As part of a settlement approved by the Securities and Exchange Commission (SEC) on August 5, 2014, Americas third largest bank has agreed to cease selling hedge fund investments to its clientsat least for now. The case stems from bank practices in 2007 related to securities sales and comes almost one year after implementation of the SECs Bad Actor rule. Private investment sales to large institutions are not affected by the agreement.
Part of Fraud Settlement
The cessation of hedge fund sales is part of a $285 million fraud settlement with the SEC over allegations that sales of collateralized debt obligations in 2006 and 2007 led to more than $700 million in losses for investors. The settlement prohibits the bank from selling investments in hedge funds and private-equity funds to its wealthy clients, and in accordance with the agreement, the bank has sent letters to hedge fund firms informing them that it can no longer offer their funds and private equity funds to clients. Until now, the bank has been offering about 40 hedge funds to clients via its private bank which manages $310 billion. The private bank clients are required to have a net worth of at least $25 million.
In 2011, a U.S. District Court in Manhattan originally denied approval of the settlement amount referring to it as “pocket change for an institution the size of the defendant bank; however, upon reversal of that ruling by the Second U.S. Circuit Court of Appeals, the District Court judge approved the settlement. Other banks that had entered into similar settlements were not subject to such restrictions because their accords were reached before a change in the law became effective last year.
The Bad Actor Rule
Pursuant to Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) the SEC adopted the Bad Actor rule, which it codified under new SEC Rule 506(d) and (e). The rule bars companies or individuals with a “criminal conviction, regulatory or court order or other disqualifying event” that occurred after September 2013 from participating in private offerings. The rule became effective on September 23, 2013.
Efforts to Obtain a Waiver
Despite the settlement agreement, the bank is nevertheless attempting to resolve the hedge fund restrictions by way of a waiver request. The SEC grants waivers so that restricted firms can continue to conduct their pre-restriction business if the waiver is viewed as being in the public’s best interest. A typical request argues that the activities for which approval is being sought are not directly related to the activities that prompted the settlement. Recently, some SEC officials have questioned the granting of waivers to repeat offenders.
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Peyman Khosravani is a global blockchain and digital transformation expert with a passion for marketing, futuristic ideas, analytics insights, startup businesses, and effective communications. He has extensive experience in blockchain and DeFi projects and is committed to using technology to bring justice and fairness to society and promote freedom. Peyman has worked with international organizations to improve digital transformation strategies and data-gathering strategies that help identify customer touchpoints and sources of data that tell the story of what is happening. With his expertise in blockchain, digital transformation, marketing, analytics insights, startup businesses, and effective communications, Peyman is dedicated to helping businesses succeed in the digital age. He believes that technology can be used as a tool for positive change in the world.
