Occupy the SEC Submits Letters to Federal Reserve Board of Governors in Response to its Advance Notice of Proposed Rulemaking on Risky & Anticompetitive Physical Commodities Transactions under the Bank Holding Company Act

Occupy the SEC (“OSEC”) has submitted a letter to the Federal Reserve Board of Governors (“Board”) regarding that agency’s advance notice of proposed rulemaking on physical commodities transactions under three provisions of the Bank Holding Company Act (“BHCA”). The Board revisits these provisions at a time when the Dodd Frank Act’s momentous changes in systematic risk regulation and recent abuses of the BHCA demand heightened prudential regulation, including heightened examination and leverage-based and risk-based capital requirements, and divestiture of existing commodities operations. 

The Board now has the opportunity to reinstate the historical separation in American law between financial and commercial activities that kept banks from becoming Too Big to Fail and overwhelming the economy.  It can prohibit institutions that receive federal depository insurance and implicit federal guarantees to act in a manner that threatens environmental pollution and risks systematic financial contagion. It can limit or mitigate speculation in physical commodities and derivatives markets that has created artificial scarcity in products such as wheat and oil on which billions of people—and governments—are reliant.

The BHCA, passed in 1956, was only one response to concentration in the banking industry and repeated financial crises at the turn of the 20th century that often began with speculative commodities transactions.  Those crises also led to progressive citizens’ movements, and the Clayton Antitrust and the Federal Reserve Acts of 1913.  These laws helped prevent banks from limiting innovation and controlling financial and commodities markets—as well as the institutions of government themselves.

The Board must implement the systematic risk provisions of the Dodd Frank Act and the Volcker Rules’ limits on proprietary trading in limiting unsafe physical commodities operations.  The Board recognizes in the ANPR the risk that physical commodities operations in such fields as petroleum trading and refining pose to a still heavily leveraged and overly complex financial system.  OSEC agrees that a single environmental risk involving a Bank Holding Company (“BHC”) or Systematically Important Financial Institutions (non-BHCs) under Title I of the Dodd Frank Act could suffer liability, reputational, and liquidity risk that would threaten institutional survival and could contaminate and destroy the financial system.  The Deepwater Horizon disaster and the extensive operations of BHCs in fields such as energy management are excellent examples of the operations’ multi-tiered threats.  As a result, the Board cannot ignore that license that Title I provides for it to institute severe leverage-based and risk-based capital requirements, reporting and disclosure requirements, and liquidity requirements, among other regulations.  The merchant banking rules, with permit passive investments in companies with physical commodities trading operations, are limited under the Volcker Rule’s restrictions on private equity investments.  The Board must also institute reporting and disclosure requirements, more extensive bank monitoring, and limit the duration and active management of merchant banking investments.

The ANPR does not comprehend that BHC physical commodities trading threatens more volatile core commodities prices and the growth of the economy and jobs.  The Board, however, has a dual mandate to limit inflation and ensure full employment and cannot only concern itself with the stability of a jury-rigged and unreliable financial system as it threatens to malfunction and explode. OSEC contends that the physical commodities trading operations risk the productivity and safety of the entire economy and stable, dependable job growth.  They also threaten to limit access to vital commodities such as wheat, soybeans, aluminum, and oil and cause increased poverty and geopolitical disruption.

OSEC contends that the Board intensified these dual crises when it failed to apply the proper criteria in its actions on the complementary, grandfathering, and merchant banking provisions of the BHCA.  The Board, starting in 2003, approved such actions as petroleum trading as complementary to financial activities without properly analyzing their risks to financial system and firm safety and soundness as well as competition in the physical commodities markets.  Evidence of illegal price manipulation and risky activity demands the rescission of those orders and divestiture of physical commodities operations.  The Board improperly interpreted the temporary and permanent grandfathering provisions of the Act to permit new BHCs to hold onto an unlimited swath of physical commodities activities.  The Act generally allows for only a three year temporary conversion period, with two extensions, and institutions such as JP Morgan and Goldman Sachs that became BHCs after Sept. 1999 can only hold onto physical commodities activities they possessed in Sept. 1997.  OSEC asserts that the Board implemented merchant banking rules with few restrictions on the lengthy term they can be held or on active BHC management of subsidiaries and little role for active internal Board monitors at those institutions.

