Misconduct could cost global banks for pension funds

Sitting in a windowless US Department of Labor conference room in January 2015, Credit Suisse officials endured a day of public humiliation.

It wasn’t enough that the bank had pleaded guilty a year earlier to helping US customers evade taxes and paying $2.6 billion in fines. A face-to-face rebuke of liberal politicians was scheduled in a strange place for global financiers.

Best known on Wall Street for publishing the monthly jobs report, the DoL also regulates US pension funds. And criminal charges, like that of Credit Suisse, force asset managers to go hat in hand to the department to seek permission to continue managing US pension fund assets.

The Asset Management division of Credit Suisse has obtained its exemption from disqualification. But now President Joe Biden’s DoL wants to expand its retirement rules to make waivers harder to get. In July, the department proposed rule changes to its “qualified professional asset manager” (QPAM) program and public comments are expected in September. These changes mean that the punishment suffered by Credit Suisse and other global banks will be increased.

The stakes are enormous. By the Department of Labor’s own estimates, the pension plans it regulates cover about 141 million people and include more than $7.6 billion in assets.

“The DoL reports that [asset] managers must be prepared to lose their QPAM status,” said Joshua Lichtenstein, partner at law firm Ropes & Gray. And the proposed rules “attempt to mitigate the risks to [pension] plans” when an asset manager fails to obtain a waiver, he said.

Prior to the 2008-09 financial crisis, the DoL generously approved waivers that allow doomed companies to continue managing pension plan assets. But as banking scandals unfolded under the Obama administration, the battle over waivers escalated.

Credit Suisse officials had the worst. They were the subject of a rare public hearing in which Ralph Nader, a liberal crusader and former candidate for president of the United States, wiggled his fingers.

Now the DoL wants misconduct in distant corners of the world to have consequences in the United States as well. Foreign convictions for offenses that would also be crimes under U.S. law would violate pension law and force companies to race for waivers.

The Royal Bank of Canada, which revealed years of litigation problems in France over alleged tax misconduct, said in regulatory filings that “any conviction in a French court would not trigger a disqualification” in the United States. But the DoL changes would mean that if convicted in France, RBC may need to seek permission to remain in the US pensions market.

The proposals go further. Misbehaving financial groups could not rely on deferred or no-prosecution deals to continue managing US pension assets. Such deals have been criticized by incendiary Liberal Senator Elizabeth Warren as a mere “slap on the wrist”. The rules proposed by the DoL indicate that the days of settlements “to avoid the consequences” of a criminal conviction are over.

To obtain DoL waivers, banks such as Credit Suisse argued that it would be costly for funds to suddenly lose a fund manager. They would incur liquidation costs and other expenses if the waivers were denied. The DoL proposes that convicted banks should pay these break-up costs. They would need to “quickly restore actual losses” to pension plans resulting from violations of the law, the department said.

These rule changes are likely to prompt global financial groups to rethink their US pension fund business. Asset managers could abandon the US market, said Sabrina Glaser, partner at law firm Kirkland & Ellis. “If you’re not managing a lot of stuff, you can decide not to manage plan assets anymore,” she said.

Credit Suisse again found itself in legal trouble in 2021 in the Mozambique “tuna bond” scandal. This year, the DoL again granted the bank an exemption, but only for one year – setting up another showdown in 2023. Warren has previously called on the Labor Department to deny the Swiss bank an exemption.

With the Democrats in power for now, Wall Street is on the defensive. But rather than swallowing costly new regulations, companies could take their chances in court by suing the Biden administration to stop the proposed changes.

“If serious concerns are ignored in any final regulations, the Department of Labor would be at significant risk of litigation” from financial groups, said Ryan Stewart, attorney at Gibson Dunn.

These waiver changes could pale next to the enforcement threats Wall Street faces from the Federal Reserve or the Securities and Exchange Commission. But Biden’s labor department is sharpening its knives to punish global banks.

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