JPMorgan Chase, Citigroup, Barclays, RBS, And UBS Seek SEC Reg D Waivers

May 21, 2015

Yesterday, I tried to predict the future. A few hours before the United States Department of Justice announced its settlement with JPMorgan Chase, Citigroup, Barclays, the Royal Bank of Scotland ("RBS") and UBS over charges of having manipulated the foreign currency markets, I offered my take on what I thought was coming down the old regulatory and prosecution pike. UPDATE: Bill Singer's Ennui In Response To The DOJ FOREX Press Junket ( Blog, May 20, 2014). Based upon the subsequent news conference and press releases, it seems that I was indeed plugged into the hidden mysteries of the Universe. Fact is, many of you have joked with me about how spot on I was. I am now working on the next winner of the Belmont Stakes.

I have little expectation that this current round of market regulation will produce anything more than the highly-touted billions of dollars in fines. Stripped of the fanfare and over-used admonitions, the federal regulators and prosecutors involved in this latest round of dealing with the too-big-to-fail and the too-big-to-do-anything-about accomplished little more than what I frequently refer to as "checkbook diplomacy." As I lamented in  yesterday's commentary:

And then, tomorrow, a lot of folks will head out for their Memorial Day vacation.

The banks will still be open for business as usual.

The ensuing press releases from the banks will tell us that they are happy to put this incident behind them. The folks in charge are no longer here. We've hired consultants and academics to tell us how to set things right. It's a new day. We'd like to offer you a free toaster with a new bank account. Can we interest you in a new credit card?

At some point, we will learn, perhaps in a footnote to some financial document that the banks set aside reserves for the eventuality of large DOJ fines.  No big deal, they will assure us. We're just going to pay the DOJ fines from the reserves and go on our merry way.  Yes, we know, it's actually a fine coming out of the pockets of our public shareholders but, hey, what else did you expect?

Posted this morning on the Securities and Exchange Commission's website is this array of links:


Division of Corporation Finance

Staff No-Action, Interpretive & Exemptive Letters

By way of brief example (all of the submitted waiver requests are similar), let's consider some of the content in the "Incoming Letter: Barclays PLC, Barclays Bank PLC, and Barclays Capital Inc.:

This letter is submitted on behalf of our client, Barclays PLC ("Barclays PLC"), Barclays Bank PLC ("Barclays Bank") and Barclays Capital Inc. ("BCI" and, together with Barclays PLC and Barclays Bank, "Barclays") and its affiliates. Barclays hereby requests, pursuant to Rule 506(d)(2)(ii) of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"), a waiver of any disqualification from relying on the exemption provided by Rule 506 of Regulation D ("Rule 506") that may be applicable . . .

Bill Singer's Comment: As I read this opening paragraph, Barclays (and by implication, the other banks) are all saying that we don't have much of a problem paying the hundreds of millions each in fines or agreeing to all the reforms BUT this Reg D disqualification -- now that's gonna kill us!  Puhlease don't disqualify us. Pulhelase grant us an exemption.
. . .

A. CFTC FX Order 

Barclays Bank consented to the entry of the CFTC FX Order, in which Barclays Bank acknowledges, among other things, the following: 

1. As a result of the actions of certain of its traders in the FX Spot Market, Barclays Bank engaged in acts of attempted manipulation of certain FX benchmarks - which are considered commodities in interstate commerce - in violation of the Commodity Exchange Act (the "CEA"). 

2. Certain Barclays Bank FX traders knowingly submitted the false bids and offers relating to certain Russian ruble I U.S. Dollar FX transactions. This conduct resulted in Barclays violating Section 9(a)(2) of the CEA, which makes it unlawful for any person "knowingly to deliver or cause to be delivered for transmission through the mails or interstate commerce by telegraph, telephone, wireless, or other means of communication false or misleading or knowingly inaccurate reports concerning crop or market information or conditions that affect or tend to affect the price of any commodity in interstate commerce ... ".

3. Through the actions of certain Barclays Bank FX traders, Barclays Bank aided and abetted attempts of certain FX traders at other banks to manipulate FX benchmark rates in violation ofthe CEA.

Bill Singer's Comment: Ah, yes, "certain Barclays Bank FX traders."As I so brilliantly predicted and admonished in yesterday's Blog:

Well, at least some if not all of the banks will be pleading - alas, the vagaries of last-minute rumors. And, sure, the spin will likely be that it wasn't actually the banks that did this but a small group of renegade employees, who conspired sub rosa and unbeknownst to the higher-ups who actually ran the banks. Then there's that thing about the higher-ups because, you know, those higher-ups who were running things at the times cited by DOJ have largely moved on and out and there is a whole new cadre of higher-ups, untainted by this current scandal. I'm guessing (going out on a limb here) that the banks will argue we shouldn't blame a humongous international organization for the misdeeds of a few out-of-control traders who kept it all off the firms' state-of-the-art compliance radar screens.

. . .

B. Other FX Settlements 

Concurrently with Barclays Bank consenting to the entry of the CFTC FX Order, Barclays PLC entered into a Plea Agreement pursuant to Rule 11(c)(1)(C) of the Federal Rules of Criminal Procedure on May 20, 2015 (the "Plea Agreement"). Under the Plea Agreement, Barclays PLC pleaded guilty to a charge of participating in a combination and conspiracy to fix, stabilize, maintain, increase or decrease the price of, and rig bids for the purchase and sale of U.S. dollars and euros exchanged in the FX Spot Market in the United States and elsewhere from at least as early as December 2007 and continuing until at least January 2013, in violation ofthe Sherman Antitrust Act, 15 U.S.C. § 1. Under the Plea Agreement, Barclays PLC also agreed to (i) pay a criminal fine of $650 million and (ii) a term of probation of three years which includes certain conditions, which include, among other things, remediation undertakings. 

