EU Fund Bonus Limits, Leveraged Loans, FDIC: Compliance
The assembly’s economic and monetary affairs committee voted in favor of a ban on managers of EU-regulated mutual funds, known as UCITS, from receiving bonuses larger than their fixed pay.
The move comes as European Parliament lawmakers and Ireland, which holds the rotating presidency of the EU, confirmed a compromise deal overhauling bank capital and liquidity rules for the 27-nation EU. That law will ban banker bonuses that are more than twice fixed pay, with scope for as much as a quarter of the bonus to be valued at a discount if payment is deferred for at least five years.
In calling for tougher fund-manager rules, lawmakers set the stage for a vote by the full parliament before negotiations with national diplomats can start. Funds that meet EU investor- protection and oversight rules can be labeled as UCITS, and gain the right to operate throughout the 27-nation bloc.
If adopted, the pay rules would also apply to employees outside the EU, Sven Giegold, the legislator leading work on the draft measures in the assembly, said in an e-mailed statement.
The Federation of European Employers, which represents corporate recruiters, has said the bonus curbs would go beyond the powers given to the European Union by the bloc’s treaties.
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Banks to Be Held Liable for Biased Auto Loans Under CFPB Rules
U.S banks may be sued by the Consumer Financial Protection Bureau if they fund discriminatory vehicle loans made by auto dealers, the agency announced yesterday.
Banks must comply with the Equal Credit Opportunity Act, which bans discrimination in lending, the CFPB said in an e- mailed statement. The new guidance demonstrates the CFPB is willing to sanction banks over mark-ups by auto dealers, which were excluded from the bureau’s authority in the 2010 Dodd-Frank Law that created the agency.
The market for auto loans is fragmented, with no lender controlling more than 6 percent of the market in the fourth quarter of 2012, according to data compiled by Experian Plc. (EXPN) The rules take aim at a practice the agency refers to as “dealer markup” and auto dealers call “dealer participation” or “dealer-assisted finance.” Consumer groups charge the structure of this market gives dealers an incentive to move buyers into more expensive loans.
Some banks have already received notices from the consumer bureau warning that they may face possible enforcement action. Ally Financial Inc. (ALLY) announced in a March 1 regulatory filing that CFPB was investigating certain retail financing practices.
The regulation of auto lending was one of the hardest- fought provisions of Dodd-Frank.
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Regulators Caution Banks to Boost Standards on Leveraged Loans
Federal regulators issued new guidance on leveraged lending to combat weakening standards as issuance of the debt grows at the fastest pace since the financial crisis.
Prudent underwriting practices have deteriorated with the inclusion of covenant-light transactions and less-than- satisfactory risk management practices, according to a guidance yesterday from the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.
Speculative-grade borrowings such as leveraged loans have benefited from the Fed’s attempts to galvanize the economy by buying $85 billion in Treasury and mortgage debt, and holding its benchmark rate near zero since 2008. Speculative-grade rated borrowers obtained $113 billion in loans last month from non- bank lenders, exceeding the pre-crisis peak of $55 billion in April 2007, according to JPMorgan Chase & Co.
Banks’ risk-rating standard must make realistic assumptions, establish underwriting methods similar to those for internal loans and perform stress testing on loans held within its portfolio as well as those planned for distribution, according to the statement.
The Fed’s third round of so-called quantitative easing began in September and was boosted in December to $85 billion in monthly purchases. Some Fed officials are concerned the policy may be fueling bubbles in some corners of the credit market.
Insider-Trading Tipsters to Face Prison Under Japan Proposal
Japan’s financial regulator is proposing imprisonment as part of stiffer penalties for people who leak information used for insider trading, according to a document obtained by Bloomberg.
Individuals who provide tips for insider traders to help them gain profits would face up to five years in prison and 5 million yen ($53,000) in fines, the document from the Financial Services Agency shows. Institutions would be subject to fines of as much as 500 million yen.
Japan is clamping down on insider trading after regulators last year found that employees of brokerages including Nomura Holdings Inc. (8604) gave tips on share offerings they managed. Under existing rules, only those who trade on nonpublic information can be imprisoned or fined.
