Dodd-Frank Whistleblower Program Suffers Major Setback as SEC Blows Whistleblower’s Cover

Posted by on April 25, 2012 Comments Off
Securities and Exchange Commission Headquarters -- DoddFrankSummary.com

Photo courtesy ABCNews.com

In an ugly slipup, federal securities regulators inadvertently uncovered the identity of a previously anonymous whistleblower while probing a stock trading platform firm.  The accidental gaffe calls into question the security of the government whistleblower program mandated by the Dodd-Frank Act, and could hurt efforts to encourage whistleblowers to come forward in the future.

The Securities and Exchange Commission (SEC) was responsible for the mistake, which occurred while the SEC was investigating Pipeline Trading Systems LLC.  During an interview of an executive of the firm, an attorney from the SEC showed him one of the whistleblower’s notebooks filled with the whistleblower’s handwritten notes.  The executive immediately recognized the handwriting

Pipeline, which operates a trading system called a “dark pool,” eventually reached a settlement with the SEC after the SEC asserted that Pipeline had intentionally misled investors regarding how orders were filled.  Pipeline did not admit or deny any of the allegations.

The whistleblower, who agreed to be identified by the Wall Street Journal, is Peter Earle, an ex-employee of one of Pipeline’s trading affiliates.  Earle told the Wall Street Journal that he is “disappointed” that the SEC disclosed his identity.

The SEC’s policy, mandated by the Dodd-Frank Act and SEC rules, is to take all reasonable precautions to keep whistleblowers anonymous.  In a statement, the SEC said, “Our review of the facts confirms that we followed this practice in this case.  While we utilize evidence from all witnesses, we do not reveal which witnesses may be cooperating with the government except as required by law or the governing rules of civil procedure.”

A provision in the Dodd-Frank Act allows whistleblowers to claim up to 30% of penalties collected by the United States for helping to uncover illegal activities in the financial industry.  Since the program’s inception in August, the SEC has received over 1,000 tips from potential whistleblowers.  Peter Earle is not eligible to collect a reward under Dodd-Frank because he contacted the SEC before the whistleblower program took effect.

The news that the SEC accidentally blew the cover of one of its anonymous whistleblower sources may harm the whistleblower program overall, and especially in cases where whistleblowers might fear for their safety.  Especially harmful is the nature of the mistake, in that it should have been relatively obvious to the SEC that executives might recognize their colleagues’ handwriting.  Such gaffes could reduce confidence in the SEC’s ability to avoid similar mistakes in the future.  At the same time, however, the notion of a lucrative reward for successful whistleblowing may remain a powerful incentive.

Poll Results: Dodd-Frank Does Not Prevent “Too Big to Fail”

Posted by on April 9, 2012 Comments Off

A new poll from American Banker shows that 57% of Americans believe that the Dodd-Frank Act has not given regulators the power to let big banks fail.  Rather, they believe that the biggest banks are bigger than ever and crisis management is more political than ever.

Picture credit AmericanBanker.com

The poll comes in the wake of a massive slowdown in Dodd-Frank-related rulemaking (though some rules are still trickling down from financial regulators, such as last week’s final rule issued by the Commodity Futures Trading Commission regarding record-keeping and firewall requirements for swap dealers) and a new public-relations campaign by the Federal Reserve, designed to bring the shadowy agency more into the public eye to increase confidence.

Some believe that this lack of confidence in the Dodd-Frank Act and federal regulators is thanks in large part to the massive lobbying efforts of large banks.  Alexander Eichler of HuffingtonPost.com notes that “Wall Street has done its part to make sure Washington waters down financial reform as much as possible, enacting a major pushback against the regulatory package. Indeed, in one 12-month period, lobbyists from Goldman Sachs alone were showing up on Capitol Hill an average of once every four days — and the actual implementation is running conspicuously behind schedule, with regulators missing more than a hundred deadlines for putting rules on the books thus far.”

SEC pitches budget boost as Dodd-Frank rule implementation slows to a crawl

Posted by on March 7, 2012 Comments Off
sec dodd frank volcker rule mary schapiro

Photo by Win McNamee/Getty Images North America

Chairman Mary Schapiro requested a large increase in budget for the SEC before Congress on Tuesday, as the agency’s five commissioners have failed to meet at all in the last four months to discuss rule implementation under the Dodd-Frank Act.

In prepared testimony before the House appropriations committee, Schapiro pledged to use the increased funds to replace outdated technologies and hire more economic and market experts.  But in light of the massive rulemaking and regulatory burden imposed by the Dodd-Frank Act, it also seems likely that the increase in budget will assist the SEC in implementing Dodd-Frank.

