Federal Bankruptcy Exemptions

Wall Street Firms are Famous for Profiting in Good Times and Bad

Federal Bankruptcy Exemptions : But their efforts to persuade Congress to let them earn fees advising the same companies in bankruptcy that they counseled in better days has met with opposition from their chief regulator, the Securities and Exchange Commission.

William Donaldson, chairman of the SEC, has written a letter expressing its opposition to a proposed change in the bankruptcy law passed by the House in March. Federal bankruptcy exemptions A provision in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2003 would allow investment bankers that have done business with a company to advise it even after the company has filed for bankruptcy, removing a restriction that has been in the bankruptcy code for decades.

The objections of the SEC to the provision, which has been backed recently by lobbyists for the securities industry, may doom its chances of inclusion in the bankruptcy bill before the Senate.

When the House passed the bill, it removed the restriction barring parties that had been involved with a company from advising it in bankruptcy. The restriction was designed to ensure that an adviser to a company in bankruptcy would be neutral and have no interests at stake. Because advisers to a bankrupt company must re-examine old transactions,Federal bankruptcy exemptions conflicts could arise if the same firm that advised a company before bankruptcy was hired to scrutinize that advice after the company collapsed.

The SEC's view was outlined in a May 22 letter to Senator Patrick Leahy, a Vermont Democrat and the ranking member of the Senate Judiciary Committee, and Senator Paul Sarbanes, a Maryland Democrat and the ranking member of the Senate Banking Committee.

They sought the SEC's thoughts in an April 10 letter to Donaldson.

In his letter, provided by a Sarbanes aide, Donaldson said that Congress should proceed "very cautiously" before loosening any conflicts of interest restriction.

Conveying the view of the commission, he wrote: "While we recognize that this one-size-fits-all statutory exclusion is controversial, we believe that it would be a mistake to eliminate the exclusion in a similar one-size-fits-all manner at a time when investor confidence is fragile."

In April Donaldson told the Senate Banking Committee that although the SEC had reached no conclusions, he thought changing the law would be a mistake. But because the letter represents the opinion of the entire commission, it will carry considerable weight.

The rule that advisers to companies in bankruptcy be disinterested has been reviewed several times in the last 30 years and maintained.

Proponents of the bill, introduced by Representative F. James Sensenbrenner Jr., a Wisconsin Republican, said that it was inefficient and costly to bar investment bankers who are familiar with a company's inner workings from advising it in bankruptcy.

As the issuance of securities and the fees from such deals have declined in recent years, securities firms have sought the business of advising companies in bankruptcy. And the number of public companies filing for bankruptcy protection hit a record last year.

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