Bonus Tiers, Street Matchmaker, Citi Fined: Compliance

The U.K. Financial Services Authority approved rules restricting guaranteed bonuses and up- front cash payments for banks’ proprietary traders and broker dealers in what is being described as a tier system.

The FSA said financial firms will be split into four groups based on their size. The toughest rules will apply to firms with “significant proprietary trading and investment banking activities,” the regulator said Dec. 17 in a statement.

European Union regulators approved laws to curb incentives for excessive risk-taking earlier this month, imposing limits on cash payouts and the size of bankers’ bonuses. The rules allow bankers to receive about 25 percent of their bonuses in immediate cash payouts and require the rest to be deferred or held in shares for a minimum of three years.

Small banks, building societies and hedge funds will face fewer rules on share awards, disclosure and bonus deferrals, under the FSA rules released Dec. 17. In addition, unlike the largest financial institutions, they won’t need to set up special remuneration committees.

Senior employees at banks with more than 1 billion pounds ($1.5 billion) in capital will comprise the top tier and be subject to the toughest rules on share retention and cash payouts. Tier-two firms will have capital between 50 million pounds and 1 billion pounds. The deadline for implementation for some banks is Jan. 1.

The FSA rules incorporate the guidelines from the EU, which were approved by the European Parliament earlier in the year.

The FSA published an updated Remuneration Code to take into account changes required by the Capital Requirements Directive, the organization said Dec. 17 in a statement on its website.

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Compliance Policy

Visa, MasterCard Model Threatened by Fed’s Debit Fee Proposal

Visa Inc. and MasterCard Inc. may face permanent damage to the fastest-growing part of their business after the Federal Reserve proposed rules that could cut debit-card transaction fees by 90 percent.

Visa and MasterCard, the world’s biggest payment networks, plunged more than 10 percent in New York trading Dec. 16 after the Fed proposed capping so-called interchange fees at 12 cents each. Currently, the networks charge merchants an average of 1 percent of the purchase price, regardless of cost, and pass that money along to card-issuing banks.

The change, if approved by the Fed after a public comment period, would wipe out most of an estimated $15 billion in annual revenue for U.S. lenders that issue Visa and MasterCard debit cards, including Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co.

The Fed hasn’t yet decided how to implement a rule that would require banks to let merchants choose from at least two independent debit networks for routing transactions, a change that could create more competition for MasterCard and San Francisco-based Visa.

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EU Nations May Vote Next Month on Draft to Ban HFC-23 Offsets

European Union member states may vote next month on a regulatory proposal to prohibit imported carbon credits linked to industrial gases in the bloc’s emissions trading system, according to a senior EU official.

The European Commission, the EU regulator, proposed Nov. 25 to restrict United Nations-sponsored offsets linked to hydrofluorocarbon-23 and some nitrous oxide credits. The draft needs to be approved by the EU’s Climate Change Committee, including representatives of national governments, before it goes into effect.

The International Emissions Trading Association called earlier this week on the commission and the EU governments to reconsider the proposal. The bloc could consider delaying the planned ban to May 1, 2013, Geneva-based IETA said.

Swiss Tighten Market Abuse Rules for Investors, Hedge Funds

Switzerland’s government is widening its ban on market manipulation, giving the Swiss supervisory authority more surveillance powers over hedge funds and private investors.

All market manipulation will be prohibited for all market participants, the government said in an e-mailed statement Dec. 17. So far, only “particularly damaging” manipulation was banned, according to the government.

“This means that in future non-supervised entities, such as hedge funds and private investors, will also be subject to partial supervision by the Swiss Financial Market Supervisory Authority,” known as Finma, the government said.

The new rules would take effect in 2013 at the earliest, the finance ministry said.

Kline Eyes Measures to Block Rule on For-Profit College Aid

John Kline, the incoming leader of the House of Representatives education committee, said he is considering measures to block an Obama administration plan to tighten for- profit colleges’ access to student aid.

The Department of Education has proposed tying for-profit colleges’ eligibility for U.S. student aid to graduates’ incomes and loan repayment rates. In September, after receiving more than 90,000 comments, the department delayed making public the final rule until early next year.

