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Dissenting Statement in the Matter of The Royal Bank of Scotland Group, plc, Regarding Order Under Rule 405 of the Securities Act of 1933, Granting a Waiver From Being an Ineligible Issuer

Commissioner Kara M. Stein

April 28, 2014

I respectfully dissent from the Order, approved by a three-to-two vote of the Commission, to overturn the automatic disqualification of Royal Bank of Scotland Group, plc (“RBS”) from eligibility as a “Well-Known Seasoned Issuer.”[1]

In January 2014, a subsidiary of RBS was criminally convicted for its conduct in manipulating the London Interbank Offered Rate (“LIBOR”).[2] The scheme profited RBS to the detriment of individuals, businesses, and governments around the globe. Under federal securities laws and regulations, this criminal conviction automatically precluded RBS from eligibility as a Well-Known Seasoned Issuer (“WKSI”) and the attendant benefits that our rules provide to WKSI filers.[3]

Since the inception of WKSI nearly a decade ago, the Commission had not granted a WKSI waiver for criminal misconduct. Last fall, that changed when the staff, through delegated authority, granted a waiver to another large issuer despite its criminal wrongdoing.[4] Last Friday, the Commission compounded that error when it granted a waiver for another criminal wrongdoer.

The arguments in both instances implicate a structural problem with our policy, whether dealing with criminal or civil misconduct. They rest largely upon the notion that the triggering conduct is insignificant when considered in the context of a large financial institution with global operations.[5] I fear that the Commission’s action to waive our own automatic disqualification provisions arising from RBS’s criminal misconduct may have enshrined a new policy—that some firms are just too big to bar.

Over the years, Congress and the Commission have adopted numerous disqualification provisions, intended to protect investors and the markets from “bad actors.”[6] Yet the Commission routinely waives them. We need to step back and think broadly about what these provisions are intended to accomplish, and ask ourselves -- are we achieving the intended goals? Are they being fairly applied to all firms and individuals? Large institutions should be treated no differently, neither better nor worse, than small and medium-sized issuers.

Sound policy arguments have been made that we need more tools to police and regulate our markets. But, we also need to ensure that we correctly and fairly utilize the tools we have. These disqualification and bad actor provisions have the potential for deterrence at large institutions that no one-time financial penalty could ever wield. Yet, we repeatedly relieve issuers of the supposedly automatic consequences of their misconduct.

Our website is replete with waiver after waiver for the largest financial institutions. Some large firms have received well over a dozen waivers of one sort or the other over the past several years. One large financial firm alone, in a 10 year period, has received over 22 different waivers — often making the argument that it has a “strong record of compliance with federal securities laws.”

Just last summer, the Commission adopted a bad actor provision mandated by Congress for Rule 506 offerings.[7] Yet, we have already granted five of those waivers, all but one to large banks and broker-dealers, RBS among them.[8]

Since 2010, the Commission has granted at least 30 WKSI waivers. Twenty-nine of them went to large financial institutions and broker-dealers. In many cases, these issuers are receiving their second, third, and even fourth WKSI waiver in less than four years.

It is true that large financial institutions may have vast operations and thousands of employees, making certain types of civil or even criminal misconduct statistically more likely. However, their size and complexity should not insulate them from the same regulatory consequences that other issuers must bear. The kind of reasoning that is used to support waivers in this context has led the Commission, by inches and degrees, to where it is today, almost reflexively granting waivers of all types, and most often to large financial institutions.

Last Friday’s Order exemplifies this problem. Among the many disqualification and bad actor provisions enacted by Congress and the Commission, loss of WKSI status may have the fewest ramifications. Nevertheless, when, as here, a subsidiary of a large financial institution is convicted for committing a crime that helped skew the value of trillions of dollars’ worth of financial instruments and contracts worldwide, we still grant relief. Say what you will about how isolated or insignificant this conduct was within the context of the entire institution, it still managed to wreak havoc on financial markets across the globe. Yet we provide our implicit “Good Housekeeping Seal of Approval,” and tell the investing public that this issuer is still deserving of reduced Commission review and subject to fewer investor protections.

If we are going to abrogate our own automatic disqualification provision on these facts, then we should consider discarding these disqualification and bad actor provisions entirely, along with the pretense that they have any real meaning.

In my view, nearly every factor in the “Division of Corporation Finance’s Revised Statement on Well-Known Seasoned Issuer Waivers”[9] weighs strongly against a waiver for RBS. The egregious nature of the misconduct weighs against a waiver. This is criminal conduct, part of a widespread scheme undertaken by multiple banks to manipulate LIBOR for profit. LIBOR affects in some way nearly every financial market across the globe — consumer and corporate loans, interest rate swaps and derivatives, mortgages, college loans, futures and options. LIBOR rigging impacted millions of American families, businesses, and communities.[10] And all of this occurred at a time when the global economy was facing its worst crisis in decades.

