America’s second largest bank was suspended from trading in hedge funds last summer by the Securities and Exchange Commission (SEC) as part of a $16.65 billion settlement with the Justice Department and other government agencies. The settlement resolved lawsuits filed in 2013 that alleged that the bank did not properly inform investors of the underlying risks of mortgage securities it was selling. Violations of securities laws can render a financial institution a “bad actor” with repercussions that include a five-year ban on the sale of private offerings. Recently, the SEC has granted waivers of such bans — but not without sharp differences of opinion among commissioners.
The Bad Actor Ban
The bank was facing a five-year ban on the sale of hedge funds due to the SEC’s Bad Actor Rule that makes firms automatically ineligible from engaging in such sales if they violate securities laws. The ban was set to go into effect this week upon final approval of the settlement by a U.S. district judge; however, the bank has been delaying that step as it continued to seek the waiver from the SEC, arguing that it needed the waiver so as to be able to provide a key service to wealthy individuals and institutional customers, that two executives referred to in the SEC lawsuit had left the bank and that it had tightened controls over how it issues securities, including requiring senior business and risk executives to sign off on such offerings.
Numerous other banks that have also been deemed bad actors after settlement with the SEC have received such waivers in recent months — which raises the question as to whether the Bad Actor Rule in fact has any real deterrent value from the perspective of bank management.
SEC commissioners granted a waiver from the ban for 30 months on condition that the bank hire an outside consultant charged with monitoring bank compliance with SEC regulations as well as reporting on compliance to the SEC. The waiver allows the selling of shares in hedge funds, startups and other private offerings to wealthy customers.
SEC commissioners had been deadlocked over whether to grant the waiver, and — not unsurprisingly — the debate lined up along political lines between Democratic and Republican commissioners: The SEC’s two Democratic commissioners argued against granting the waiver, citing concerns the agency has been too lenient on Wall Street firms that repeatedly violate the securities laws, while the two Republican commissioners favored granting those waivers that the SEC enforcement staff recommends. Historically, commissioners have granted waivers when it has been demonstrated that defendant banks have taken remedial steps to correct prior misconduct.
David draws on 20+ years’ experience in both legal practice and in business services delivery since his own call to the Bar in 1989. With several years in the startup environment, including as a co-founder in the legal tech space specifically, he brings a unique and timely perspective on the role of data, automation and artificial intelligence in the modern and efficient delivery of services for legal consumers. Having been both a corporate buyer of legal services and a services provider, he identifies the greater efficiency and value that can be achieved in legal operations for corporate buyers especially.
An attorney, David worked for law firms Pinsent Masons and Linklaters in London before moving to New York to join Credit Suisse. As CAO, he helped negotiate & execute the relocation of Credit Suisse into its new NYC global HQ. Subsequently, David directed major global outsourcing, shared sourcing, HR operations & process efficiency initiatives including the digitization of records, the global roll-out of PeopleSoft HRMS & Y2K. David has worked extensively in the UK, US, Philippines, India and China markets in the areas of data management, human resources and business process outsourcing.
Most recently, David has been successfully investing in and serving as an advisory board member of several legal services start-ups including a cloud-based solution for legal process automation and e-filing; and a technology solution for large-scale capture of court and other public data used for litigation analysis, among others.
David graduated from the University of Manchester with Honors in Law and Bar School (College of Legal Education) in London, and has been a member of Middle Temple since 1989. He is the founder and former Chairman of The Global Sourcing Council.
Member: Bar of England & Wales, ABA, NYCBA, ACC, DRI