These omissions demand that the Board revisit its regulations and orders and require divestiture or at least extensive prudential limits on physical commodity operations.  The recent financial crisis illustrated the limits to prudential regulation and tools such as Value at Risk for both banks and regulators when it comes to unpredictable and severe crises.  We recommend that the Board adopt a precautionary approach and at least require transparent reporting and disclosure, significant leverage-based and risk-based capital requirements, liquidity requirements, and limits on the duration and intensity of BHC management of operations.  Prudential regulation would mitigate but not resolve the difficulties with the current BHCA operations.

Indeed, the Board fails to recognize in its ANPR that physical commodities operations could result in massive environmental liability and that the Federal government could become responsible for initial remediation and cleanup costs.  Under statutes such as Superfund (CERCLA), the possibility that the Federal government will become responsible for initial remediation costs is significant.  There is a possibility of massive initial, or even permanent, social and environmental disruption even if the polluter does not evade its responsibilities under the bankruptcy or resolution procedures under Title II of the Dodd Frank Act.  There is no justification for providing a further subsidy so that BHCs can engage in risky and socially unproductive activities.

The Board has also failed to recognize that the massive and cumulative physical commodities investments permitted under the complementary provisions of the BHCA require that the agency issue an Environmental Impact Statement.  The National Environmental Protection Act (“NEPA”) requires that agencies make such statements before certain major agency actions, such as permitting risky petroleum drilling, to allow for a fully informed process.

The Board, finally, fails to square the explicit and implicit subsidies that BHCs receive with their negative effects on physical commodities and derivative markets as well as productivity.  Since deregulation in the 1980s, physical commodities and derivative markets have increasingly resembled other speculative financial markets.  Further permission for speculation will allow unfair competition with BHCs using the massive capital structures that are the product of heavy government guarantees to concentrate resources and benefit from insider information to the detriment of customers and the public.  Recent Federal Energy Regulatory Commission enforcement actions against J.P. Morgan and other BHCs manipulating the energy markets illustrate the negative effects on the economy.  Although certain customers could benefit from deals, they threaten the productivity and stable growth of the economy.

OSEC contends there is no justification for allowing activities that were the subject of criminal prosecution in the Enron crisis and which threaten global financial safety to continue.  The Board must significantly revise its prior orders and regulations to permit a safer, more productive financial sector and a wider economy that works for the benefit of all.

Occupy the SEC Submits Letter to FDIC Regarding its Proposed Implementation of Too Big to Fail Regulations Under Title II of the Dodd Frank Act

Occupy the SEC (“OSEC”) has submitted a letter to the FDIC regarding that agency’s proposed regulations implementing Title II of the Dodd Frank Act (“DFA”).  Title II of the DFA contains vital provisions that, if properly implemented, would help address the troublesome risks presented by “Too Big to Fail” (“TBTF”) financial institutions.

Title II seeks to allow for orderly resolution of troubled Systemtically Important Financial Institutions (“SIFIs”) in a manner that spares taxpayers the undue burden of supporting the colossal financial conglomerates that led to the 2008 financial crisis.

Unfortunately, a weakly-implemented Title II would be nothing more than a backdoor-bailout for overleveraged SIFIs.  OSEC has encouraged the FDIC to impose stringent penalties for SIFIs that are required to fall under its receivership under Title II.  The mistakes made by the government in handing out a billion dollar under the Troubled Asset Relief Program (TARP), completely free of any meaningful warrants or conditions, must not be repeated.

OSEC encourages the FDIC to recoup compensation from culpable management at troubled SIFIs, and to set future limits on executive compensation at bridge financial companies under receivership.  Excessive executive compensation at trouble SIFIs only serves to drain vital capital.  Financial executives should not be permitted to profit from their managerial malfeasance, especially when relying on the government to ease their companies’ unwinding and reorganization.

OSEC also encourages the FDIC to require bloated SIFIs to spin off subsidiaries, which would reduce these conglomerates’ anticompetitive market power.  Requiring divestitures would also serve to dilute risk across a greater number of entities, which in turn would reduce the risk that any of those entities would will be considered “Too Big to Fail” due to systemic inter-connectedness.

The final regulations must contain serious disincentives for SIFIs to undergo Title II receivership, otherwise the Title II resolution process will become just another version of a government bailout.