It is no secret that Republicans have staunchly refused to increase the SEC’s budget as a method of both protesting the Dodd-Frank Act and preventing its implementation.  Perhaps in an effort to circumvent Republican opposition, Schapiro’s testimony mentioned Dodd-Frank rule implementation only in passing, and instead focused on the SEC’s need for additional staff to deal with rapidly expanding markets and increased enforcement actions.

At the same time, the SEC’s rulemaking implementation has slowed by about half, from an average of about nine rules per month in the first year following the Dodd-Frank Act’s passage to an average of about five ever since.  Schapiro called this slowdown a “natural lull,” citing the SEC’s addition of a new commissioner last November and the high volume and complexity of public commentary on proposed rules in the last year, especially on the SEC’s proposed Volcker Rule.  Adding to the appearance of a slowdown, most of the SEC’s rulemaking meetings have taken place behind closed doors.

There seems to be little doubt of a connection, however, between the SEC’s slower pace of rulemaking and Congress’ tightening of the SEC’s purse strings.

Dodd-Frank Criticism Roundup: What the Media is Saying About the Act’s Faults

Posted by on February 21, 2012 Comments Off

As the Dodd-Frank Act approaches its second anniversary, a rising tide of criticism of the way it is being implemented has been heard in the media.  While large financial institutions have consistently criticized the Act itself and resisted rules promulgated by the agencies since Dodd-Frank’s enactment in June 2010 (and even earlier), political analysts and commentators are now weighing in on what they claim is the Act’s inevitable doom.

Dodd-Frank a “Hydra”

On Saturday, the Economist published a lengthy criticism of both the Dodd-Frank Act and the rules being promulgated under it.  Quoting Jonathan Macey, a professor of corporate law at Yale Law School, the editorial stated, “‘Laws classically provide people with rules. Dodd-Frank is not directed at people. It is an outline directed at bureaucrats and it instructs them to make still more regulations and to create more bureaucracies.’ Like the Hydra of Greek myth, Dodd-Frank can grow new heads as needed.”

The piece went on to note that in stark contrast to other financial reform legislation throughout the nation’s history, which tends to be short and simple, the Dodd-Frank Act itself is nearly 1000 pages long, and requires agencies to promulgate even more rules, making it impossibly complex.  For example, the article notes, while Sections 404 and 406 of the Act only take up a few pages, the Securities Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”) adopted a final rule under this section that requires large financial corporations to fill out a 192-page form (“Form PF“) at an estimated initial cost of $100,000 to $150,000.

The editorial also criticizes the plethora of agency powers created and/or modified by the Dodd-Frank Act, the loopholes created by the law, and the costs of the new whistleblower program.

dodd frank summaryThe Complexity Conundrum

The Washington Post weighed in on the Economist’s article, noting that while complex rules are difficult to comprehend and create loopholes, simpler regulations tend to be interpreted to give regulatory agencies heavy-handed power and overbroad authority.  The Post also went into more detail on the massive amounts of money being spent by large financial institutions on lobbying and meeting with financial regulators.

Three Reasons Dodd-Frank Is Doomed

Yesterday, Jeremy Bowman of financial services magazine The Motley Fool published an article giving the three major reasons he believes that the Dodd-Frank Act is “doomed.”  According to Bowman, the Act’s “toothless enforcement,” “lack of funding,” and “endless complexity” will be the downfall of the financial reform legislation.

Bowman opines that “By granting big banks exemptions to the laws it’s supposed to be enforcing, the SEC has made a habit of encouraging bad behavior.”

He goes on to note that the SEC’s habit of settling cases and granting waivers is, in part, due to lack of funding, which impairs the SEC’s ability to bring large-scale enforcement actions against the armies of high-powered lawyers that large financial firms tend to hire.

Finally, Bowman argues, the Act’s complexity creates loopholes and increases legal costs for large financial corporations.

Other Recent Criticisms

 

Two Dodd-Frank “Tweaking” Bills Clear House Committee

Posted by on February 17, 2012 Comments Off

The House of Representatives Financial Services Committee has cleared two bills aimed at “tweaking” portions of the Dodd-Frank Act.  Both bills have received broad bipartisan support, and seem likely to pass easily.