In addition, Barclays Bank consented to an order by the Federal Reserve imposing a civil monetary penalty of $342 million and ordering Barclays Bank and its New Y ark Branch to cease and desist and take certain affirmative actions to enhance internal controls and compliance programs (the "Board Order"). 

Barclays Bank and its New York Branch also consented to the entry of an order by the New York State Department of Financial Services (the "NYDFS") pursuant to Sections 44 and 44-a of the New York Banking Law imposing a civil monetary penalty of $485 million and requiring Barclays Bank and its New York Branch to take certain disciplinary actions against employees that were involved in the wrongful conduct and to continue to engage the independent monitor previously selected by the NYDFS to conduct, consistent with applicable law, a comprehensive review of Barclays Bank's compliance programs, policies, and procedures (the "NYDFS Order" and, together with the Plea Agreement, the CFTC FX Order and the Board Order, the "FX Settlements"). 

Furthermore, by a Final Notice dated May 20, 2015, the U.K. Financial Conduct Authority imposed a financial penalty of 284,432,000 on Barclays Bank for failing to control business practices in its FX business in London (including G 10 and emerging market spot FX trading, FX options and FX sales).

. . .


Barclays respectfully requests that the Commission waive any disqualifying effects that the Orders may have under Rule 506 of Regulation D. Barclays believes that the facts support a conclusion that the granting of a waiver would be consistent with the guidelines for relief published by the Division of Corporation Finance. 1 Applying the Rule 506 disqualification to Barclays and its affiliates would be disproportionately and unduly severe, for the reasons described below. 

Bill Singer's Comment: "Disproportionately and unduly severe" . . . and if there was ever a textbook example of when a firm should be disqualified under Rule 506, please, tell me what it would look like if not the myriad of penalties imposed by the regulators cited prior to this request for a waiver? I would be hard-pressed to come up with a better definition of what should constitute an "ineligible issuer."

Nature of Violations: Responsibility for the Alleged Violations 

The violation addressed in the Orders does not pertain to Regulation D offerings, or to offers and sales of securities generally. With respect to the CFTC FX Order, the employees responsible for the violation of the CEA were FX spot traders. With respect to the CFTC ISDAFIX Order, the employees responsible for the violation of CEA were USD swaps and USD options traders. None of these individuals was an officer or held a position on the Board of Directors of Barclays PLC or any of its subsidiaries. There are no findings that the misconduct described in the Orders occurred at the direction of senior management of Barclays. Moreover, there is no indication that the wrongdoing reflected "a tone at the top" that condoned or chose to ignore the misconduct. Rather, Barclays has accepted responsibility for the conduct of the FX, USD swaps and USD options traders involved in the conduct described in the Orders. 

Bill Singer's Comment: It's always the "employees responsible" and, gee, how nice that none of the actual traders was "an officer or held a position on the Board of Directors." I mean, for godsakes, did y'all sleepwalk through all of this massive market manipulation?  Do you really think that your firm made a meaningful commitment to effective, pre-emptive compliance policies?  Are you still hiding behind that deflection of "no findings" and "no indication." In the end, if I understand your implications, the firm did nothing wrong and was victimized by a handful of "employees responsible." Yeah, right.

Importantly, the Orders do not (i) allege fraud in connection with offerings by Barclays PLC, Barclays Bank or any of their subsidiaries of their securities, (ii) allege that members of the Board of Directors, the Executive Committee, the Disclosure Committee or the Financial Reporting and Control unit within the Global Finance Department of Barclays PLC knew about the violation or (iii) allege that members of the Board of Directors, the Executive Committee, the Disclosure Committee or the Financial Reporting and Control unit within the Global Finance Department of Barclays PLC ignored any warning signs or "red flags" regarding the violation. As a result, Barclays believes that a disqualification under Rule 506 is not required for the public interest or the protection of existing and potential investors. 

Bill Singer's Comment: Gimme a goddamn break! Of course the manipulation of the Forex market had nothing to do with "offerings" by the parent or subsidiaries. We're talking about rigging a spot market for currency trading NOT the offering of a private placement or initial public offering in currencies. Are you truly going to split those hairs? The issue of invoking the Reg D "ineligible issuer" disqualification is that you (or, if you prefer, your "employees responsible") had engaged in horrific acts in furtherance of a conspiracy to rig the Forex markets, thus causing massive financial harm to the markets -- which, as you know, include existing and potential investors. The invocation of the disqualification is supposed to get your attention and ensure that you feel some pain for the acts set forth in the settlement. You're not supposed to be rewarded by the grace of a pretense or legal fiction.

Duration of the Alleged Violation 

The misconduct occurred over a period of approximately five years. However, as mentioned above, the misconduct was isolated to the actions the Barclays FX, USD swaps and USD options traders, and remedial action, as described below, has been implemented to ensure that the misconduct does not reoccur. . .
Bill Singer's Comment: Oh, I'm sorry, I guess that I misunderstood. Now that you explain it, sure, I see your point. The misconduct only took place for about five years. That's not so bad. It could have taken place for ten or twenty years because you apparently were clueless as to the dimensions of this illegal activity. Of course, now that you have taken remedial action, we will all sleep better. But, lemme ask you a question, you know all those other past settlements involving you and other banks?  How come we seem back at square one? Maybe, just maybe, if the SEC rejects your request for a waiver of the Reg D disqualification, you will really feel some pain and make an even better attempt to run a legal and compliant business?

Investment Company Act Notices and Orders

Other Commission Orders, Notices, and Information