Occupy the SEC Awaits Agency Votes on Final Version of the Volcker Rule: Promulgation of Vital Component of Dodd-Frank Already Delayed by Two Years

On December 10, 2013, the Federal Reserve, the Office of the Comptroller of the Currency (“OCC”) and Federal Deposit Insurance Corp. (“FDIC”) are scheduled to vote on a final version of regulations implementing Section 619 of the Dodd-Frank Act, better known as the “Volcker Rule.”  The Commodity Futures Trading Commission (“CFTC”) and the Securities and Exchange Commission(“SEC”) are also expected to vote on the regulation around that same time.

Occupy the SEC (“OSEC”) urges these financial regulators to vote favorably on the Volcker Rule, instead of re-proposing it, as has been suggested by the U.S. Chamber of Commerce and other pro-bank lobbyists.  A vigorously enforced Volcker Rule could help avert another financial crisis similar to the Great Recession of 2008.  That crisis was caused in large part by excessive bank speculation in trading markets, and the Volcker Rule seeks to reduce the risk associated with these activities by prohibiting proprietary trading by government-backstopped banks.

In February 2012, OSEC issued a 325-page comment letter to the banking regulators urging vigorous and robust implementation of Section 619.  OSEC also issued letters to members of Congress in the summer of 2012 during the government’s investigation into JP Morgan’s “London Whale” trading losses, which could have been averted with a strongly enforced Volcker Rule.  In February 2013, OSEC filed a lawsuit against the above-mentioned financial regulators and the Department of Treasury for their delay in implementing the Volcker Rule, which by Congressional mandate should have been finalized by October 2011.

OSEC will issue an analysis of the Rule once the final version, which is expected to exceed 1000 pages, is issued later this month.

Occupy the SEC is a group of concerned citizens, activists, and financial professionals that works to ensure that financial regulators protect the interests of the public, not Wall Street. For further information, visit  http://occupythesec.org or email info {at} occupythesec .org.


Occupy the SEC Submits Comment Letter to Securities and Exchange Commission on Proposed Money Market Regulations

Occupy the SEC (OSEC) has submitted a comment letter to the Securities and Exchange Commission (Commission) in response to its proposed regulations covering the money market fund industry.

Five years ago the Money Market industry suffered a severe crisis caused by a multitude of factors.  Inadequate and feckless regulation was indubitably one of these factors.

In its comment letter, OSEC commends the Commission for now taking positive steps to fill this regulatory lacuna with prudential regulations that have the potential to preserve market stability and investor confidence. The SEC proposal follows some of the recommendations that OSEC submitted earlier to the Financial Stability Oversight Council (FSOC), but misses several important reforms.

OSEC has submitted its comments in order to ensure that the new MMF rules are developed with input from the perspective of the public, in light of the fact that the public is likely to bear the greatest costs of the systemic risk stemming from the MMF industry.

In its letter, OSEC recommends that regulators consider a series of measures that address gaps in the SEC’s 2010 MMF reforms.  Specifically, OSEC calls for enhanced diversification, increased liquidity and transparency, and greater fund board accountability so that fund investors have full knowledge of the risks involved, and can choose the fund structure that best aligns with their preferences.

The comment letter is available at OSEC’s website as a PDF.

Occupy the SEC Submits Amicus Brief to U.S. Supreme Court in Consolidated Troice Cases, Advocating for Fraud Victims

In October 2013, the U.S. Supreme Court will hear oral arguments on three consolidated cases, Chadbourne Chadbourne & Parke LLP v. Troice, Willis of Colorado Inc. v. Troice and Proskauer Rose LLP v. Troice.  Even though these cases have largely fallen below the general public’s radar, they are extremely important, as an incorrect decision by the Supreme Court could severely limit the ability of victims of financial fraud to seek justice.

These cases relate to two statutes passed in the 1990’s, the Private Securities Litigation Reform Act (PSLRA) and the Securities Litigation Uniform Standards Act (SLUSA).  The financial lobby was able to convince Congress that the nation’s courts were flooded with frivolous securities fraud cases.  To address that perceived problem, Congress passed the PSLRA, which placed several hurdles on securities fraud filings in federal court.  Later, when it seemed that fraud victims had found a way to get around PSLRA, by filing securities fraud cases under state law (instead of federal securities law), Congress passed SLUSA.  The SLUSA statute completely forbids class actions brought under state law if the case alleges fraud that is “in connection with” a federal securities transaction.