Kline, a Minnesota Republican who will become chairman of the education committee in January, said he would rather that nonprofit and for-profit colleges be required to disclose graduation rates, costs, and graduates’ debt burdens to all applicants. The so-called gainful employment rule is scheduled to go into effect in 2012, and Kline said he has been looking at ways of “stopping” it.

The rule may be blocked by including language in a spending bill that would prevent the department from implementing it, Kline said. He said he would prefer to work with Secretary of Education Arne Duncan to soften or eliminate the proposal.

Basel Bank Rules to Have ‘Modest Impact’ on Growth

An overhaul of bank capital rules drawn up by the Basel Committee on Banking Supervision will trim global economic growth by as much as 0.22 percent, which the regulators said was a “modest” amount.

The growth curbs would come over the eight-year transition period during which the rules are implemented, the Basel committee and Financial Stability Board said in a report posted on the Basel committee’s website Dec. 17.

Regulators are addressing concerns from lenders and companies that the overhaul, known as Basel III, may force banks to cut lending, jeopardizing the economic recovery. The Institute of International Finance, an industry group, said in June an earlier version of the plans would have left economic output 3.1 percent lower throughout the euro currency zone, U.S. and Japan during the period from 2011 through 2015, compared with a baseline scenario.

The report “leaves quite a lot more to be desired,” Etay Katz, regulatory partner at law firm Allen & Overy LLP in London, said. “I think bankers when they see this will be sceptical of the rigor with which this analysis has been conducted,” because the impact of planned Basel liquidity rules isn’t taken into account.

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Finra Retooling Market Surveillance to Catch Abuses

The Financial Industry Regulatory Authority is revamping how it scans for abuses such as insider trading, responding to increased fragmentation of markets, Chief Executive Officer Richard Ketchum said Dec. 17.

Finra conducts market surveillance for most stock exchanges, reflecting 80 percent of U.S. trading, after adding NYSE Euronext’s markets to its oversight responsibilities in June. While the regulator currently operates separate databases for trading-related information for securities listed on the New York Stock Exchange and Nasdaq Stock Market, the goal is to “pull that together” in 2011 to spot manipulative and illegal activity across venues, Ketchum told reporters in New York.

With stock activity dispersed across as many as 50 venues including exchanges, electronic communication networks, dark pools and the trading desks of broker-dealers, manipulative practices have spread out in an attempt to elude regulators, he said. Surveillance must aggregate data across markets to identify patterns and related trading, Ketchum said.

Data for Nasdaq-listed securities and over-the-counter or off-exchange trading resides in one database, while NYSE and NYSE Arca information is in another, said Finra Vice Chairman Stephen Luparello. Adding the latter data into the former system will give regulators a “much fuller picture” of markets, he said.

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Half of Bankers May Quit If Bonuses Disappoint, Recruiter Says

Forty-eight percent of workers in the financial services industry consider changing jobs if annual bonuses disappoint, said recruiter Astbury Marsden, which advises companies in Europe and Asia.

Forty-five percent of the 1,122 bankers surveyed said they expected bonuses to be higher this year than last, the London- based recruitment firm said in an e-mailed statement today. Collective bonuses are likely to be less than the 7.3 billion pounds ($11.3 billion) paid last year.

Pay in the sector increased 17 percent this year to compensate for reduced bonuses, the recruiter said. Forty-five percent of the workers anticipating a higher bonus this year expect it will amount to 47 percent of their base salary, according to the survey.

Derivatives Rules Raise Concerns in Nascent Market: China Credit

Rules governing credit-default swaps in China are too narrow, hindering their growth at a time when the corporate bond market is expanding 45 percent, according to bankers.

About 23 agreements covering a notional 1.99 billion yuan ($298 million) have been sold since China set up a credit derivatives market a month ago, according to the central bank. That compares with outstanding contracts on $30 trillion of debt globally at the end of June, according to data compiled by the Bank for International Settlements in Basel, Switzerland.

While bankers, regulators and government officials met on Hainan island last week in the first conference since the yuan contracts started to discuss the future of the market, they didn’t expand on rules to determine what would trigger a settlement of the swaps under a so-called credit event.

