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Hester Peirce Archives

Earlier this week, the Court of Appeals for the D.C. Circuit issued its much awaited opinion regarding the Securities and Exchange Commission's conflict minerals rule. The court ruled in the SEC's favor with respect to the challengers' Administrative Procedure Act and economic analysis claims and in the challengers' favor on their constitutional claim. The claim on which the challengers prevailed has attracted the most attention, but other parts of the opinion could also have important effects.

The Federal Deposit Insurance Corporation has produced valuable research on community banks, but more research is needed to address an issue of great concern for small banks--growing regulatory burdens. At the end of 2012, the FDIC released a helpful community banking study that explored the characteristics and practices of community banks. And yesterday, the agency issued a report on community bank charter attrition, which offers valuable insights into the nature and drivers of bank consolidation. The message of the most recent report is clear--despite years of consolidation activity, community banks are here to stay. That is good news, because the diversity of the U.S. financial system--including its large number of community banks--is critical to its ability to serve the nation's diverse financial needs. The study's optimistic assessment of the future, however, largely ignores one key issue--the effects of regulatory burdens on small banks.

Regulators on the Beat
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Mark Cuban and his attorney wrote a piece in the Wall Street Journal today that is worth reading. Cuban successfully beat back insider trading charges by the Securities and Exchange Commission. To do so, he took the relatively unusual step of going to trial instead of settling with the SEC. Defending oneself against an SEC enforcement action is costly financially, but can also take a toll on one's mental and physical health, family life, and career. For that reason, many people choose--regardless of the validity of the SEC's allegations--simply to settle and move on with life as best they can. Cuban maintains that the SEC should operate under a rule currently applicable in the criminal context that requires the government to turn over to the defense material exculpatory evidence. Cuban's commentary raises broader questions about regulatory agencies' enforcement programs.

Bidding Bye to the Bank
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The Wall Street Journal reported yesterday that senior JPMorgan executive, Michael Cavanagh, is leaving for private equity firm Carlyle. As the article explains, people are surprised, because Mr. Cavanagh was thought to be in the running for Mr. Dimon's job. No doubt the offer from Carlyle was enticing, but the Journal reported that there was also something he was running away from at JPMorgan--the prospect of winning the CEO job only to find that it consists primarily of dancing deftly with droves of regulators. So he will leave JPMorgan for the regulatory safe haven of private equity, where he'll be able to concentrate on lending instead of regulatory fights, at least until the regulators turn the brunt of their focus on private equity. Meanwhile, the bankers who stay behind will be too busy mastering the art of compliance to have time for their customers and business plans. As our recent small bank survey shows, this is not a uniquely big bank problem. Executives at small banks are also finding out that a job that used to be about making good loans is now about regulatory compliance.

CFTC's Aimless Budgeting
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In the wake of the financial crisis, the Commodity Futures Trading Commission convinced Congress to expand its mission and its powers. It is now working on a substantial budget increase to go with its increased authority. Congress should not hand more money over to the agency until the CFTC produces a reasonable plan for how it will spend the money and an explanation for its recent spending choices.

Letting Nonbanks Be Nonbanks
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Two recent speeches by financial regulators are the latest entries in an ongoing discussion about regulating nonbank financial institutions and financial stability. Decisions made in this area will have significant consequences for the health of our financial system.

A federal district court recently ruled against John Chevedden in his bid to get a shareholder proposal included in Express Scripts' proxy materials. The company did not want to include the proposal because it contained material facts that directly contradicted statements in the company's public filings. After Express Scripts filed suit, Mr. Chevedden agreed to correct some of the errors--something he apparently had not offered in response to earlier requests from the company. The court held that the company could exclude the Chevedden proposal because, "[e]ven if Chevedden's revised proposal was timely, which it clearly is not, there are still substantial inaccuracies in the revisions to the supporting statement that render the revised proposal subject to exclusion" under the SEC's rules.

Mr. Chevedden is an experienced crafter of shareholder proposals. The Manhattan Institute's Proxy Monitor reported that just under a quarter of shareholder proposals between 2006 and 2013 "were sponsored by just two individuals, John Chevedden and Kenneth Steiner, and their family members and trusts." In a 2007 comment letter to the Securities and Exchange Commission, Mr. Chevedden explained that "[t]he current resolution process ensures that management and the Board focus a reasonable amount of attention to the issue at hand as they must determine their response to the shareholder proposal." The shareholders footing the bill might not agree that companies should be forced to spend time and resources responding to proposals that contain material inaccuracies.

Securities class actions often follow close on the heels of major announcements by public companies. These class actions have been portrayed as a shareholder's weapon against corporate wrongdoing, but too often that weapon inflicts harm on the very shareholders it is intended to protect.

Advice with Borders
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The Securities and Exchange Commission settled with Credit Suisse for providing financial services to U.S. clients without having registered with the SEC. The Swiss firm's efforts at winning American business were successful enough to generate more than 8,000 U.S. client accounts with more than $5 billion in assets. The firm took inadequate steps to ensure that it was in compliance with U.S. law and, even after deciding to stop offering cross-border advice, the firm took several years to close U.S. accounts. The settlement includes an admission of wrongdoing and a $196 million payment consisting of disgorgement of the firms' fees, plus interest and a $50 million penalty.

That kind of money suggests that clients were really harmed, but the complaint does not reveal any investor harm. Indeed, the delay in shutting the cross-border program down appears to have stemmed in part from reluctance of clients to part with their advisers. Contrast the Credit Suisse settlement with a settlement last year with a registered adviser that the SEC alleges stole more than $3 million from a police and firefighter pension fund to buy shopping malls. The settlement consisted only of requiring the adviser to repay the money it had allegedly stolen. A sophisticated global firm like Credit Suisse has the wherewithal to understand and comply with registration requirements, but the SEC's disproportionately large settlement in a case without discernible investor harm will dissuade other foreign firms from registering to serve U.S. investors. Such a result is not good for investors, who ought to be able to seek advice overseas.

Suing for Settling
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Advocacy group, Better Markets, filed suit in federal district court today to challenge the settlement between JPMorgan and the Department of Justice last November related to JPMorgan's crisis-era sales of residential mortgage-backed securities. The complaint alleges that the DOJ violated the law when it entered into a settlement that was shielded from judicial review and the details of which remain a mystery. As Better Markets paints it, the deal was negotiated by a politically connected bank with a department officials scrambling to show themselves tough on too big to fail institutions. The complaint suggests that the large settlement numbers served as a smoke screen to conceal DOJ's gentle slap on JPMorgan's brutish wrist. Better Markets, itself a confidant of regulators, likely overstates DOJ's deference in this matter, but correctly points out the settlement's troubling lack of transparency. When it was announced, I objected that the settlement's large dollar figures were not accompanied by any clear explanation of the violations being punished.



Isaac Gorodetski
Project Manager,
Center for Legal Policy at the
Manhattan Institute

Katherine Lazarski
Press Officer,
Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.