SEC Sovereign Fund Probe, Air-Bag Rule: Compliance

The U.S. Securities and Exchange Commission started a broad investigation involving several financial firms to determine whether they made improper payments to secure investments from sovereign wealth funds, according to two people with direct knowledge of the matter.

The sweep in part focuses on whether banks, hedge funds and private equity firms paid placement agents to win access to the state-owned money, said the people, who declined to be identified because the investigation isn’t public. An agent working with a sovereign wealth fund may be considered a government official, making interactions with that person subject to the Foreign Corrupt Practices Act.

The nature of the probe recalls a spate of public corruption cases in the U.S. where money managers were accused of making improper payments including campaign contributions to win contracts from public pension funds. The agency adopted new rules last year to curb so-called pay-to-play practices.

The SEC investigation was previously reported on the Wall Street Journal’s website late in the day on Jan. 13.

SEC investigators are also scrutinizing whether the firms improperly provided other benefits, including entertainment or travel, directly to fund employees in order to secure investments or sell securities, one of the people said.

Regulators have conducted bribe-related sweeps of other industries, including pharmaceuticals and natural resources.

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Compliance Policy

TRW, Autoliv Air-Bag Sales May Increase on U.S. Rule

The U.S. National Highway Traffic Safety Administration said Jan. 13 it will require all new cars sold in the U.S. to meet a minimum standard of protecting passengers from side- window ejections, especially in rollovers, by 2018.

Forty-seven percent of people killed in rollover crashes are ejected from vehicles, the agency said. Under the new rule, automobile air-bag makers including Autoliv Inc. and TRW Automotive Holdings Corp. may gain business.

Automakers will need redesigned side-curtain air bags to meet the new mandate because the devices will have to remain inflated longer, said Ray Pekar, Autoliv’s investor relations director at its U.S. unit, based in Auburn Hills, Michigan.

Automakers can meet the requirement, which NHTSA said will cost $31 a car or $507 million annually for the industry, with side-curtain air bags that cover windows or with glazing that can strengthen automotive glass and prevent it from shattering.

According to NHTSA, the stronger anti-ejection measures may save 373 lives a year.

A highway-safety group that pushed Congress to require the occupant-protection rule said it was “disappointed” that NHTSA gave automakers the option to use window glazing or air bags rather than requiring both.

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Massey Blast Rules Raise Costs at Patriot, International Coal

The disaster at a Massey Energy Co. mine last year is exacting a price for rivals such as International Coal Group Inc. and Patriot Coal Corp., as the Obama administration steps up safety inspections and penalties.

Increased U.S. scrutiny of mining companies cost the coal industry about $665 million in lost productivity last year, based on data from Wood Mackenzie Consultants Ltd. and the fuel’s average price on the New York Mercantile Exchange. The industry produced about 3.6 million fewer tons of coal than it would have without the increased oversight.

Regulators with the U.S. Mine Safety and Health Administration say they have focused on mines with the most safety violations since the explosion in April that killed 29 people at Massey’s Upper Big Branch mine in West Virginia, the worst U.S. mine accident in 40 years. Officials say they want to change a system in which mining companies appeal safety citations to stop the agency from documenting a “pattern of violations” that allows for increased oversight.

Regulators are proposing rules that would require companies to provide gear that measures coal dust exposure and safety alarms. Another rule would make companies clearly identify the legal operator, to keep them from avoiding fines.

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Somalia Plans Rules, Taxes for Mobile-Phone Operators

Somalia will start governing its untaxed and unregulated telecommunications industry to boost growth and investment, said Information, Posts and Telecommunications Minister Abdulkareem Jama.

The government has drafted rules for managing mobile-phone frequencies, phone numbers and interconnection agreements, a system in which telecommunications operators carry cross-network traffic, Jama told reporters Jan. 14 in Nairobi, the capital of neighboring Kenya.

Somalia’s Finance Ministry is finalizing the details of a tax to be introduced to the industry, Jama said. Both proposals must be scrutinized by lawmakers before going into force, he said, without providing a timeline. He said the regulations will not discourage investment.

Somalia’s Western-backed government has been battling insurgents since 2007. The country hasn’t had a functioning central administration since the ouster of dictator Mohamed Siad Barre in 1991. Small-scale mobile-phone operators set-up businesses in the country and began to flourish amid the chaos, said Jama. The Horn of Africa nation currently has 11 licensed telecommunications companies.

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French Antitrust Regulator Will Make Fines Clearer, Narrower

France’s antitrust regulator will set fines for anti- competitive behavior in a narrower and more transparent manner under a proposal that gives weight to mitigating factors such as a company’s ability to pay and behavior limited to a unit.