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Compliance Action

Citigroup Fined by Japan Regulator Over Late Reports

Citigroup Inc., the third-largest U.S. bank, was fined 23 million yen ($274,000) by Japanese financial regulators for filing late and erroneous reports.

Citigroup Global Markets Inc. missed deadlines for filing 12 financial reports and also submitted two reports containing false data on how many shares it held in companies, the Financial Services Agency said in a statement on its website Dec. 17, without elaborating.

“Citigroup takes this matter seriously and will further strengthen its framework for the submission of large shareholding reports,” said Atsuko Yoshitsugu, a Tokyo-based spokeswoman for Citigroup, in a telephone interview.

Citigroup’s four units, including Citigroup Global Markets Inc., are subject to the fine, the regulator said. New York- based Citigroup accepted the watchdog’s findings and will pay the fine, Yoshitsugu said.

SEC Said to Subpoena Wall Street Banks in Mortgage-Bond Probe

U.S. regulators subpoenaed JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp., Goldman Sachs Group Inc. and Wells Fargo & Co., seeking information on the banks’ role in bundling mortgages for sale to investors, a person familiar with the matter said.

The Securities and Exchange Commission subpoenas asked the banks for details on how mortgages were selected and bundled into securities, said the person, who declined to be identified because the probe isn’t public. Reuters reported the SEC probe Dec. 17, saying the subpoenas were sent last week.

Vickee Adams, a Wells Fargo spokeswoman, declined to comment on whether the San Francisco-based bank had received a subpoena from the SEC, and said only that the bank is “always in contact with regulators, legislators and others who are interested in our procedures.”

Joe Evangelisti, a spokesman for JPMorgan, Michael DuVally, a spokesman for Goldman Sachs, Bill Halldin of Bank of America and Citigroup’s Danielle Romero-Apsillos all declined to comment. SEC spokesman John Heine also declined to comment.

Swiss, Liechtenstein CDs Get Germany $2.4 Billion, Spiegel Says

Germany will get an extra 1.8 billion euros ($2.4 billion) in tax payments from people who hid money in Liechtenstein and Switzerland, Der Spiegel reported, citing government estimates.

The tax evaders were exposed because Germany bought compact discs with client data from banks in the two countries, the magazine said in a preview of an article to be published. About 1.6 billion euros are due this year, and 200 million euros next year, according to Der Spiegel.

Courts

Hedge Fund Matchmaker Caught in Insider Probe’s ‘Spider Web’

James Fleishman, arrested Dec. 16 in the broadening investigation of insider trading on Wall Street, earned $275,000 last year working as a matchmaker for hedge funds and company insiders, prosecutors said.

Fleishman, who works as a sales manager for Primary Global Research LLC, a so-called expert networking firm, helped facilitate the transfer of market-moving data from technology firm employees to investors. The company’s consultants, who were also employees of technology companies, allegedly gave clients an advantage with secret sales numbers and production data from Dell Inc., Advanced Micro Devices Inc., Taiwan Semiconductor Manufacturing Co., and Flextronics International Ltd.

Fleishman was the preferred contact for Primary Global clients, the government alleged. He “connected” an analyst seeking information about Marvell Technology Group Ltd.’s sales contracts with an unidentified global supply manager at Dell, and with Mark Anthony Longoria, a former supply chain manager at Advanced Micro Devices, the U.S. said.

Longoria, arrested Dec. 16, appeared in federal court in Austin, Texas, and was released on $50,000 bond. Sam Bassett, his lawyer, said his client is cooperating with the investigation.

Fleishman’s lawyer, Brad Bailey, said Dec. 16 that he is reviewing the charges. His client was released on $700,000 bail after appearing before a federal judge in San Jose, California. He is to appear in a New York court Jan. 4.

The case is U.S. v. Shimoon, 10-mj-2823, U.S. District Court, Southern District of New York (Manhattan).

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For commentary, see Interviews section, below.

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Madoff Trustee Makes It Halfway With $7.2 Billion Deal

The estate of billionaire Jeffry Picower, an investor in Bernard L. Madoff’s Ponzi scheme, agreed to forfeit $7.2 billion to victims of the fraud, bringing the amount collected by authorities to $9.8 billion.

