Private-Equity Taxes, Systemic Firms, Rabobank: Compliance

Private-equity executives, who spent millions of dollars successfully fighting efforts to raise taxes on their investment profits, may not escape a new 3.8 percent levy in President Barack Obama’s health-care law.

The overhaul enacted two years ago includes a tax on unearned income to help pay for the expansion of insurance coverage. It’s set to start in 2013 and will apply to capital gains -- such as private-equity managers’ profits on leveraged buyouts -- as well as interest, dividends, annuities, royalties and rents for married couples who make more than $250,000 and individuals who earn at least $200,000.

The impact will be even greater if tax cuts enacted during the presidency of George W. Bush expire as scheduled at the end of this year. Unless Congress acts, the top rate on long-term capital gains and dividends, now 15 percent, would go to 20 percent and 39.6 percent. For high earners above the threshold, the health-care tax would bring the levy on dividends to as much as 43.4 percent.

The Supreme Court heard arguments last week on the constitutionality of parts of the health care law, and a ruling expected by the end of June could determine whether the tax takes effect.

The share of profits private-equity managers receive from investments is known as carried interest. It is often taxed as capital gains, which carry a lower rate than ordinary income and fall under the new Medicare levy, said Elizabeth Kessenides, a tax attorney in New York City who represents people in financial services including private-equity and hedge-fund managers.

The private-equity industry has argued that carried interest should be taxed as investment income rather than wages because it encourages entrepreneurial risk-taking.

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Compliance Policy

U.S. Regulators to Move Closer to Designating Systemic Firms

The U.S. Treasury Department and regulators will move one step closer today to designating some companies as posing a risk to the country’s financial system in the event of their failure.

The Financial Stability Oversight Council will hold a meeting at which it will finalize criteria for singling out non- bank financial companies as systemically important and thus subject to greater supervision, the U.S. Treasury Department said.

The final rule is FSOC’s second attempt to define metrics and a procedure for designating non-bank companies as systemic. Federal Reserve Chairman Ben S. Bernanke said March 29 that FSOC’s designation tool is a way regulators have become more prepared for a crisis.

The FSOC, headed by Treasury Secretary Timothy F. Geithner, proposed a rule in October that set standards for determining which non-bank firms require Federal Reserve scrutiny. Banks with over $50 billion in assets were automatically deemed risky to the financial system in the event of their failure.

The final rule regulators will approve today will be largely unchanged from that proposed in October, said officials familiar with the deliberations who spoke on condition of not being further identified. The wording, however, can be changed until the vote is taken.

Under the October proposal, regulators will evaluate non- bank financial companies with more than $50 billion in assets if they meet any one or more of the following thresholds: A 15-to-1 leverage ratio; $3.5 billion in liabilities on derivatives contracts; $20 billion of outstanding loans borrowed and bonds issued; $30 billion in gross notional credit-default swaps outstanding; or a 10 percent ratio of short-term debt to assets.

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Compliance Action

Rabobank Takes Over Friesland Bank as Capital Hurdles Loom

Rabobank Groep (RABO), the biggest Dutch mortgage lender, will take over Friesland Bank NV as the smaller 99-year-old lender struggles to meet new capital requirements and sets aside more money for bad loans.

Friesland Bank Chairman Kees Beuving confirmed the takeover in a statement yesterday.

Friesland Bank, based in the Dutch city of Leeuwarden, said bad-loan provisions rose to “unusually high” levels in 2011 and funding became more expensive after Fitch Ratings cut the lender’s long-term credit rating in June. The bank, which reported a 43 million-euro ($57 million) loss in 2010, said last year’s results were also hurt by a writedown on its 23 percent stake in Van Lanschot NV. (LANS)

Friesland Bank “has stakes in Van Lanschot, BinckBank NV (BINCK) and an insurance joint venture with Delta Lloyd,” said Jan Willem Weidema, an Amsterdam-based analyst at ABN Amro Bank NV. The takeover will send a “ripple” through the Dutch sector, he said.

To meet capital requirements under Basel III rules, “we needed to be profitable, cut the Van Lanschot stake and not have any setbacks,” Beuving told reporters yesterday. Results for 2011 “won’t be great,” he said, adding that Friesland hasn’t been rescued.

Regulators gave permission for an “immediate merger,” the banks said.

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Tanzania Planning Bourse Section for Small Business Listings

Tanzania’s central bank is planning to create a section on the Dar es Salaam-based stock exchange to let small businesses raise capital and list shares.

