Eight Senators Urge SEC to Finalize Rule on Conflicts of Interest

Finish Line

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Recently, a former SEC trial attorney has placed a bright spotlight on the failure of his old agency to charge more individuals at Goldman Sachs over securities fraud in the “Abacus” deal. Abacus was composed of mortgage securities that Goldman knew were toxic. But they packaged them up and sold to investors anyway, and then actively bet against those investors. It is a stark example of a serious conflict of interest.

Unfortunately, not only have the bankers responsible for the conflicted deals gone unpunished, but also the Dodd-Frank rule targeted at stopping material conflicts of interest remains unfinished. (For more on why the rule is important, see AFR’s 2012 letter).

Last week, Senators Feinstein, Merkley, Markey, Boxer, Franken, Durbin, Warren and Reed sent a letter to the SEC urging them to prioritize completion of this long-neglected rule. The letter highlights that the SEC is over 1,730 days late on completing this rule:

“The SEC was directed to issue rules no later than 270 days after the enactment of Dodd-Frank. It has now been over 2,000 days since the President signed Dodd-Frank into law. This is unacceptable. We urge you to work quickly to finalize strong rules implementing Section 621.”

The letter also highlights the problem with leaving Dodd-Frank’s conflict of interest rule unfinished:

“As you know, Section 621 prohibits material conflicts of interest for those involved in structuring asset-backed securities and serves as a critical component of financial reform based on the lessons we learned from the financial crisis. The U.S. Senate Permanent Subcommittee on Investigations’ April 2011 report on the financial crisis detailed some of the transactions that were designed to fail so that the entities constructing them could bet against them and profit. This is an appalling practice that the SEC can address by releasing a strong final rule on Section 621.

Financial institutions should not be able to sell securities to investors and then bet against those same securities, to purposefully design securities or structures with the intent that they will fail or with defective components, or to mislead investors by structuring products specifically intended to benefit an undisclosed entity. These types of structures are built on deception, and withholding material information is fundamentally contrary to the efficient operation of our financial markets and to the protection of investors.”

 

You can find the complete letter here, or the text below.

 
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Advocates and Lawmakers Press for Relief to Groups of Students Victimized by Predatory Practices

For well over a year, lawmakers, law enforcement, advocates and scammed students alike have been pressuring the Department of Education to relieve the staggering debt of students who attended for-profit colleges like Corinthian which broke the law. In response, the Department convened a negotiated rulemaking session to clarify what the process would be going forward for students who were victims of illegal acts by their school, and wanted to assert their legal right to a “defense to repayment,” or debt cancellation.

But as outlined in a letter delivered this week and signed by 34 organizations, the Department’s draft of the proposed regulations has moved in the wrong direction. Among the worst items of their proposal is a requirement that defrauded borrowers seek debt cancellation within two years — or lose eligibility. This is particularly troubling because there is no limit on the number of years the government can collect on the student debt.

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Senator Warren Presses For Debt Cancellation NOW for Defrauded Students

In the Senate HELP Committee’s confirmation hearing for Acting Education Secretary John B. King Jr, Senator Elizabeth Warren asked why the defrauded students of the now-bankrupt Corinthian Colleges have not received the debt relief they’ve been promised, despite the fact that the Department of Education has both the authority and the legal obligation to grant it.

Corinthian Colleges, Inc. was a for-profit school that received billions and billions in federal student loan money before its bankruptcy. But instead of the opportunities students were seeking Corinthian further impoverished them, cheating them of the education they were promised while burdening them with millions in outstanding debt.

Prior to its collapse, Corinthian faced an investigation from the Securities and Exchange Commission, a lawsuit from the Consumer Financial Protection Bureau for predatory lending, which the Bureau subsequently won, and legal actions and investigations by twenty-three state Attorneys General. Corinthian has since faced two enforcement actions by the Department itself.

But to date, the Department has only granted relief to less than one percent of the affected students** — and only those who attended a single school, Heald College.

Senator Warren pressed Acting Secretary King on what’s taking so long, noting, “I don’t get why it doesn’t move faster. We know they’ve been defrauded!”

A transcript of her remarks in the Committee follow:

Senator Elizabeth Warren: I want to raise one more issue. The students who were cheated by Corinthian College. Now, before Corinthian College collapsed, this for-profit college sucked down billions and billions of dollars in federal student loan aid by roping in students with false and misleading information and then saddling them with debt that is going to be impossible to repay. It was outright fraud, and in response the Department made a lot of promises to Corinthian’s victims. Last April, the Department promised to give Corinthian students “the relief they are entitled to under federal law.” Two months later, the Department announced they would “find ways to fast track relief based on legal findings for large groups of students” and there would be “no need for students to make individual showing that they were affected by the school’s fraud.” The Department also estimated last summer that about 40,000 former Corinthian students would be eligible for this so called fast track relief. Now, that’s out of hundreds of thousands of total Corinthian student that the Department acknowledged could be eligible for relief. It is now eight months later, and just 1,300 of those 40,000 fast track students have received relief. And I want to know what the plan is here to actually deliver on the promises that the Department has made. It seems to me, Dr. King, that the Department is moving painfully slowly while students who got cheated are struggling under debts that they were conned into taking on. Time is running out for these students, so I want to know, how do you plan to live up to the Department’s promises and actually ensure that each and every student who was defrauded receives debt relief now? Not years from now, but now?