The first bill is aimed at correcting an apparent oversight in the original Act which we reported on last week.  The original Act failed to include the Consumer Financial Protection Bureau (CFPB) among the financial regulatory entities who could request attorney-client and other privileged documents from financial companies without those companies risking waiver of the attorney-client privilege.  The first bill corrects this oversight and should provide additional privacy protections, thus increasing the CFPB’s ability to effectively request documents and data from financial services firms.

The second bill would reduce the scope of a controversial portion of the Act which requires banks to spin off some of their swaps trading into affiliates.  The measure was added into the Dodd-Frank law by then-Senator Blanche Lincoln, and was widely opposed at the time by Republicans, the financial industry, and even some Democrats.

The so-called “Lincoln Provision” or “Push-Out Rule” requires banks to “push out” several kinds of swap trading into affiliated entities, purportedly to reduce the risk for the central bank entity.  The bill approved by the committee on Thursday would limit this rule only to the riskiest of derivatives, including asset-backed and structured-finance securities swaps.

The House committee’s ranking Democrat, Barney Frank (one of the namesakes of the Act), agreed with the measure modifying the “push out” rule.  “I never myself never thought it made a great deal of sense,” said Frank.

CFPB and Banks Seek Dodd-Frank Amendment to Protect Privileged Documents

Posted by on February 13, 2012 Comments Off
cordray cfpb legal privilege dodd frank summary

CFPB Director Richard Cordray stated that he supports an amendment to "correct what we believe is an oversight."

An apparent oversight in the Dodd-Frank Act causing banks to resist turning legal documents over to the Consumer Financial Protection Bureau (CFPB) has sparked a debate about potentially amending the Act.  The Act gives the CFPB broad power request documents from banks, but as bankers have noted, does not provide the same protection for legally privileged documents as is provided for such documents turned over to other financial regulatory agencies have under a 2006 law.

Under normal circumstances, legal advice letters and memoranda from lawyers are protected from disclosure to any outside party under the attorney-client privilege doctrine.  This protection is usually deemed waived, however, if those documents are given to any other outside party.  Under the 2006 measure, part of the Financial Services Regulatory Relief Act of 2006 (12 U.S.C. § 1813, 1828(x)), financial institutions may turn over legally privileged documents to certain financial regulatory agencies without waiving this privilege.

The CFPB, however, did not exist in 2006, having been created by the Dodd-Frank Act in 2010.  And the drafters of Dodd-Frank appear to have overlooked the privilege issue.  Without statutory protection of privileged documents, banks who turn over such documents to the CFPB run the risk of having to produce those documents to civil plaintiffs and government trial attorneys in future actions.

In a bulletin issued on January 4 of this year, the CFPB told financial institutions that the 2006 law was “intended” to cover the CFPB, and that banks must, upon request, turn over legally privileged documents, but banks are not buying it.  The matter of whether privilege has been “waived” would normally be determined by a court, not the CFPB.  As a result, banks are resisting turning over any such privileged documents until statutory protection is enacted.

The Wall Street Journal reports that all sides support amending the law to provide this protection to documents turned over to the CFPB by banks.  CFPB Director Richard Cordray called the omission of this protection an “oversight,” and stated that he and the CFPB also support an amendment.

While all parties agree that an amendment is needed, Republicans and Democrats disagree, however, on the best way to enact it.  House Republicans support amending the Dodd-Frank Act directly, while Democrats support adding the CFPB to the list of protected financial institutions under the Financial Services Regulatory Relief Act of 2006.

In a client alert in January, the law firm of Pepper Hamilton LLP informed clients about the potential issue, noting that “A deep irony lies buried in this story. The fact is that Congress today is so fractured that even technical corrections to the Dodd-Frank Act seem unlikely. . . .  In contrast, the Financial Services Regulatory Relief Act of 2006, which enacted Section 1828(x), passed the Senate on unanimous consent and it passed the House without any nays. How times have changed.”

Campaign Contributions from Wall Street Rise as Republicans Call for Dodd-Frank Repeal

Posted by on February 2, 2012 Comments Off
newt gingrich mitt romney dodd frank repeal

Presidential hopefuls Newt Gingrich and Mitt Romney have outpaced President Obama in campaign contributions from Wall Street. (photo by Matt Rourke, AP)

Republican presidential candidates have seen their campaign contributions from Wall Street outpace President Obama’s by more than 5 to 1 in the wake of their calls for repeal of the Dodd-Frank Act.

Earlier this week, both Newt Gingrich and Mitt Romney criticized the Act’s financial reforms and its resulting regulations, saying that the Obama administration’s financial regulations caused Florida’s housing market to bottom out and homeowners to go even further into debt.  Gingrich also slammed Dodd-Frank in last week’s GOP debate.