Under the plan, companies and individuals linked to cartels and other antitrust infractions will be granted more opportunities to argue for cuts in fines, though the maximum possible penalty would remain unchanged.

The regulator began a two-month public-comment period on the proposed changes, and will host a round table discussion in March before publishing the final text.

Canada Tightens Mortgage Rules to Curb Household Debt

Canadian Finance Minister Jim Flaherty tightened rules to restrain record household borrowing, giving the Bank of Canada more scope to extend a pause in interest rate increases.

Flaherty said yesterday Canada will shorten the maximum amortization period for government-insured mortgages to 30 years from 35 years, lower the maximum amount homeowners can borrow against the value of their homes, and withdraw its insurance on home-equity lines of credit.

Canada has relied on tighter mortgage regulations to rein in mortgage and consumer borrowing, aiming to stop rising debt levels from threatening the economic recovery. Bank of Canada Governor Mark Carney has kept borrowing costs near historical lows, even as he has warned about the risks of rising debt levels, in order to support an economy battered by weak demand for the country’s exports.

Yesterday’s announcement “gives the bank a little bit more flexibility,” said Mark Chandler, head of Canadian currency and rates strategy at Royal Bank of Canada’s RBC Capital unit in Toronto.

The moves to shorten the maximum amortization period and lower the refinancing maximum will take effect March 18. The government will also withdraw its insurance on home-equity lines of credit starting on April 18, Flaherty said in a statement.

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EU Lawmaker Proposes Interest Rebate for Crisis-Aid Repayment

Ireland should be given a rebate on interest payments if the government fully repays European aid to ease its debt crisis, the European Parliament’s top financial lawmaker said.

Sharon Bowles, chairwoman of the 27-nation assembly’s Economic and Monetary Affairs Committee, proposed that struggling euro-area economies should be refunded part of the interest rate charged on emergency loans if they make all repayments.

Ireland faces an average fee of around 5.8 percent for an 85 billion-euro ($112.8 billion) European Union-led rescue package agreed to in November. To raise 5 billion euros to lend on to Ireland, the European Commission, the EU executive in Brussels, this month paid an interest rate of only 2.59 percent; the profits go to the EU budget.

Europe should reduce the interest rate on emergency aid to Ireland by 50 percent when revamping the financial backstop meant to stem the euro-area debt crisis, economists said last week. Finance ministers met yesterday in Brussels to discuss the economic crisis.

Compliance Action

Goldman Halts Facebook Offering in U.S., Citing Rules

Goldman Sachs Group Inc. halted an offering of Facebook Inc. shares to U.S. investors on concern that “intense media attention” on the deal may violate rules limiting marketing of private securities.

Instead, the sale, first reported Jan. 2, will be restricted to non-U.S. investors, the New York-based bank said in an e-mailed statement yesterday. Goldman Sachs and funds it manages had agreed to buy $450 million of closely held Facebook before the bank began seeking investors.

“Goldman Sachs concluded that the level of media attention might not be consistent with the proper completion of a U.S. private placement under U.S. law,” it said in the statement. The move “was based on the sole judgment of Goldman Sachs and was not required or requested by any other party.”

Goldman Sachs, the biggest U.S. securities firm before converting to a bank in 2008, had been trying to sell as much as $1.5 billion in Facebook shares to investors inside and outside the U.S. before making the change announced today. The company didn’t say whether it still expects to raise that amount. The target is still achievable, according to a person with knowledge of the bank’s plan who declined to be identified because it isn’t public.

A Facebook spokesman, Jonathan Thaw, said Goldman Sachs is “in the best position to answer any questions.”

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Andean Integrated Exchange to Delay Startup of Joint Trading

The bourses of Peru, Chile and Colombia said they will delay the startup of joint trading after the Lima Exchange suspended its participation for two weeks in December.

Trial runs will continue until March, when a board of directors will set a new date for the startup, the integrated exchange known as MILA said yesterday in an e-mailed statement. the integrated exchange was originally scheduled to begin trading in February.

AIG Repays Fed, Swaps Treasury Investment for Common Stock

American International Group Inc. retired a Federal Reserve credit line and swapped the Treasury Department’s preferred stake for 92 percent of the insurer’s common stock as the U.S. unwinds its investment in the company.

Treasury now owns 1.66 billion shares of New York-based AIG that will be sold to repay an investment of about $49 billion through the end of last year, the regulator said in a statement on Jan. 14. Treasury paid an additional sum of about $20 billion as it helped retire the company’s obligation to the Fed.

The New York-based insurer is working to replace government funds with private capital after selling assets to help repay the Fed. The company raised $2 billion selling bonds on Nov. 30, its first debt sale since the 2008 rescue that swelled to $182.3 billion.

