Monday, August 7, 2017

Regulators’ Penalties Against Wall Street Are Down Sharply In 2017

Business-friendly shift under President Trump is only one factor, as enforcement actions from the financial crisis wind down.


By Jean Eaglesham, Dave Michaels and Danny Dougherty
The Wall Street Journal
August 7, 2017

Wall Street regulators have imposed far lower penalties in the first six months of Donald Trump’s presidency than they did during the first six months of 2016, a comparable period in the Obama administration, according to a Wall Street Journal analysis.

Lawyers who defend financial cases said a shift to a business-friendly stance at regulatory agencies in the Trump administration is one of several reasons for the decrease. Other factors include delays resulting from the change in administrations and the winding down of cases from the financial crisis.

Penalties levied against firms and individuals by the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Financial Industry Regulatory Authority in the first half of 2017 were down nearly two-thirds compared with the first half of 2016—putting regulators on track for the lowest annual level of fines since at least 2010, the Journal found. Fines of $489 million in the first half of 2017 compared with $1.4 billion in the 2016 period.

The SEC levied some $318 million in penalties during the first half of 2017, a search of federal court documents and all publicly available records on the agency’s website and data provided by Andrew N. Vollmer, a professor at the University of Virginia School of Law, showed. Last year, agency actions yielded $750 million in penalties during the same period, an agency spokesman said. The SEC declined to disclose its own tally of 2017 penalties; the agency didn’t dispute that the total value of penalties fell in the first half of 2017 compared with the same term in 2016.

Kevin Callahan, the spokesman, said the SEC doesn’t consider six months to be long enough to draw any lessons about the agency’s effectiveness. The number of cases brought over the two periods was “relatively constant,” he added.

The Trump administration is preparing to roll back some Obama-era financial regulations. Fines marched steadily higher during the previous administration, partly because of enforcement against misconduct that occurred before and during the financial crisis.

James McDonald, enforcement chief at the CFTC, said variations in penalty tallies from year to year are normal and “not an indication of any changes in our commitment to vigorously prosecute violations of our laws to preserve market integrity and protect customers.” He said, “There will be no let up, no pause, and no delay in our enforcement program.”

Nancy A. Condon, a Finra spokeswoman, said “vigorous enforcement is an essential part of our oversight.” The nongovernmental watchdog, which oversees brokers and brokerage firms, assesses its regulatory programs “based on our ability to efficiently and effectively identify and discipline bad actors,” she added, and “not on the volume of actions or overall quantity of fines.”

The Trump administration brings new priorities to the SEC and CFTC, said Thomas Sporkin, a former senior SEC official and now a partner at law firm Buckley Sandler LLP. “When you move from an administration that put a heavy emphasis on regulation to a more conservative, business-friendly one, that means a change in the agenda,” he said.

Each of the three agencies has changed its enforcement chief in the past five months, and both the SEC and CFTC have new chairmen. The SEC and CFTC have each been operating with less than the full roster of five commissioners: The CFTC had just two commissioners until last week, when the Senate voted to approve two more; the SEC had two until May and now has three.

Because SEC commissioners have sometimes split along party lines on the issue of financial penalties, vacant seats make it harder for agency enforcers to bring certain kinds of cases, according to current and former officials. “With only two commissioners in place, it only takes one to prevent the staff from bringing an enforcement action,” said Mark Schonfeld, a former director of the SEC’s New York office and now a partner at law firm Gibson Dunn & Crutcher LLP.

Another factor is the falloff in blockbuster, multibillion-dollar cases the SEC and CFTC have brought against Wall Street alleging crisis misconduct and market manipulation in recent years.

The drop in the CFTC’s half-year penalties, to $154 million from $603 million, was mostly the result of two big benchmark-rigging cases it brought in May 2016, according to the Journal’s analysis.

At the SEC, a single case filed in June last year, alleging a bank misused customer assets, imposed penalties of $358 million—more than 10 times the agency’s biggest penalty in the first half of this year of $30 million.

The scarcity of big cases is reflected in SEC settlements of cases alleging accounting violations, a priority area under the last chairman. The highest accounting-related penalty in the first half of 2016—$80 million paid by biotech giant Monsanto Co.—dwarfs the highest penalty for accounting failures so far in 2017—$8.25 million paid in January by medical-device company Orthofix International NV. Orthofix admitted wrongdoing; Monsanto, a much bigger company, settled with the SEC without admitting or denying wrongdoing.

SEC Chairman Jay Clayton, who took over in May, has expressed concern about the size of corporate penalties the SEC has levied in recent years, saying they hurt shareholders and it would be better to punish guilty individuals.

Wall Street is lobbying to reduce the size of financial penalties. Organizations including the U.S. Chamber of Commerce, the Financial Services Institute and Fidelity Investments have been pushing Finra, which is financed by the industry, to ease up.

Finra, which is overseen by the SEC, is weighing a potential change to its enforcement guidelines, according to people familiar with the matter.

The watchdog imposed only two fines of more than $1 million in January through June this year and didn’t announce either.

In the first half of 2016, Finra imposed at least five fines of more than $1 million and publicly announced each of them.

Overall this year, Finra has levied $17 million in fines, down 77% from the first half of last year.

“There has been a dialing back,” said Brian Rubin, a partner at law firm Eversheds Sutherland (U.S.) LLP. Finra “has gotten lot of feedback from member firms that there has been a big increase in fines [in recent years] …and that’s something they’re looking at.”


Article Link To The WSJ: