WASHINGTON – The Federal Reserve Board said it ended enforcement actions against Bank of America Corp. and JPMorgan Chase related to bid-rigging in the municipal market, meaning the banks will no longer have to communicate with the Fed about their progress on instituting and carrying out programs to prevent related future violations.
The Fed announced the terminations without elaborating in notices on June 15 and June 20. Enforcement actions are generally terminated when the firm has remedied the underlying problem. A spokesperson for Bank of America said the bank didn't have a comment and JPMorgan couldn't be reached for comment.
The Fed’s action against the banks was part of a coordinated effort by a number of regulators and agencies after it was discovered that numerous dealers and investment product providers had allegedly rigged the bidding process issuers used for investment products so that issuers did not necessarily get the best prices for them. The other regulators included the Office of the Comptroller of the Currency, the Securities and Exchange Commission, the Internal Revenue Service, the Department of Justice, and 20 state attorneys general.
Bank of America's December 2010 agreement, which was signed by Bank of America chief executive officer Brian Moynihan, and JPMorgan's July 2011 agreement required the banks' boards of directors to submit written plans to the Fed that would strengthen their compliance risk management programs as they related to competitively bid transactions. The agreements required that the plans address, among other things: policies and procedures to ensure that competitively bid transactions comply with applicable laws and regulations; measures to ensure compliance and improve accountability of competitively bid transactions; procedures for periodic testing of the program’s effectiveness; and ongoing training on firm policies and relevant securities and tax laws and regulations.
Bank of America and JPMorgan were also required to submit progress reports to the Fed within 30 days of the end of each calendar quarter starting with the first quarter after the agreement was signed.
In addition to the Fed action, Bank of America entities agreed to pay a combined $137 million in restitution to federal and state agencies for its participation in the bid rigging conspiracy. JPMorgan agreed to settlements with federal regulators that totaled $211 million.
More than $36 million of Bank of America's total was paid as disgorgement of ill-gotten gains and interest in a settlement with the SEC that was agreed to in December 2016. More than $51.2 million of JPMorgan's total was paid in a settlement with the SEC.
Bank of America also took advantage of the DOJ’s Antitrust Corporate Leniency Program by being the first and only entity to come forward and report its wrongdoing to the department before the DOJ opened its investigation into the bid-rigging scheme. The program allows corporations and individuals involved in antitrust crimes to self-report and avoid criminal convictions and resulting fines and incarceration.
The OCC agreement with Bank of America included a total payment of $9.2 million stemming from the bank’s involvement and profiting from 38 collateralized certificate of deposit transactions that harmed municipalities or other non-profits participating in the transactions.
The bid rigging charges stem from municipalities’ practice of temporarily investing the proceeds of their muni issuances in reinvestment products before the money is used for its intended purposes. According to IRS regulations, the proceeds of tax-exempt municipal securities must generally be invested at the fair market value. The most common way of establishing fair market value is through a competitive bidding process where bidding agents search for the appropriate investment vehicle for a municipality.
The SEC found that certain bidding agents steered business from municipalities to the banks through a variety of mechanisms and, in some cases, the agents gave the banks information on competing bids and deliberately obtained purposefully non-winning bids so the banks could win the transaction. Bank of America won bids for 88 affected reinvestment instruments, including guaranteed investment contracts, repurchase agreements, and forward purchase agreements, because of the conduct, the SEC found.
The banks compensated the bidding agents by steering them business and submitting courtesy and purposefully non-winning bids upon request, according to the SEC. Bidding agents also sometimes received undisclosed payments and kickbacks, the commission said.
The conduct involved in the bid rigging, including undisclosed consultations, agreements, or payments, made the process uncompetitive and meant that the process could not be used to establish a fair market price. That in turn affected the prices of the reinvestment products issuers were entering into and jeopardized the tax-exempt status of the underlying munis, which totaled billions of dollars, the SEC said.