AIG was first rescued by the Fed in 2008 after the firm was unable to meet obligations on contracts that protected banks against losses on investments tied to subprime mortgages. The bailout was revised at least four times to make more funds available, lower interest payments and give the company additional time to sell assets. The transactions on Jan. 14 were part of a plan announced in September.

IMF Urges Guernsey to Step Up Fight Against Money Laundering

The International Monetary Fund said it is concerned about the way Guernsey implements its money-laundering rules, saying there is a “disconnect” between cases that are investigated and those eventually prosecuted.

The British Crown dependency needs to bolster rules to prosecute foreign money launderers and expand the list of “high-risk customers,” the IMF said in a report published in Washington on Jan. 14.

“The modest number of cases involving money laundering by financial-sector participants, and the disconnect between the number of money-laundering cases investigated versus the number of cases prosecuted and eventually resulting in a conviction, calls into question the effective application,” the Washington- based lender said.

Guernsey has come under pressure to comply with European Union rules, improve disclosure and do away with low taxes. About a third of the island’s economy comes from financial services. The IMF wants Guernsey’s regulator to bolster its compliance regime, while law-enforcement agencies should improve their performance when investigating money laundering.

SFC’s Fong Says Mini-QFII Program Awaiting China’s Approval

Eddy Fong, chairman of Hong Kong’s Securities and Futures Commission, said the so-called mini-QFII program is awaiting approval from China’s government.

The program would allow brokers and fund managers to invest yuan funds raised in Hong Kong in mainland Chinese securities.

Fong spoke to reporters at the Asian Financial Forum in Hong Kong yesterday.

Courts

N.Y. Man Threatened to Kill SEC Officials, U.S. Says

A Dix Hills, New York, man accused last month of running unregistered commodity pools was arrested for allegedly threatening to kill officials of U.S. financial regulatory agencies, including the Securities and Exchange Commission and Commodity Futures Trading Commission.

Vincent P. McCrudden, 49, was picked up Jan. 13 at Newark Liberty International Airport in New Jersey, according to Robert Nardoza, a spokesman for U.S. Attorney Loretta Lynch in Brooklyn, New York.

McCrudden and two companies he controlled were sued in December by the CFTC for operating commodity pools in violation of the Commodity Exchange Act. McCrudden threatened to kill “any and all of 47 current and former officials” of the SEC, the CFTC, the National Futures Association and the Financial Industry Regulatory Authority, according to the complaint.

McCrudden was scheduled to appear in federal court on Jan. 14 in Central Islip, New York.

His lawyer, Bruce Barket of Garden City, New York, said in a phone interview that McCrudden, while short-tempered and ill- mannered, is “a decent, hard-working guy who doesn’t pose a threat to anybody. It’s unfortunate but not a crime.”

The case is U.S. v. McCrudden, 10-mj-1503, U.S. District Court, Eastern District of New York (Central Islip).

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Interviews/Speeches

Gensler Says Swaps Transparency Will Increase Market Liquidity

U.S. Commodity Futures Trading Commission chairman Gary Gensler said greater transparency in the $583 trillion swaps market will lead to increased competition and market liquidity.

“A greater number of market makers also lowers risk to the system and provides greater liquidity,” Gensler said Jan. 14 in remarks prepared for a forum at George Washington University Law School in Washington.

The CFTC and Securities and Exchange Commission are proposing rules required under the Dodd-Frank Act. The regulatory overhaul inspired by the credit crisis aims to reduce risk in the swaps market.

The CFTC plans to make aggregate swap-trading data available to the public more often than the six-month intervals required under Dodd-Frank, Gensler said. The aggregate swaps data would be similar to information the CFTC publishes weekly on large traders in the futures market, Gensler said. He said the agency has a “long tradition of bringing weekly transparency to the futures marketplace.”

Noyer Says Regulatory Decisions on Banks Shouldn’t Be Automatic

Bank of International Settlements Chairman Christian Noyer cautioned against banking rules that kick-in automatically, such as the ones currently being considered to prevent asset price bubbles from forming.

“Regulators’ capacity for judgment must be preserved,” Noyer said Jan. 14 in a speech in Paris. Authorities should “avoid blind, automatic systems” particularly with respect to the second pillar of Basel rules, he said.

The outcome of debates on the use of “bail-ins” and “contingent capital” are far from decided, he said.

Separately, Noyer, who spoke to legal students in Bordeaux, said no financial institution or market should escape regulation.

“This regulation must be appropriate, that is in proportion to the objectives we want to achieve,” he said in the speech to the students. “And in no way should it result in distortions to competition, or lead to any form of regulatory arbitrage.”

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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