The bank is seeking consultants to prepare the plan for the capital markets regulator, which will start in the 2012-13 fiscal year, it said in a statement published in the Daily News yesterday. The plans also include trading of municipal bonds on the bourse and setting up a commodities exchange, it said.

Overstock.com Says SEC Won’t Take Any Enforcement Action

Overstock.com (OSTK) says SEC’s Salt Lake Regional Office closed 2009 investigation, won’t recommend any enforcement action.

The company became aware of the investigation in September 2009 when it received a subpoena from the Salt Lake Regional Office of the U.S. Securities and Exchange Commission, “following Overstock.com’s disclosure of restatements of certain of its financial statements,” according to a statement by Overstock.com.

Overstock.com brought “all of these matters to light, we made the corrections, we fully disclosed these matters,” Patrick Byrne, Overstock.com chairman and CEO, said in the statement, adding that the company is “pleased with this result.”

Karen L. Martinez, Assistant Regional Director of the SEC’s Salt Lake City Regional Office, confirmed in a telephone interview yesterday that the investigation was closed. She declined to comment further on the matter.

ArcelorMittal, Evraz Face South African Collusion Penalties

South Africa’s Competition Commission recommended the local units of ArcelorMittal (MT) and Evraz Plc (EVR) pay as much as 10 percent of their annual sales in penalties for colluding on steel prices.

The regulator on March 30 asked the more senior antitrust watchdog, the Competition Tribunal, to take the measure, the Pretoria-based commission said in an e-mailed statement yesterday.

Its investigation of a 2008 complaint found that ArcelorMittal South Africa Ltd. (ACL) and Evraz Highveld Steel & Vanadium Ltd. (EHS) “engaged in concerted practices or had understandings that Highveld would follow Mittal’s lead on the pricing mechanism and changes in pricing,” the commission said. The commission also found the companies divided the markets by “specific types of goods.”

ArcelorMittal South Africa is the continent’s largest maker of flat steel and Evraz the second-biggest producer in the country.

“We will study the referral papers and comment thereafter,” Themba Hlengani, a spokesman for ArcelorMittal South Africa, said in an e-mailed response to a query yesterday.

“At this stage the Company doesn’t have any comments,” Cathie Lewis, Evraz Highveld’s company secretary and investor relations spokeswoman, said in an e-mailed reply. “We are studying the Commission’s Complaint Referral we received today,” she said yesterday.

India Bars Soybean Futures to Curb Excessive Price Volatility

India, Asia’s biggest supplier of soybean meal, barred commodity exchanges from offering new contracts in soybeans in April to curb speculation.

“In order to curb the excessive volatility in the prices of soybean, the commission has decided not to allow soybean futures contracts scheduled to be launched in the month of April,” the Forward Markets Commission said in a circular to exchanges published on its website today.

Motorola Mobility Faces EU Antitrust Probes on Patents

Motorola Mobility Holdings Inc. (MMI) faces European Union investigations over licensing of patents, following a similar probe into Samsung Electronics Co. (005930)

The European Commission opened two formal investigations to check whether Motorola Mobility violated EU competition rules “by seeking and enforcing injunctions against Apple’s and Microsoft’s flagship products such as iPhone, iPad, Windows and Xbox on the basis of patents it had declared essential to produce standard-compliant products,” it said in a statement.

Samsung, Motorola Mobility, Microsoft Corp. (MSFT) and Apple Inc. (APPL) are involved in litigation across Europe as demand for smartphones and tablets soars. Google Inc., (GOOG) which is buying Motorola Mobility, has written to groups that set industry standards to assure them it will fairly license patents.

Regulators said they were acting on complaints filed by Apple and Microsoft over Motorola Mobility’s possible abuse of a dominant position for not licensing the patents on “fair, reasonable and non-discriminatory terms” as agreed with standards organizations.

“We haven’t finalized our acquisition of Motorola Mobility, but will work with the European Commission to answer any questions they might have,” said Al Verney, a spokesman for Google in Brussels. “We have longstanding concerns about patent abuses, including lawsuits and royalty demands targeting the Android ecosystem.”

Libertyville, Illinois-based Motorola Mobility didn’t respond to an e-mail out of regular office hours.

Apple declined to comment on the probes.