This conduct has led to fines and penalties at RBS of roughly $1 billion.[11] In addition, nine individuals at various banks have been arrested by UK authorities,[12] and the Department of Justice (“DOJ”) has charged eight individuals at banks and brokerage firms.[13] DOJ’s press release notes that the criminal investigation continues.[14] In fact, one of the individuals charged is mentioned by name throughout the Statement of Facts attached to the RBS Deferred Prosecution Agreement as directly colluding with RBS traders.[15] If additional arrests are made, or this individual or others decide to cooperate or otherwise provide additional information, we could be faced with even more damaging information relevant to our waiver analysis.

The misconduct also hurt many banks at a time when governments around the world were trying to ensure that banks could continue to provide the credit needed to keep our economies moving. In fact, the Federal Deposit Insurance Corporation (“FDIC”) filed a complaint last month on behalf of 38 failed U.S. banks.[16]

The FDIC’s allegations reveal disgraceful conduct at relatively high levels. For example, the FDIC Complaint quotes from telephone transcripts revealing that RBS’s London-based Head of Money Markets Trading, and its Head of Short-Term Markets for Asia, knew of the rigging. The Head of Money Markets Trading is quoted as saying: “People are setting to where it suits their book. . . . LIBOR is what you say it is.”[17]

Suffice it to say, this is egregious criminal conduct with far-reaching consequences in the United States, in the markets the Commission oversees, as well as in global financial markets. This factor weighs strongly against granting a waiver.

The duration and extent of the misconduct also weighs against granting a waiver. The manipulation was relentless and protracted, occurring hundreds of times over the span of four years.[18] The criminal conduct involved at least 21 different employees,[19] some of them market-desk heads. How could management not know? Did no one question the source of these profits? Alternatively, if management did not know, this too is a problem.

As for the impact of denying a waiver, RBS has failed to offer evidence that would show any significant impact from loss of WKSI status. RBS’s waiver request simply lists all of the capital raising it has done through takedowns from its WKSI shelf registration over the past few years.[20] However, these same types of offerings could be made from a non-WKSI shelf, so they have not isolated any effect from the loss of WKSI. This will not prevent RBS from raising capital. It will simply protect investors by requiring a higher level of review of RBS’s registration statements.

I am also unpersuaded that the remedial steps taken justify a waiver. Remedial steps are important, and deserving of credit because their implementation should represent a necessary condition for even considering a waiver. However, if a WKSI issuer is able to secure a deferred prosecution agreement, and its subsidiary pleads to a felony, then thorough remedial steps are usually required and almost certain to have occurred. If this is heavily weighted in favor of a grant, as opposed to serving as more of a baseline for consideration, it will nearly always result in granting a waiver for criminal misconduct. This should not be the case.

Finally, the Division’s revised statement on WKSI Waivers accords much weight to the question of whether the conduct at issue relates to disclosures.[21] This conduct does implicate false disclosures. RBS artificially boosted its profits by submitting false LIBOR rates and misleading counterparties. The scheme was designed to, and did, inflate trading profits. Moreover, these false disclosures created the impression to investors that RBS was more creditworthy that it actually was.

The FDIC’s complaint describes that the manipulation “artificially increased [the] ability to charge higher underwriting fees and obtain higher offering prices for financial products.” Further, “had market participants and purchasers of the [] financial products known the true credit risk and liquidity issues…some market participants would have declined to do business with them or would have demanded more favorable terms.”[22]

The misconduct is directly related to disclosure, and this weighs against granting a waiver.

Setting aside how closely this conduct may be related to disclosures, we should not give the issue so much weight as to effectively circumvent the language of our own rule. Almost all of the enumerated crimes in the rule that trigger WKSI ineligibility do not, on their face, relate to disclosure. They include, for example, larceny, theft, robbery, extortion, forgery, counterfeiting, embezzlement, and wire fraud.[23] The touchstone in this context is not disclosure as much as it is honesty and integrity. On that measure, RBS’s misconduct weighs against granting a waiver.

As to any significance that could arise from the fact that most of this conduct occurred at a subsidiary of a subsidiary, I am unpersuaded. Rule 405 specifically provides for disqualification based upon the misconduct of subsidiaries, and for good reason. Large institutions often have complex structures operating through dozens or even hundreds of subsidiaries. Why would we encourage large issuers to structure around our rule by creating ever more complicated business organizations?

