Wall Street’s Practice of Compelling Confidentiality of Private Underwriting Fees: An Antitrust Violation?

• Published date: 01 September 2023
• DOI: http://doi.org/10.1177/0003603X231180244
• Author: Thomas C. Willcox
• Date: 01 September 2023
• Subject Matter: Articles

https://doi.org/10.1177/0003603X231180244

The Antitrust Bulletin

2023, Vol. 68(3) 363 –391

© The Author(s) 2023

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DOI: 10.1177/0003603X231180244

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Article

Wall Street’s Practice of Compelling

Confidentiality of Private Underwriting

Fees: An Antitrust Violation?

Thomas C. Willcox*

Abstract

A small oligopoly of commercial and investment banks dominates the arranging and underwriting of loans

and bonds for publicly traded companies. The oligopoly’s dominance apparently compels nondisclosure

of preliminary agreements that outline the proposed issuance terms of the loans or bonds. Also, the

banks do not disclose the arranging and underwriting fees to anyone outside the oligopoly and prohibit

disclosure to anyone by their customers, which non-disclosure violates the securities laws. This makes

it impossible for customers to compare such fees and more difficult for non-oligopoly banks to offer

competing bids. This article concludes the Antitrust Division, and Securities & Exchange Commission

should investigate these practices.

Keywords

Antitrust, agreement not to advertise, joint venture, ancillary restraints, Wall Street, arrangement

fees, underwriting fees, debtor-in-possession financing

I. Introduction

This article contends that numerous Wall Street banks may engage in a systematic counseling or com-

manding of violations of certain federal securities laws, which require routine public disclosure of

documents by publicly traded companies engaging in large credit transactions, and who must file pub-

licly various documents related to these transactions. This counseling or commanding consists of com-

pelling these corporate borrowers to keep strictly confidential, and therefore not publicly file, the

documents describing the fees the banks charge for connecting those borrowers and lenders, with the

result the corporate customers cannot compare them or use them in negotiations to obtain lower fees.

It is not the legal obligation of the banks to file these documents. However, their apparent routine impo-

sition of confidentiality agreements upon the corporate borrowers makes them vicariously liable for the

violation of federal securities laws that require filing.

As discussed in more detail below, the result of these practices is that it is not possible for corporate

borrowers to use the information at issue for negotiations with the banks. Also, it is not available for a

clearing house which reviews the filings at issue for fee information, then sells that information so

corporate borrowers may use these compilations to lower the fees they are charged by the banks.

*Member, District of Columbia and New York Bars

Corresponding Author:

Thomas C. Willcox, Attorney at Law, Washington, DC, USA.

Email: thomaswillcox@willcoxlaw.com.co

1180244ABXXXX10.1177/0003603X231180244The Antitrust BulletinWillcox

research-article2023

364 The Antitrust Bulletin 68(3)

Finally, whether the fee information is available online for the clearinghouse to collect or not, the prac-

tices prevent the issuers from sending it to a clearinghouse for collection and resale for a price.

Therefore, these practices are arguably violations of the antitrust laws. Before this argument is made in

more detail, a thorough examination of the legal backdrop of the relevant federal securities laws must

be set forth.

These laws require that companies required to make periodic filings under the securities acts file

various documents with the publicly accessible filing system maintained by federal securities regula-

tors. Such documents report events which may be material to the financial condition of the company,

such as when it makes an agreement in principle to borrow $100 million or more. The company also

must report when the transaction closes.

When a company subject to the federal securities laws enters into an agreement to borrow funds in such

amounts, it must make a filing stating that such an agreement has been made. When it reports the closing

on the transaction, it must attach the agreement documentation, or file the same the next time it files a

quarterly or yearly report. Relevant exhibits must be filed. Also, if a company wishes to keep sensitive

material in an exhibit confidential, it may redact such information; however, it still must file the exhibit.

This article discusses two markets relevant to the allegations at issue; with each such market using

groups of banks working together to put the deals together, with one or two banks typically being the

primary bank for the borrower. Hence, the primary bank for the borrower does not handle the task of

syndicating the loan, or purchasing the securities, alone. Instead, such bank includes between two

and upward of twenty other banks to share the work, and profits, involved in arranging the loan or

purchasing the securities. Thus, a group of banks which would otherwise be competitors sign a com-

mitment letter or purchase agreement with the borrower. Case law discussed below shows this has

been the established practice on Wall Street for many years. A notable feature of this system is that

it makes each syndicate a group of competitors exchanging information, including the prices charged

to corporate borrowers. Therefore, each syndicate is under the antitrust laws of a joint venture.

The large syndicated loan market is the first one that works in such a fashion. In these transactions,

several primary banks sign a commitment letter, which spells out the interest rates and other terms such

as collateral maintenance, to lend to the borrower. Then, these primary banks line up secondary banks

to do the actual lending. In this market, the primary banks are known to place confidentiality provisions

in the commitment letter signed prior to closing that prohibit the commitment letter from being filed

with federal securities regulators. Such appears to be a violation of the securities laws as described

above. Even further, the primary banks are known to insert in the commitment letter confidentiality

requirements that require that the fee letter never be filed with the government, raising the question of

another securities law violation.

Litigation, either bankruptcy or disputes between a borrower and a lender/guarantor, can produces

some more, if not much, transparency. First, when in bankruptcy, any company paying substantial fees to

a third party typically must seek are typically approved by the court and disclose such fees to other credi-

tors. Such fees would include those paid to a syndicate financing a loan to a debtor in bankruptcy. It is in

the interest of the lending banks that the fees are not to be disclosed and would be expected that the lend-

ing banks would not wish to disclose the fees they keep so confidential outside of bankruptcy court.

Bankruptcy court financings have compelled an interesting admission from the banks. As noted

above, the company and banks must obtain approval from the court for all aspects of the loan. Consistent

with the practices outside of bankruptcy court, the banks typically seek confidential treatment of the fee

letters during such insolvency proceedings.

One option for the banks, as shown in one case, is to make only de miminus reference to the fee letter

in the many pages of financing documents and ask for approval of the entire filing. However, in a sec-

ond case, the motion submitted to the court included a redacted copy of the fee letter. Furthermore, this

second motion contends that it is a “custom and practice” in the finance industry to keep fees charged

to corporate borrowers confidential.