Dealers’ WKSI woes: a case of rough justice?

Stripping firms of special issuance status suggests heavy-handed approach by SEC

"It's like: can you get around without a driver's licence?" asks the head of structured notes at a major issuer in New York, likening a US regulator's decision to strip his bank of privileges that allow it to fast-track issuance programmes to being stranded without a car in a country where the automobile is king.

He's referring to the Securities and Exchange Commission's 'well-known seasoned issuer' (WKSI) designation, which allows firms to issue debt and equity securities to the public without having to jump through costly hurdles first. Those who enjoy WKSI status don't need to notify the watchdog of the size of proposed issuance programmes in advance. They also have the freedom to use simpler factual disclosure documents, and can use a dedicated website to showcase their wares.

But what the SEC gives, it can take away. In recent years, five major issuers – Bank of America Merrill Lynch (BAML), Credit Suisse, Deutsche Bank, JP Morgan and UBS – have lost their WKSI status, in most cases for unrelated breaches of securities law.

It takes time to win that status back: if a bank loses its WKSI privileges by becoming a so-called ineligible issuer as a result of, say, violating anti-fraud laws or committing a felony under the Exchange Act, it will need to wait three years before it can be considered eligible to regain it.

In recent years, five major issuers – Bank of America Merrill Lynch, Credit Suisse, Deutsche Bank, JP Morgan and UBS – have lost their WKSI status, in most cases for unrelated breaches of securities law

In bid to fathom some of the agency's more recent disbarments, it's instructive to look back to 2014, when the first of the above issuers, BAML, lost WKSI privileges. April of that year saw a warning shot fired across the industry's bows, when SEC commissioner Kara Stein hit out at the agency's decision to award Royal Bank of Scotland (RBS) – then still an active issuer – a waiver on its WKSI status.

Stein argued the bank's role in the Libor-rigging scandal – which included a criminal prosecution for its Japan securities unit – ought to automatically disbar it from enjoying WKSI privileges.

"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," she wrote in a dissenting statement on the SEC's decision.

The line of argument Stein chose to take – namely that the waivers the SEC regularly granted to firms due to be automatically stripped of their WKSI status even for unrelated indiscretions were evidence it was straying from its mandate – was illuminating.

Her broadside, along with the lobbying of now former commissioner Luis Aguilar, clearly struck a chord in a febrile political climate; now the pendulum has swung the other way, and firms who transgress in unrelated matters – sometimes in far-flung jurisdictions – can automatically expect to lose their WKSI status.

RBS subsequently withdrew from the structured products market – a decision many at the time speculated was down to politicking and fears of further reputational damage at the UK state-backed bank, rather than a pure business decision.

Not long after the RBS judgement, BAML lost its eligibility after a $16.65 billion settlement with the US Department of Justice in 2014, over claims it misled investors into buying toxic residential mortgage-backed securities – a result of legacy issues at the bank unrelated to its contemporaneous issuance programmes.

Whether these cases allow a watchdog that is regularly held up by politicians as being too soft on big banks to point to easy victories over Wall Street is open to question

UBS became ineligible in October 2015 after agreeing to pay $19.5 million to settle claims it made false and misleading statements and omitted certain information when offering structured notes linked to a proprietary index – a case that did little to improve the reputational risk dealers face when selling prop index products to retail investors.

But the three other dealers to have lost their WKSI status in the last two years have done so as a result of misdemeanours that were at best tangentially related to securities issuance programmes. Credit Suisse became an ineligible issuer in May 2014 after pleading guilty to conspiracy to aid and assist US taxpayers in filing false income tax returns and other documents with the Internal Revenue Service. The bank sought a WKSI waiver but withdrew its application after SEC staff told the bank it would not win approval, Reuters reported.

Deutsche Bank meanwhile became an ineligible issuer after one of its traders at its South Korean subsidiary was convicted for stock manipulation in January 2016.

JP Morgan lost its status in December 2015 after two wealth management subsidiaries agreed to pay $267 million and admit wrongdoing to settle charges that they failed to disclose conflicts of interest to clients. An appeal, which stressed that the main losers of the decision would be investors, fell on deaf ears.

Whether these cases indicate that the issuers in question pose a heightened risk to US investors, or whether they allow a watchdog that is regularly held up by politicians as being too soft on big banks to point to easy victories over Wall Street, is open to question.