In the end, this should be simple. We have a rule that confers a special benefit to issuers that have a good track record. And we have a rule that calls for automatically rescinding that benefit when the issuer misbehaves. Here, the Commission waived that common sense rule despite egregious criminal misconduct. RBS failed to justify why we should do so. In granting this waiver, I believe the Commission has strayed from its mission, and strayed from a careful and prudent course. Accordingly, I cannot and do not support the Commission’s Order.


[1] See Order Under Rule 405 of the Securities Act of 1933, Granting a Waiver From Being an Ineligible Issuer, In the Matter of Royal Bank of Scotland Group, plc, Rel. No. 33-9578, April 25, 2014;

[2] In February 2013, the U.S. Department of Justice charged Royal Bank of Scotland, plc, with wire fraud and price fixing as part of a Deferred Prosecution Agreement that included a $100,000,000 fine. See A subsidiary, RBS Securities Japan Limited, pled guilty to one count of wire fraud, paid a $50,000,000 fine, and was sentenced in January 2014. See; Additional banks have also been charged in the scheme. See, e.g.,;; and

[3] See Rule 405 of the Securities Act of 1933 (the “Securities Act”) (17 C.F.R. 230.405).

[4] See Letter dated September 19, 2013, regarding “UBS-AG — Waiver Request of Ineligible Issuer Status under Rule 405 of the Securities Act,”

[5] See Letter dated September 19, 2013, regarding “United States of America v. UBS Securities Japan Co., Ltd.;” p. 6-7,; Letter dated March 27, 2014, regarding “The Royal Bank of Scotland plc and RBS Securities Japan Limited Settlement of LIBOR Investigations;” p. 3,

[6] See, e.g., Section 27A(b) of the Securities Act and Section 21E(b) of the Securities Exchange Act of 1934 (exclusions to the use of safe harbors for forward looking statements); Section 9 of the Investment Company Act of 1940 (ineligibility of certain affiliated persons and underwriters); Rule 262 of the Securities Act (disqualification from eligibility for Regulation A exemption); Rule 507 of the Securities Act (disqualification from eligibility for exemption under Rules 504, 505 and 506 of Regulation D); Rule 602 of the Securities Act (disqualification from eligibility for Regulation E exemption); Rule 206(4)-3 of the Investment Advisers Act of 1940 (ineligibility to receive solicitation fees).

[7] See Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (15 U.S.C. 77d); Disqualification of Felons and Other “Bad Actors” from Regulation D Offerings, Rel. No. 33-9414.

[8] See Division of Corporation Finance No-Action, Interpretive and Exemptive Letters, Regulation D — Rule 506(d) Waivers of Disqualification,

[9] See Division of Corporation Finance’s Revised Statement on Well-Known Seasoned Issuer Waivers

[10] United States municipalities suffered as well, with losses allegedly in the billions. In a lawsuit filed by the City of Philadelphia for LIBOR rigging, it claims that complex swaps affected by the manipulation “cost state and local governmental entities hundreds of millions or even billions of dollars, depleting treasuries, ruining budgets and hindering the delivery of public services.” See City of Philadelphia v. Bank of America Corporation, et al, No. 2:13-CV-04352 (E.D.P.A. 2013); .

[13] See Three Former Rabobank Traders Charged With Manipulating YEN LIBOR; UBS Securities Japan Co. Ltd. to Plead Guilty to Felony Wire Fraud for Long-running Manipulation of LIBOR Benchmark Interest Rates,; ICAP Brokers Face Felony Charges for Alleged Long-Running Manipulation of LIBOR Interest Rates,

[14] See RBS Securities Japan Ltd. Sentenced for Manipulation of Yen Libor;

[16] See Complaint in Federal Deposit Insurance Corp. v. Bank of America Corporation, et al; 14-CV-1757, (S.D.N.Y 2014).

[17] See id. at pg. 28-29.

[19] See Annual Report of The Royal Bank of Scotland Group plc, Comparing this number of employees involved to the total of roughly 137,000 employees is a meaningless exercise. No criminal conduct will ever involve the complicity of thousands of employees. Likewise, the idea that we must find direct knowledge of a crime within the executive suite before we will enforce our rule is irresponsible, and likely would encourage purposeful inattention.

[20] Letter dated March 27, 2014, regarding “The Royal Bank of Scotland plc and RBS Securities Japan Limited Settlement of LIBOR Investigations,”

[21] However, the idea that disclosure holds such significance appears belied by the fact that we just granted a waiver to RBS five months ago for a disclosure-based violation. See This prior waiver is also relevant to the issue of recidivism, another factor that weighs against waiver.

[22] See Complaint in Federal Deposit Insurance Corp. v. Bank of America Corporation, et al; 14-CV-1757, (S.D.N.Y 2014), p. 43; 82.

[23] See Rule 405 of the Securities Act (17 C.F.R. 230.405).

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