Acting Secretary John King: I appreciate the question. So a few things to know. The special Master Joe Smith is working diligently with a team and we are adding capacity to that team to add to existing claims…

Sen. Warren: Can I just stop you right there, Dr. King, because this is part of what’s bothering me. I don’t understand why this takes so long. This isn’t hard, what we’re trying to do here. Students are waiting, their credit is getting worse and worse, the interest is accumulating on these loans, the process needs to move faster. And I don’t get why it doesn’t move faster. We know they’ve been defrauded!

Sec. King: We’re trying to make it move faster. I can say a promising note is that $115 million has gone to students either through borrower defense or through close school discharge. We are trying to group claims so that we can respond to them as quickly as possible. We are in the process of negotiating rulemaking on new borrower defense rules going forward that will make it easier for the department to efficiently group claims.

Sen. Warren: That’s going to be 2017.

Sec. King: So the challenge has been that the legal requirement, as you know, is for a demonstration that there was a clear violation of state law. We have students in a variety of states so we are working through those. On campuses where we have a clear finding, and these is true in the Heald and Everest cases, where we have a clear finding at the state level we have been able to group claims or we are in the process of grouping claims. But you are right, we need to make the process move faster and we intend to.

Sen. Warren: I just really want to push on this we potentially have hundreds of thousands of students who have been cheated here. You promised fast track to 40,000 students…That was three-quarters of a year ago, nearly, two-thirds of a year ago, and we’ve only gotten about 1,300 people through it. You know, I just want to remind us that Congress gave the Secretary of Education broad authority to cancel the loans of students who attend colleges that broke the law. I hope if you are confirmed you will use that authority to ensure the students get every dime of relief that they deserve, without making them jump through a bunch of unnecessary hoops. They’ve already been hit hard enough. This is the time for the Department of Education to step up and be on their side.

Sec. King: Yes, I’m committed to protect the interests of borrowers and also to do what we can through the enforcement unit and the gainful employment regulations to make sure we do not have a repeat of Corinthian, to the extent we can avoid it.

Sen. Warren: And that’s powerfully important. Thanks for sitting through two rounds of questions on this stuff.

** In June 2014, the Department said “about 40,000 borrowers” were impacted by the Heald enforcement action. The Second Special Master Report noted that only 1,312 Heald students have received relief. In November, the Department announced that 85,000 former Everest students were affected by their joint enforcement action with the California Attorney General. Thus, this 1% of affected borrowers figure vastly underestimates the population, since it only includes Corinthian students covered by the two enforcement actions.

 

Senator Warren on Attempts to Further Rig Our Justice System (H.R. 766)

In a speech on the Senate floor on February 3rd, Senator Elizabeth Warren described America’s criminal justice system as “rigged” in favor of big corporations and the wealthy and powerful. The Senator also condemned attempts in the House to pass H.R. 766, a bill that makes it harder to the Department of Justice to investigate and prosecute financial crimes.

The House is set to vote on H.R. 766 on February 4. Americans for Financial Reform opposes the bill, and has written to Congress voicing that opposition. [UPDATE: H.R. 766 passed the House 250–169].

Here is the complete transcript of Senator Warren’s speech:

Mr. President, across the street at the Supreme Court, four simple words are engraved on the face of the building: Equal Justice Under Law. That’s supposed to be the basic premise of our legal system: that our laws are just, and that everyone – no matter how rich or how powerful or how well-connected – will be held equally accountable if they break those laws.

 

But that’s not the America we live in. It’s not equal justice when a kid gets thrown in jail for stealing a car, while a CEO gets a huge raise when his company steals billions. It’s not equal justice when someone hooked on opioids gets locked up for buying pills on the street, but bank executives get off scot-free for laundering nearly a billion dollars of drug cartel money.

 

We have one set of laws on the books, but there are really two legal systems. One legal system is for big corporations, for the wealthy and the powerful. In this legal system, government officials fret about unintended consequences if they’re too tough. In this legal system, instead of demanding actual punishment for breaking the law, the government regularly accepts token fines and phony promises to do better next time. In this legal system, even after huge companies plead guilty to felonies, law enforcement officials are so timid that they don’t even bring charges against individuals who work there. That’s one system.

 

The second legal system is for everyone else. In this second system, whoever breaks the law can be held accountable. Government enforcement isn’t timid here – it’s aggressive, consequences be damned. Just ask the families of Sandra Bland, Freddie Gray, and Michael Brown about how aggressive they are. In this legal system, the government locks up people up for decades, ruining lives over minor drug crimes, because that’s what the law demands.