Promising to repeal the Act if elected, Gingrich stated to The Guardian, “Dodd-Frank is a direct hit on the housing system in Florida.  You get the regulators out of the way and you will, in fact, find it easier to sell houses, and you will see the prices of houses go back up.”

Romney went even further, blaming the 2008 crash of the housing market on President Obama, The Guardian reported.

Meanwhile, campaign contributions from Wall Street now favor Republican candidates over the president by more than a 5 to 1 margin.  The majority of contributions have been to Romney’s campaign, who has long-standing ties to Wall Street from his days at private equity firm Bain Capital.

According to campaign finance data compiled by the Center for Responsive Politics and The Huffington Post, the financial sector has spent at least $33 million to support Republican candidates so far in the 2012 election cycle.  President Obama has raised about $6 million from these sources.

“I will repeal the Dodd-Frank legislation, which is harming local banks and hurting credit creation when we need it most,” Romney told the Las Vegas Journal-Review on Sunday.  Gingrich said, “I would repeal Dodd-Frank tomorrow morning.”

President Obama has said he will fight any effort to repeal or weaken the law.

Large Banks Fight to Limit the Overseas Reach of Dodd-Frank Swaps Rules

Posted by on January 30, 2012 Comments Off
H Rodgin Cohen of Sullivan and Cromwell

H. Rodgin Cohen of Sullivan & Cromwell LLP is among the lobbyists arguing to limit Dodd-Frank's extraterritorial reach. Photo by Nicole Bengiveno/New York Times.

Lobbyists for the banking industry are gaining traction in their argument that U.S. financial regulators should exempt the overseas derivatives-trading operations of large banks from their oversight.

According to government records, more than half of Goldman Sachs Group Inc.’s, Morgan Stanley’s, and other large banks’ derivatives-trading business is conducted overseas.  If their lobbyists’ arguments are accepted, these operations would largely be outside the jurisdictional reach of the Dodd- Frank Act.

The limits of Dodd-Frank’s extraterritorial reach have been hotly contended since its enactment.  The banks have testified to Congress, met with financial regulators, and filed letters and comments which contend that they will be put at a severe competitive disadvantage if Dodd-Frank regulations were to apply to their foreign operations.  The argument as put forth by banking lobbyists has been gaining traction with regulators, and maintains that the combination of U.S. supervision of holding companies with foreign supervision of overseas operations is sufficient.

A Bloomberg News analysis of the banks’ quarterly filings with the Federal Reserve “shows that Goldman Sachs had 62 percent of its $134 billion in fair- value derivatives assets and liabilities in non-U.S. branches or subsidiaries for international banking as of Sept. 30, while 77 percent of Morgan Stanley (MS)’s $101 billion was in non-U.S. operations.”

In seeking the exemption for foreign operations, the banks have hired New York-based Sullivan & Cromwell LLP.  Cleary Gottlieb Steen & Hamilton LLP also been hired by a dozen U.S. and international banks, including UBS Securities LLC and Barclays Capital, to lobby a similar position.

The argument has been accepted by some members of Congress and among regulators as financial agencies attempt to complete their rules before 2013. Representative Barney Frank — one of the Act’s namesakes — and Senator Tim Johnson as well as other legislators from both parties are urging financial regulators to focus rulemaking primarily on the U.S. side of the banks’ businesses.

Gary Gensler, Chairman of the Commodity Futures Trading Commission (CFTC), has said that the CFTC will not complete its guidelines on Dodd-Frank’s extraterritorial reach until after April 2012.  The financial industry has also been waiting for a similar proposal from the Securities and Exchange Commission.  Gensler has indicated previously that, when it comes to the overseas operations of large banks, the CFTC might eventually defer to foreign regulators that have comparable and consistent regulations.

