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04-Feb-2018
This SEC Rule Makes No Sense for Big Banks
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The automatic bar from private placements is a wild non sequitur. 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 mlevine51@bloomberg.net
To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net