Hillary Clinton's New Plan To Toughen Wall Street Penalties

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Hillary Clinton has a new plan to toughen Wall Street penalties

Max Ehrenfreund

Democratic presidential candidate Hillary Rodham Clinton will unveil a proposal this week to more severely punish financial executives and firms that are found to have committed serious wrongdoing, part of a wide-reaching strategy for cracking down on corporate malfeasance and more tightly regulating Wall Street, campaign officials said Wednesday.

The plan has several features, officials said. Clinton officials say she would strongly encourage prosecutors to pursue individual executives and bankers at firms accused of wrongdoing -- by criminal prosecution, efforts to reclaim their compensation or dismissal. In recent years, by contrast, regulators have faced criticism for prosecuting corporate entities, not individuals.

In addition, while current law allows many executives to take up certain roles in the financial industry even after being found culpable for violations of criminal or securities laws, Clinton's plan would also seek to prevent more people convicted of crimes from working in any capacity in the industry.

"Clinton believes that the best way to deter corporate wrongdoing is to hold individuals accountable for their misconduct," according to a summary of the proposal obtained by The Washington Post.

Responding to concerns of activists including Sen. Elizabeth Warren (D-Mass.), the proposal also would limit the access of major financial firms to the markets if they engage in serious wrongdoing.

Among other things, Clinton would extend the statute of limitations on some crimes to allow prosecutors more time to develop a case. She will seek independent sources of funding for enforcement for agencies such as the Securities and Exchange Commission and Commodity Futures Trading Commission, which could shield regulators from interference from Capitol Hill. The Consumer Financial Protection Bureau already has a separate source of funds, which Republicans in Congress have sought to cut off.

"When the woman who may be the next president of the United States says that she wants to crack down on corporate crime and hold individuals accountable, Wall Street will listen, as will the rest of corporate America," said the University of Michigan law professor David Uhlmann, a former federal prosecutor who was briefed by the campaign about the proposal.

Clinton's plans, described by officials on the condition of anonymity, will be included in a larger financial regulatory proposal to be announced this week. The former secretary of state, who has been accused of being too close to Wall Street, has been working to show she is responding to the public's concerns about financial abuse. On Wednesday, she sent a letter exhorting Democratic lawmakers to fight Republican attempts to weaken the Consumer Financial Protection Bureau and the 2010 Dodd-Frank law that tightened financial regulation.

The Justice Department has faced criticism in recent years for imposing corporate penalties -- paid by shareholders -- rather than prosecuting individual bankers involved in wrongdoing. Recently, the department reminded prosecutors to prioritize prison sentences for white-collar criminals over corporate fines. Legal experts said Clinton's proposal would go beyond current policy by providing more resources for white-collar investigations, as well as requiring prosecutors to extract admissions of guilt or go to trial.

Clinton's plans certainly face challenges. White-collar investigations are often complicated and time-consuming, and successful cases demand manpower and money. Federal officials have promised stricter enforcement in the past.

In recent years, when the Justice Department has reached settlements with companies -- often involving financial penalties -- prosecutors have agreed not to press criminal charges against the firms. Officials say that doing so makes securing a settlement easier.

Now, Clinton will propose limiting those accords -- known as deferred prosecution agreements -- to special situations. For instance, Ullmann suggests, a hospital in a rural area could be forced to reject patients if convicted of criminal misconduct.

Separately, Clinton would also seek to limit a special exemption that big banks have received even after acknowledging serious financial misconduct.

For example, several major banks earlier this year admitted manipulating currency markets and paid billions of dollars of fines. Technically, banks that admit such misconduct are banned under securities law from obtaining ready access to capital markets. But the SEC has the authority to waive that ban, and it has repeatedly done so because these firms are major players in these markets.

As president, Clinton would have several options for limiting the exemption, officials say, through legislation or by appointing commissioners who agree with her views to the SEC.

The exemptions "are significant benefits for the eligible companies," Warren, a liberal critic of the commission, has written.

Also under Clinton's proposal, bankers who violate any of a wide range of laws would be blacklisted from working in the financial industry. (Existing law bars individual bankers committed of certain offenses from working in certain parts of the industry. Clinton would expand that prohibition up and down Wall Street.)

Campaign officials said that both Clinton and Gary Gensler, the former chairman of the Commodity Futures Trading Commission who is widely viewed as a strict enforcer of banking regulation, were heavily involved in preparing her proposal. Gensler is now the campaign's chief financial officer.

"It's the first time we’ve seen a serious call for more enforcement resources, and I just think that's so fundamental," said Brandon Garrett, a legal scholar at the University of Virginia who was also briefed.

All the same, Clinton's plan may not satisfy progressive activists who have called for the reinstatement of a law separating Wall Street from Main Street banking that her husband repealed as president.

That law, widely known as the Glass-Steagall Act, barred financial institutions from combining staid retail banking with risky but lucrative investment banking. Two of Clinton's opponents in the Democratic primary, former Maryland governor Martin O'Malley and Sen. Bernie Sanders (I-Vt.), have said that Glass-Steagall should be restored, while Clinton has said she does not think the rule is necessary.

[Read more: Elizabeth Warren and John McCain want Glass-Steagall back. Should you?]

Other details of Clinton's proposal have also appeared in the press ahead of her announcement. As president, she would amend the Volcker Rule, which prohibits financial institutions from making risky investments with government-insured deposits. Clinton's goal would be to prevent banks from avoiding the restriction by investing in certain hedge funds, reports Vox.

And Clinton will propose a nominal fee on trades on the stock market to restrain the computerized, automated trading that critics say can create financial instability, according to The Huffington Post. The amount of the tax and the specific trades to which it would apply are unclear.