Volcker Rule Roundup: What the media is saying about the Volcker Rule debates in Congress

Posted by on January 19, 2012 1 comment

dodd frank summary, dodd frank act, paul volcker, volcker ruleIn the wake of yesterday’s hearings on Capitol Hill where financial regulators, banks, and organizations presented their arguments for and against proposed implementations of the Dodd-Frank Act‘s Volcker Rule, various experts, commentators, and opinion writers have expressed their opinions, put forth interesting facts, and reported generally on the hearings and rules.  Here’s what they are saying:

“Some argue that allowing federally backed institutions to continue to make these investments allows them to see potential gains that far outweigh their potential risks. . . .  [T]he fight over the Volcker Rule is, in some ways, an example of large financial institutions trying to continue the behavior that some say contributed to a financial meltdown in the first place.” ~ Danielle Kurtzleben, “Why You Should Care About the Volcker Rule,” U.S. News and World Report

“When things go well, the benefits of [the proprietary trading] arrangements [addressed by the Volcker Rule] are garnered by the executives who run these companies (and perhaps shareholders). When things go badly, the downside costs are pushed in various ways onto the taxpayers and all citizens. . . .  Powerful players in the financial sector are entitled to make their arguments against the Volcker Rule. But for-hire ‘research’ that shows the rule will hurt the broader economy should not be regarded as convincing evidence.” ~ Simon Johnson, “Should We Trust Paid Experts on the Volcker Rule?”, New York Times “Economix” Blog

“My core problem with the Volcker Rule is that it seems to me to be trying to eliminate excessive investment risk at our core financial institutions without measuring either the level of investment risk or the capacity of the institutions to handle the risk, which would tell us whether the risk was excessive. Instead, the rule focuses on the intent of the investment rather than its risk characteristics.” ~Testimony of Douglas J. Elliott before the House Financial Services Committee, as reported by Brookings

“Top U.S. regulators announced that the Volcker Rule will be refined despite cries from the opposition to dispose of the measure.” ~ Daniel Purt, “Volcker Rule to be refined despite opposition,” Credit Newsline

“According to CFTC Commissioner Scott O’Malia, quoting Sheila Bair, the former Chairman of the FDIC, and a former Acting Chairman and Commissioner of the CFTC, the proposed rules are aptly described as a ’300-page Rube Goldberg contraption of a regulation.’ . . .  Commissioner O’Malia also noted that after publishing 300 pages of preamble and rule text, one would expect the CFTC to have a very clear regulatory mandate and enforcement responsibility, but that isn’t the case. Broadly speaking, Commissioner O’Malia stated it is unclear what role the CFTC has in enforcing the gamut of rules that will ultimately comprise the Volcker Rule.” ~ Steve Quinlivan, “CFTC Volcker Rule proposal is a Rube Goldberg contraption,” Lexology.com

“Lobbyists for U.S. banks say a proposed ban on proprietary trading will cost companies and investors more than $350 billion. Some economists and fund managers say the claim is greatly exaggerated”  ~ David Scheer, “Attack on Volcker Rule Seen Exaggerating Cost of Disorder,” Bloomberg

Rep. Michael Grimm (R-N.Y.) ripped into the regulators who appeared at the hearing, dubbing them ‘overzealous” bureaucrats who have “found creative ways to make a terrible rule even worse.’ ~ Josh Boak, “Volcker Rule shredded by Republicans,” Politico.com

“Setting aside the fact that even Paul Volcker has said the provision would have done little to avoid to the recent crisis, the Act’s various exemptions illustrate the confusion and hypocrisy underlying the rule. ~ Mark A. Calabria, If the ‘Volcker Rule’ Is So Great, Why Exempt Treasuries and Agencies?, Cato-at-liberty.org

 

Rigid Dodd-Frank financial regulations may hurt farmers, say agriculture groups

Posted by on January 18, 2012 Comments Off
dodd frank summary, dodd frank act, farmers, agriculture

(Photo by Rex Larsen)

Financial reform regulations under the Dodd-Frank Act that are too rigid could damage the ability of small agricultural companies and individual farmers to obtain access to the financial risk management services that are vital to their business, said the National Association of Wheat Growers and other agriculture groups in a letter sent to Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler last week.

The groups were generally supportive of the Dodd-Frank Act’s “broad objectives,” but stated that they are concerned with the rules that financial regulatory agencies are supposed to promulgate in accordance with the Act.

The letter argued that the proposed definition of “swap dealer” is overbroad and could end up imposing strict regulations on agricultural risk management providers such as local grain elevators, making them less likely to offer a full range of risk management services. As a result, producers would not have as much access to risk management options and the risk management sector would likely consolidate.

The letter also asked for clarification of how certain proposed rules will interact.  It urged the CFTC to explicitly exclude commercial hedging transactions from the definition of “swap dealing activity” and to recognize the differences between significant swap dealers and those looking to facilitate legitimate hedging practices.  The letter also asked for a higher de minimis exception to allow for rising commodity prices and increased market volatility.

The groups writing represented farmers, cooperative associations, grain dealers and millers, food processors, and others. The full text of the letter is located here.