Since the passage of SLUSA, every circuit court and the Supreme Court have wrestled with what “in connection with” actually means.  The Court is again addressing the issue in the Troice cases.

The financial lobby has filed briefs arguing the Court should define “in connection with” broadly.  Occupy the SEC (“OSEC”) has filed an amicus brief opposing the lobby.  OSEC’s brief explains that an overly broad definition of “in connection with” would significantly hamper the ability of victims of financial fraud to file civil claims.  Many transactions that have little to do with securities fraud (e.g., loan fraud or mortgage fraud) would no longer be eligible for review under state law.  Federal court filings are generally more burdensome and expensive.  The bottom line is that a broad definition of “in connection with” would mean fewer lawsuits against financial fraudsters.  That outcome would embolden other fraudsters, and would leave fraud victims with fewer civil court options.

OSEC’s amicus brief is available at: http://occupythesec.org/files/OSEC-Troice-Amicus.pdf

The Good, The Bad, & The Ugly – Week of 7/22/2013


Senate hearing earlier this week on bank holding companies (the designation that GS and MS were granted, and one which JPM already had) and their involvement in physical commodity markets, as a follow up to the bombshell NYTimes article last weekend. Warren and Brown asked very hard-hitting questions, and an academic named Saule Omarova gave some fantastic testimony. Her paper is essential reading.  Some background by Michael R. Crittenden and Christian Berthelsen at The Wall Street Journal July 23, 2013.

Federal grand jury delivers a 41-page indictment to hedge fund SAC Capital for insider trading. Heidi Moore at the Guardian July 25, 2013.

Elizabeth Warren and other democratic senators defy party and hold firm on student loan rates. Tracy Jan at The Boston Globe July 24, 2013.


Recent bombshell New York Times article details how Goldman shuffles aluminum around warehouses, shaving a penny here a penny there, and as a result racks up billions in costs to the public. Not to mention the London Metal Exchange, the regulator here, is filled with bankers from all the major Wall St banks. Next up: Copper. David Kocieniewski at The New York Times July 20, 2013.

Lawrence Summers, sexist proponent of complete deregulation, is the potential frontrunner to head up the FED. What worse candidate is there to pick? A most revealing pick for the supposed lesser of two evils Obama. What gymnastics will establishment liberals do to defend this one? David Dayen at Salon July 24, 2013.

The Good, The Bad & The Ugly – Week of 7/15/13


  • The Federal Energy Regulatory Commision (FERC) will fine JP Morgan Chase “close to $1 Billion” for manipulating energy prices in an Enron-esque scheme in Michigan and California. Could easily be an Ugly as Taibbi reviews all the fines “the good bank” Chase has racked up since the crisis. Matt Taibbi at Rolling Stone July 18, 2013.
  • In what still might be an overly optimistic headline, Jessie Eisinger posits that “Finally the Bank Regulators Have Had Enough.” With capital ratios increasing to $6 for every $100, and new derivatives rules being put in place, you can bet the banks will fight back tooth-and-nail. Furthermore there is still time for regulators to back down. We can only hope Mr. Eisinger is right. Only time will tell. Jesse Eisenger at ProPublica July 17, 2013.
  • The SEC has filed suit against hedge fund titan Steven Cohen of SAC Capital for failure to supervise fund managers who were engaging in insider trading. While it would be better if this “failure” was prosecuted at the big banks too, it’s still good to see the regulators going beyond lower- and mid-level folks. Joshua Gallu & Katherine Burton at Bloomberg July 19, 2013


  • By contrast, the “Fabulous Fab” Tourre trial is nothing more than an attempt to pin the notorious ABACUS case on a lower-level employee while the executives who were really behind it sit in the wings after Goldman signed one of those “neither admit, nor Deny” agreement with the SEC. It’s “like prosecuting a foot-soldier for war crimes” Heidi Moore at The Guardian July 15, 2013.


