By Jenna Greene, From The National Law Journal

Exemptions sought from the Labor Dept. over restrictions on pension fund management.

In the elite world of multibillion-dollar Wall Street banks, the U.S. Department of Labor rarely looms large.

That changed this week. The agency will play a key role in determining whether five mega-banks that pleaded guilty to criminal charges can effectively participate in the $7 trillion pension fund market.

Citicorp, JPMorgan Chase & Co., Barclays PLC and The Royal Bank of Scotland PLC were charged by the U.S. Department of Justice with manipulating the price of U.S. dollars and euros exchanged in the foreign currency exchange spot market. Each bank pleaded guilty to a one-count felony charge of conspiring to fix prices and rig bids. UBS AG agreed to plead guilty to a one-count charge of wire fraud related to manipulating benchmark interest rates.

U.S. Attorney General Loretta Lynch, speaking to reporters on May 20, cited the “breathtaking flagrancy” of the conspiracy, which she described as “brazenly illegal.” Lynch said the department “intends to vigorously prosecute all those who tilt the economic system in their favor; who subvert our marketplaces; and who enrich themselves at the expense of American consumers.”

Combined, the five banks will pay more than $5 billion in fines. The penalties are historic, but the longer-term concern for the banks is how a felony conviction may affect their status with overseers including the Labor Department. Agency regulations disqualify felons from a range of business activities.

Regulators, however, also have the power to grant waivers that would allow the banks to conduct business as usual despite their criminal records.

The banks already scored one major victory. The U.S. Securities and Exchange Commission on May 20 granted a series of waivers to all five banks, conditioned on full compliance with the terms of the plea agreement.

The banks argued it would be “disproportionately and unduly severe” to refuse the waivers, as JPMorgan counsel Jonathan Pressman, a partner at Wilmer Cutler Pickering Hale and Dorr, wrote in a 13-page letter to the SEC. He argued that the bank’s participation in the antitrust conspiracy “does not call into question the reliability of [JPMorgan’s] current or future disclosure as an issuer of securities because none of the conduct is related in any way.”

Likewise, Barclays counsel George White, a partner at Sullivan & Cromwell, wrote to the SEC that the employees responsible for the price fixing were spot traders. “There is no indication that the wrongdoing reflected ‘a tone at the top’ that condoned or chose to ignore the misconduct,” he wrote.

The SEC ruled that the companies made a “showing of good cause” that they should retain their eligibility as “well-known seasoned issuers” of securities.

The Labor Department could be a more difficult sell, however, if its dealings with another recent wrongdoer are any indication. In May 2014, Credit Suisse A.G. pleaded guilty to a criminal charge of conspiring to aid and assist U.S. taxpayers in filing false income tax returns.

The Swiss bank scored a waiver from the SEC. But the bank has yet to secure a permanent exemption from the Labor Department to allow it to provide full asset management services to covered pension funds and Individual Retirement Accounts.

At issue is whether Credit Suisse can still be deemed a “qualified professional asset manager.” To date, Citi, JP Morgan and Barclays have asked the Labor Department for the same waiver, an agency spokesman said.

Such asset managers—typically large financial institutions—are exempt from a wide range of prohibitions under The Employee Retirement Income Security Act. The exemptions allow managers to conduct sophisticated transactions for clients in the pension fund market.

In January, the Labor Department’s Employee Benefits Security Administration held a day-long hearing, with 20 witnesses to consider Credit Suisse’s request to maintain its status as a qualified professional asset manager.

Asset managers “should maintain a high level of integrity,” said Timothy Hauser, deputy assistant secretary for program operations at the employee benefits agency, during the hearing. The question is whether letting Credit Suisse remain a manager “is in the interest of [pension] plans, participants and beneficiaries, and protective of their interests.”

Public Citizen says no. “Why should corporate crime pay?” founder Ralph Nader said during the January meeting, according to a transcript of the proceedings. “The Department of Labor has an opportunity here to stand proudly at its post and send a clear signal to other qualified professional asset managers that if you commit unthinkable criminal violations, you lose.”

Hauser responded, “We’re not giving them a pass from the duties of loyalty or prudence. We’re not giving any relief whatsoever to the entity that was actually convicted of the crime, you know.”

The agency closed the comment period on Credit Suisse in March, and a decision is expected in the coming months.

In granting earlier waivers, the Labor Department has heavily weighed the distance between wrongdoers and the asset managers.

“Of particular importance is the degree to which the investment and compliance operations of the [qualified pension asset managers] can be sufficiently isolated from the influence of `bad actors,’ ” the department wrote in approving a waiver for BNP Paribas last month. In 2014, the French bank pleaded guilty to two criminal charges of violating U.S. sanctions against Sudan, Cuba and Iran.

The Labor Department found that BNP’s asset managers “were not involved in the criminal activities that give rise to the convictions.”

As the department considers the latest waiver requests from the banks, a spokesman said in an email that “the public will have an opportunity to comment and may make a request for an administrative hearing” if the agency proposes an exemption.

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Credit: simarts/iStockphoto.com

Attorney General Loretta Lynch announcing, during a press conference at the U.S. Department of Justice, that five major banks have agreed to plead guilty to felony charges of conspiring to manipulate the price of U.S. dollars and euros. May 20, 2015. Photo by Diego M. Radzinschi/THE NATIONAL LAW JOURNAL

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