Yes, there are two legal systems – one for the rich and powerful and one for everyone else. Continue reading

Lawmakers Oppose Forcing Wall Street Riders Onto Year-End Spending Bill

As the end of the year approaches, Wall Street lobbyists have been putting the “pedal to the metal,” trying to ensure that there are some holiday gifts for them wrapped up in the year-end spending bill. Just as they did last year, Wall Street is planning to jam dangerous and widely unpopular deregulation onto the “must-pass” spending bill. But many lawmakers have been pushing back, saying that it’s “cynical and corrupt.” From speaking out on Twitter to making speeches on the floor of the Senate, lawmakers have said NO to riders that roll back financial reform. Here is a compilation of some of their comments.

On December 8th, Senator Jeff Merkley (D-OR) organized several speeches with his colleagues on the Senate floor against Wall Street deregulation on the year-end spending bill with Senator Bill Nelson (D-FL), Senator Jack Reed (D-RI) and Senator Elizabeth Warren (D-MA). (TRANSCRIPT)

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Fact-checking Politifact on the Consumer Bureau

In the latest GOP Presidential debate, Carly Fiorina attacked the Consumer Financial Protection Bureau (CFPB), calling it an agency with “no congressional oversight.” That statement is not just “half true” as it was rated by Politifact, a fact-checking website run by the Tampa Bay Times. It’s untrue.

The CFPB, as Politifact said, does not get its funding through annual congressional appropriations. But the Bureau is a bank regulator, and not a single one of the other bank regulators – the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), or the Office of the Comptroller of the Currency (OCC) – is funded that way either. And for good reason: as far back as 1864, when the OCC was created, this country has sought to bolster the independence of bank regulators by insulating them from the politically-charged congressional appropriations process.

In reaching its judgment that “the bureau has an unusually low amount of congressional oversight,” Politifact appears to have relied on two known critics of the agency, Todd J. Zywicki of George Mason University and Brenden D. Soucy, a Miami lawyer.

By consulting a wider range of authorities, Politifact would have gotten a fuller picture. Arthur Wilmarth of George Washington University Law School, for example, has described the CFPB’s powers, governance and funding arrangements as “hardly unprecedented among federal financial regulators.” Like virtually all regulators, the Consumer Bureau is subject to the many requirements of the Administrative Procedures Act. In addition, as Adam Levitin of Georgetown University Law Center pointed out to a House committee in 2011, the Bureau’s budget, unlike that of the other financial oversight agencies, is capped at a specified percentage of the Federal Reserve’s operating budget, while its decisions are uniquely subject to review and rejection by a council of other regulators.

When all the facts are taken into account, it is clearly neither true nor even half-true to characterize the CFPB as “a vast bureaucracy with no congressional oversight that’s digging through hundreds of millions of your credit records to detect fraud.” Fiorina, in making that statement, is simply repeating a false narrative developed by banks and lenders against the first and only and financial oversight agency with a mandate to put the interests of consumers ahead of the power and profits of the financial industry. By giving Fiorina credit for being even partially correct, Politifact, too, is buying into that narrative.

New Project Helps Bank Workers Blow the Whistle on Corruption and Abuse

New Whistleblow Wall Street Project

October marks the seven year anniversary of the passage of the Troubled Asset Relief Program (TARP), which bailed out the financial sector during the 2008 economic meltdown. Given that the nation’s biggest banks have only gotten larger since the financial crisis, accountability in the financial sector is more important than ever, and Wall Street’s employees can be a crucial part of making that happen. That’s why it is good news that an alliance of workers, advocates, and lawyers have come together to launch Whistleblow Wall Street, a new website that will make it easier to expose wrongdoing in the banking industry.

The website, which is a project of the economic justice non-profits The Other 98% and The Rules, aims to help bank employees learn about their rights as whistleblowers, find legal representation, and includes an encrypted secure drop to anonymously share information.

The 2010 Wall Street Reform and Consumer Protection Act created new protections for whistleblowers, including prohibitions on retaliation. But even with these new safeguards, it can be hard to figure out what to do with information about misconduct. So as a part of the launch, the Government Accountability Project, a not-for-profit legal organization specializing in whistleblowing cases, has volunteered to help anyone who is considering blowing the whistle, or who has already blown the whistle and needs help because of reprisal.

To draw attention to the campaign, a series of billboards are going up throughout the financial district in New York encouraging Wall Street employees to blow the whistle on abuse and corruption in their firms, with the message “See Something? Do Something!”. In addition, members of the Committee for Better Banks – a coalition of bank workers, advocacy and labor organizations working to improve conditions in the financial industry – will be handing out leaflets at financial centers in New York City, Washington D.C., St. Louis, and Orlando.

Former CitiBank executive Richard Bowen, who himself blew the whistle on subprime mortgage fraud, has urged fellow financial sector employees to not give in to “fear or a misplaced sense of company loyalty,” but instead to “Please, say something! Show personal integrity and report behavior that may be harming others.” The Whistleblow Wall Street platform aims to empower workers like Bowen to speak up when they see wrong-doing, so they can be part of making sure that abuses like those that that led to the last crisis are not allowed to flourish unchecked.