  • Detroit’s emergency manager Kevyn Orr and governor Rick Snyder arranged a rushed bankruptcy filing for the city, the largest in US history. Orr has made clear that he will treat the tens of thousands of retirees who rely on the city’s pension funds as “unsecured creditors” on a par with Wall Street borrowers, regardless of the fact that Wall Street has already pulled nearly $500 million in underwriting fees out of the beleaguered city. Steven Church, Dawn McCarty & Margaret Cronin Fisk at Bloomberg July 19, 2013

The Good, The Bad & The Ugly – Week of 7/8/13


  • Elizabeth Warren along with a group of bipartisan lawmakers are introducing a bill aimed at recreating the Glass-Steagall Act, which separated commercial banking from investment banking, before it was repealed under Clinton with the Gramm-Leach-Bliley Act in 1999. Carter Dougherty and Cheyenne Hawkins at Bloomberg July 11, 2013.


  • Chase gets caught robo-signing affidavits in credit-card collection lawsuits in order to make selling credit card debt to collection companies even easier. Matt Taibbi at Rolling Stone July 11, 2013.
  • The dust is still settling, so we don’t know yet how this will work out, but the CFTC caved to pressure from industry and overseas regulators to limit the scope of US oversight of crossborder swaps. In a 3-1 vote today, the Commissioners agreed to put out guidance for swaps dealers and investors about how the new regulatory boundaries would work. Considering London’s notoriously “light touch” approach to regulation that brought us the London Whale, it’s hard to be optimistic. Silla Brush at Bloomberg July 12, 2013.


  • The SEC gives Wall Street a huge gift as it allows hedge funds to advertise to investors who are “accredited” (people who have at least $1 million net worth not including housing). Nine million people are “accredited”, many of whom will wade into the risky waters of hedge funds for a taste of their  alleged prestige. This is vindication for all those Mary Jo White skeptics who questioned her nomination. Heidi Moore at The Guardian July 10, 2013.
  • Timmy Geithner’s post-Treasury activities highlight the lucrative speaking fee circuit that seems to be the thing to do these days (rather than the bad-optics of lobbying) for slimy politicians after they leave office. Lynn Parramore at Alternet July 10, 2013

The Good, The Bad, & The Ugly – Week of 7/1/2013


One side effect of the Snowden leaks and the revelations of the U.S. spying on it’s supposed “allies” might be the collapse or at least the weakening of two “Free-Trade” Agreements (which really just give aways to multinational corporations), the Trans Pacific Partnership and the US-European “Free Trade” Agreement. Yves Smith at Naked Capitalism July 1, 2013.


The FED is “clear as mud” as to when the too-big-to-fail banks will have to comply with capital standards setting a hazy “phase in” stage starting January 2014 which may not ever even happen. Pam Martens at Wall Street on Parade July 3, 2013.


The FED gives Goldman a huge concession as it gives them two more years (July 12, 2015) to comply with a requirement to divest part of its derivatives business to a separately capitalized unit. Ronald D. Oral at Marketwatch (Wall Street Journal) July 3, 2013.

The Good, The Bad, & The Ugly – Week of 6/24/2013


Gary Gensler is holding firm on cross-border derivative reform, much to the surprise of all the big shots who thought they would get the exemptive waiver extended no problem. Here’s to Gensler going out in style. George Bailey at Naked Capitalism June 25, 2013.

Jon Corzine to be sued by federal regulators for his role in the collapse of MF Global. A rare move against an ex-Goldmanite. But in a case like MF Global, civil charges really aren’t enough. Ben Protess at The New York Times June 25, 2013.


Obama administration and bank-friendly congressmen try and give Gary Gensler the Brooksley Born treatment as the anxiety rises before the July 12th deadline. However, Gensler unlike Born holds all the cards. Here’s to Gensler not making an 11th hour compromise in the face of adversity. Yves Smith at Naked Capitalism June 27, 2013.

Mortgage rates soar from 3.93% to 4.46% for 30-year fixed mortgage in one week, the highest rate since July 2011. Prashant Gopal at Bloomberg June 27, 2013.


A USA Today article details how two-thirds of recipients taking part in the “independent” foreclosure review received a paltry $300 – the smallest possible amount. With many lingering questions about how compensation was determined, who would get it, and the role of the big banks in the process, it’s clear that the people ravaged by the foreclosure crisis still haven’t been given anything resembling justice. Julie Schmit at USA Today June 25, 2013.