft to respond to Waters’ letter inquiring about the new working group. He also said most of the investigative work was not being conducted by the task force, itself, but from within the agencies that make up the task force.
Rep. Brad Miller (D-N.C.) asked Khuzami whether anyone at the SEC has been able to review the settlements the SEC has entered into, noting the Federal Housing Finance Agency’s (FHFA) critical report on how the settlement between Freddie Mac and Bank of America “was settled too cheaply and for the wrong reasons.”
Khuzami said the SEC currently has a vacant inspectors general position. He said there has not been an overall review of the settlements, but noted that there is a “great deal” of scrutiny and review of each settlement.
Panel II Testimony
In his testimony, William Galvin, Secretary of the Commonwealth of Massachusetts, said permitting a firm “to enter into a settlement where it pays a fine, but neither admits or denies that it has done anything wrong, permits that firm to avoid basic culpability for its actions.” He added, “if we intend to reform the worst practices in the financial industry, then the firms that have violated the law must acknowledge that what they have done is wrong.”
Regarding the SEC v. Citigroup case, Galvin said as an executive agency “the SEC must be able to decide which matters to investigate, which cases to litigate, which charges to bring, and the terms of any settlements.”
In his testimony, Richard Painter, Professor of Law at the University of Minnesota Law School, said he agrees with the Second Circuit’s opinion in the SEC v. Citigroup case, saying the SEC “needs discretion to decide how limited enforcement resources should be used in a way that maximizes investor protection” and “federal courts should not define the way the SEC litigates and settles cases.”
Painter also said “for the SEC to litigate and lose a case with potential weaknesses can wreak havoc on the enforcement regime. The outcome may encourage wrongdoing by others who will see the S.E.C.’s loss as an opportunity to violate the same or related provisions of law with apparent impunity.”
In his testimony, Kenneth Rosen, Professor of Law at the University of Alabama School of Law, discussed the flexibility behind the SEC’s current use of the neither admit nor deny policy and the SEC v. Citigroup case. Rosen also said the time is now “for a comprehensive and vigorous dialogue on issues like limited resource allocation prioritization as it relates to enforcement.” As financial instruments and markets become more complex, Rosen said coordination amongst all levels of government drawn into the battle against financial irregularities “will be critical.”
Panel II Q&A
Rep. Barney Frank (D-Mass.) asked if it would be beneficial for the SEC to bring forward a large, and potentially expensive, case that the agency is confident it could win in order to set an example that the agency is willing to pursue wrongdoings no matter the cost.
The panelists agreed that the SEC should pursue strong cases and suggested the SEC be able to retain some of the revenue it collects from settlements.
Frank cautioned against this approach, noting his concern about the incentives that may derive from authorizing an enforcement agency with the ability to levy fines and then spend those fines.
Frank noted provisions in the Dodd-Frank Act that require all financial regulators to ensure compensation procedures and practices include claw back measures. He wondered whether regulators can use this authority to ensure firms include claw back provisions in their compensation packages that require individuals who are responsible for a large firm to pay for some of that loss.
For more on the hearing, please click here.