Bank of America Granted Penalty Relief in SEC Mortgage Case










The U.S. Securities and Exchange Commission resolved an impasse over punishing Bank of America Corp. in a mortgage-bond case, clearing the way for the lender to complete a $16.7 billion global settlement, people familiar with the matter said.

In a private meeting earlier this week, SEC commissioners voted to waive most of a set of additional sanctions that could have seriously curtailed the bank’s asset management business and ability to raise money for private companies, according to the people, who asked not to be named because the decision isn’t yet public. Some of the relief is conditioned on the bank’s good behavior and comes with an outside monitor, the people said.

The bank also got hit with a penalty that takes away its ability to issue more shares or bonds without getting SEC approval for each deal.

The SEC’s decision came as Bank of America and the agency neared a deadline for a federal judge in North Carolina to sign off on the settlement. The two sides had twice sought more time from the court as negotiations dragged on.

The agreement ends a legal headache for Bank of America, which, like most Wall Street firms, has been working to conclude numerous government probes stemming from the 2008 financial crisis. The contretemps at the SEC also portends future difficulties for large banks seeking to end enforcement cases, especially if they are repeat offenders.

Bank of America’s case was held up on a 2-2 deadlock between Republican and Democratic commissioners. Chair Mary Jo White, who as a private attorney represented ex-Bank of America Chief Executive Officer Kenneth Lewis, was recused.

Even when White is a swing vote in other cases, the commission is still likely to continue grappling with the broader debate: whether Washington regulators have been too soft on the financial industry.

Recidivist Firms

The penalty waivers, once a routine and obscure job handled by SEC staff lawyers, have in recent months become a flashpoint at the five-member commission.

The extra punishments are tucked into securities laws and were originally crafted to stop egregious frauds, mainly by small-time schemers and boiler-room operators. Because they kick in automatically when a case is resolved, a company needs to get the agency to waive the penalty.

Democratic Commissioners Luis Aguilar and Kara Stein have often pushed for the commission to debate the exemptions, arguing that extra penalties may be appropriate for recidivist Wall Street firms. On the other side, Republicans Daniel Gallagher and Michael Piwowar have generally backed the waivers when recommended by the agency’s staff.

Stein, people familiar with the matter have said, is determined to keep pressing the issue in other cases.

That won’t sit well with at least one of her Republican counterparts.

“This has taught me that I can never again vote on an enforcement recommendation without knowing the status of the waiver requests,” Gallagher said in an interview yesterday. He declined to discuss the specifics of the Bank of America deal.

There were three main sanctions at issue in the case.

The commission granted a full waiver on the harshest penalty, which would have barred the bank from managing mutual funds, the people familiar with the matter said. The commission also refused to halt a punishment that precludes the bank from raising capital without jumping through regulatory hoops.

Partial Waiver

The commissioners compromised by granting a partial waiver on the third penalty, which would have banned the bank from helping clients such as hedge funds and fast-growing startups raise money by selling private shares. The agreement allows the firm to continue the work it already does in this area for 30 months, the people said.

During that time, the bank will have to hire an independent consultant to monitor its policies, procedures and compliance. The bank will need to reapply for full relief, a request that must be signed by the chief legal officer or chief executive, the people said.

John Nester, a spokesman for the SEC, declined to comment, as did Lawrence Grayson, a spokesman for Bank of America.

The SEC case was part of a deal the bank struck in August with the Justice Department, state attorneys general and other regulators over claims that it sold souring mortgage securities without disclosing all the risks to investors. Most of the alleged wrongdoing involved Merrill Lynch Co. and Countrywide Financial Corp., companies Bank of America bought.

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