Irving Picard, the trustee liquidating Bernard L. Madoff Investment Securities LLC, sued Picower in May 2009, claiming he withdrew $7.2 billion more than he invested. Picower died in October 2009 at age 67. Picard and U.S. Attorney Preet Bharara, who is probing the Madoff fraud, announced the settlement Dec. 17.

Picard said that investors in Madoff’s Ponzi scheme, the largest in U.S. history, lost $20 billion in principal. Account statements at the time of Madoff’s arrest in December 2008 showed total balances of $65 billion. Picard, who filed hundreds of lawsuits seeking $50 billion, has now recovered $9.8 billion.

Picower began investing with Madoff in the late 1970s, controlling dozens of accounts. He had a heart attack and drowned in his swimming pool in Palm Beach, Florida. The settlement “honors what Jeffry would have wanted,” said his widow, Barbara. She said is “confident” her husband was “in no way complicit” in Madoff’s fraud.

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Ex-Jefferies Money Manager Gets Six-Year Sentence

Former Jefferies Paragon Fund money manager Joseph Contorinis was sentenced to six years in prison after being convicted in an insider-trading scheme that prosecutors say netted more than $7 million in illegal profits.

U.S. District Judge Richard Sullivan in New York described Contorinis as the “poster child for what happens " when there is insider trading,” a crime he said damages the economy.

Sullivan also ordered Contorinis to forfeit as much as $13 million.

Contorinis was convicted by a federal jury in Manhattan in October of securities fraud and conspiracy. Jurors found that he illegally traded on inside merger tips supplied by Nicos Stephanou, an investment banker who was the government’s chief witness in the trial.

Prosecutors asked Sullivan to send Contorinis to prison for about 8 years to 10 years, as recommended by U.S. sentencing guidelines. Lawyers for Contorinis, who is in custody, asked for a “significantly” lesser sentence, saying the money manager’s profit from the trades was less than $1 million and that his life “has been ruined.”

Prosecutors said Contorinis had lied at the trial when he testified that he relied on an analyst report for his trades.

The case is U.S. v. Contorinis, 09-cr-01083, U.S. District Court, Southern District of New York (Manhattan).

Interviews/Speeches

Hills Says U.K. Bank Liquidity Must Be Stress Tested

Simon Hills, an executive director at the British Bankers’ Association, talked about financial services in London and the outlook for U.K. banks, including stress tests.

He spoke with Andrea Catherwood on Bloomberg Television’s “The Pulse.”

For the video, click here.

Clark, Cohen, Berenzweig on Insider Trading Arrests

Christopher Clark, a partner at Dewey & LeBoeuf LLP and a former assistant U.S. attorney, discussed the U.S. probe into insider trading and the recent arrests of technology company workers who allegedly sold secret information, and the likelihood that hedge fund individuals will be arrested.

Clark spoke with Betty Liu on Bloomberg Television’s “In the Loop.”

Separately, Joel Cohen, a partner at Gibson Dunn & Crutcher LLP, talked about the U.S. probe into insider trading. He discussed the possibility that this could be a case involving a “build-around that has come in as a consequence of something called Reg FD, which came into effect in 2002, which requires companies to make sure they release information in a uniform way,” Cohen said.

Separately Seth Berenzweig, managing partner at Berenzweig Leonard LLP, discussed the events of Dec. 17 and said more arrests can be expected.

Three technology company workers and a man who worked at an expert-networking firm were arrested Dec. 16 as part of the probe. Cohen spoke with Erik Schatzker on Bloomberg Television’s “InsideTrack.” Berenzweig spoke with Matt Miller and Carol Massar on Bloomberg Television’s “Street Smart.”

For the Clark video, click here.

For the Cohen video, click here.

For the Berenzweig video, click here.

Comings and Goings

Daimler to Name Barth Head of Compliance, Manager Magazin Says

Daimler AG will appoint Volker Barth, currently the carmaker’s head auditor, as chief compliance officer, Manager Magazin reported in an e-mailed preview of an article appearing in its next edition, citing unidentified people in the company.

To contact the reporter on this story: Carla Main in New Jersey at cmain2@bloomberg.net.

To contact the editor responsible for this report: David E. Rovella at drovella@bloomberg.net.

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