Courts

Lehman Unit Appeal on Interest-Rate Swaps Rejected by U.K. Court

Administrators of two Lehman Brothers Holdings Inc. (LEHMQ) units can’t force buyers of interest-rate swaps to make payments on derivatives contracts arising from the period after the New York-based bank collapsed in 2008, a U.K. court ruled.

Three London appeal judges said the obligation to uphold swaps contracts when they matured was void where an “event of default” occurred with the seller in bankruptcy. The case dealt with four separate appeals, and the legal interpretation of derivatives agreements, two of which involved Lehman units.

The decision means ITV Plc (ITV)’s Carlton Communications Ltd. doesn’t have to pay about 2.7 million pounds ($4.3 million) plus interest to Lehman Brothers Special Financing Inc., and that JFB Firth Rixson Inc. (JFB) and three other companies don’t owe anything on interest-rate swaps sold by Lehman Brothers International Europe in 2007.

Lehman Brothers, which bankruptcy filed in September 2008, had more than 900,000 derivative contracts outstanding when it collapsed.

Interviews

Regulators Should Propose New Volcker Rule, Paredes Says

U.S. financial regulators should “re-propose” the so- called Volcker Rule that bans banks from engaging in proprietary trading, U.S. Securities and Exchange Commission member Troy Paredes said.

“At this point, the most prudent path forward would be a re-proposal,” Paredes, one of two Republicans on the five- member commission, said at a conference in Washington sponsored by the Council of Institutional Investors. “We run the risk that when we solve one problem we create many other problems and other unintended consequences.”

The SEC, along with the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency released a 298-page proposal in October to implement the proprietary trading ban, which was a part of the 2010 financial regulatory overhaul.

The proposal includes exemptions that would allow banks to conduct proprietary trading that is tied to market-making activities or hedging risk. Those exemptions have been criticized for adding complexity that would make implementing the ban difficult.

The Dodd-Frank Act calls on regulators to finalize the Volcker Rule by July 21.

Carlyle’s Rubenstein Expects U.S. Review of Carried Interest Tax

David Rubenstein, co-founder of Carlyle Group (CG) Inc., said he expects the U.S. Congress will review the favorable tax treatment of profit-based compensation for private equity managers next year.

“The carried interest debate is likely to be resolved in the next Congress in the context of comprehensive tax reform,” Rubenstein said yesterday at a Washington conference sponsored by the Council for Institutional Investors, a group representing employee benefit funds, foundations and endowments with combined assets exceeding $3 trillion, according to its website.

Carried interest, a share of profits taken as compensation, are taxed at the capital gains rate of 15 percent rather than the rates as high as 35 percent that apply to wages.

The tax treatment of private equity has gained attention in part because of former Massachusetts Governor Mitt Romney’s bid for the Republican presidential nomination. Romney, a co-founder of Bain Capital LLC, said in January that he paid an effective tax rate of 13.9 percent on income of $21.6 million.

Rubenstein, one of three Carlyle founders who received a total of $413 million last year, declined to say how treatment of carried interest should be changed.

Comings and Goings

JPMorgan’s Hannam Steps Down, Pledging to Appeal FSA Fine

JPMorgan Chase & Co. (JPM)’s global chairman of equity capital markets, Ian Hannam, stepped down to appeal a 450,000-pound ($720,000) fine from the U.K. finance regulator for disclosing inside information.

Hannam, 56, gave details of a new oil find and a potential bid for Heritage Oil Plc (HOIL) in two e-mails sent in 2008 to a prospective client, the Financial Services Authority said in a statement today. Hannam, who is based in London, said he had been acting in the best interests of his client.

Hannam is among bankers advising Xstrata Plc, the subject of a bid from Glencore International Plc (GLEN). At JPMorgan, which also serves as a broker to Xstrata, Hannam helped the mining company first sell shares in 2002, and was involved in many of its subsequent takeovers, including the $18.1 billion purchase of the Canadian nickel producer Falconbridge Ltd. in 2006.

JPMorgan is the third-ranked mergers adviser in Europe this year after Morgan Stanley and Goldman Sachs Group Inc., according to data compiled by Bloomberg. The New York-based firm ranks third in arranging equity and equity-linked stock and rights offerings in the region this year, the data show.

Hannam will complete his current commitments before leaving the bank, Emilio Saracho, the head of investment banking for Europe, the Middle East and Africa, said in a memorandum to employees today. Brian Marchiony, a spokesman for the firm in London, declined to comment beyond the memo.

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

To contact the editor responsible for this report: Michael Hytha at mhytha@bloomberg.net.

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