The proposal for imprisonment is more severe than recommendations made by an FSA advisory committee in December. The panel had urged that the names of brokerage employees who leak confidential information be disclosed to the public in egregious cases.
The agency’s proposed law change would bring Japan into line with the U.S.
BRICS to Discuss Currency Swaps at Summit, Brazil Official Says
Leaders from Brazil, Russia, India, China and South Africa will discuss swaps in local currencies at a summit next week, Brazil Trade Minister Fernando Pimentel said yesterday on a conference call.
Brazil’s talks with China over a reais-for-renminbi swap are progressing, he said.
Separately, talks over the creation of a BRICS development bank are advancing. The BRICS development bank won’t be a rival to the International Monetary Fund or the World Bank. An agreement on the exact amount of resources to be committed isn’t likely and Russia favors capping each side’s contribution to $10 billion at first, Mikhail Margelov, President Vladimir Putin’s envoy to Africa, said March 15 in an interview in Moscow.
The BRICS summit will take place March 25-27 in Durban, South Africa.
FDIC Said to Plan First Sale of Home-Loan Bonds Since July 2011
The Federal Deposit Insurance Corp. plans to sell $221.1 million of securities backed by residential mortgages held by failed banks, according to a person familiar with the transaction.
The agency is selling guaranteed notes backed by $276.4 million of loans, said the person, who declined to be identified because the terms aren’t set. More than 70 percent of the mortgages are from Home Savings of America, and at least six other banks contributed 2.5 percent or more, the person said.
The FDIC began raising cash in 2010 through the bond market for the first time since the early 1990s, offering the agency a source of liquidity aside from assessments on healthy banks or its emergency line of credit with the U.S. Treasury.
The Washington-based agency’s sales since then have been tied to $7.4 billion of assets, with the FDIC placing $359.4 million of bonds backed by $449.3 million of commercial-mortgage debt in its last offering in May 2012, according to data compiled by Bloomberg. It last sold securities tied to residential notes in July 2011, the data show.
Jefferies Group LLC (JEF) is managing the latest sale, in which the underlying mortgages are 54 months old on average and carry current loan-to-value ratios of 106 percent, the person said.
David Barr, a spokesman for the FDIC, declined to comment.
ICE, NYSE Euronext Asked EU on March 18 to Rule on Merger
It made the request to the European Commission on March 18, according to the filing. It said the U.K., Spain and Portugal have 15 working days to object to the EU’s competition authority taking control of the merger review process.
ICE said it would formally notify the deal to the EU later.
SAP Adopts European Corporation to Speed Up Decision-Making
SAP AG, the German business-management software maker, plans to turn itself into a European corporation to enable faster decision-making as it focuses on grabbing database customers from Oracle Corp. (ORCL)
SAP will ask shareholders to approve a change of its legal status from an Aktiengesellschaft to a Societas Europaea, or SE, at next year’s annual meeting, it said yesterday. One aim is to speed up decisions on the supervisory board, said a person familiar with the matter, who asked not to be named because the discussions are private.
The SE structure, already adopted by companies including BASF SE (BAS), Allianz SE (ALV) and Puma SE (PUM), was created by the European Commission to simplify regulatory and legal requirements for companies with subsidiaries in more than one European country. Previously, multinationals had to follow each of the EU members’ own legal system where they had a subsidiary.
The change is of particular interest to German companies as the SE status allows them to choose between the German two-tier system of management board and supervisory board and the single- tier system adopted elsewhere in Europe with only one board. The legal form also simplifies cross-border mergers and acquisitions.
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Raj Rajaratnam’s Brother Rengan Charged With Insider Trading
Rengan Rajaratnam, the younger brother of imprisoned hedge- fund founder Raj Rajaratnam, was indicted by a federal grand jury on charges he took part in an insider-trading scheme tied to Galleon Group LLC.
Rengan Rajaratnam, 42, is accused of conspiring with his brother to trade on material nonpublic information about Clearwire Corp. (CLWR) and Advanced Micro Devices Inc. (AMD) in 2008, Manhattan U.S. Attorney Preet Bharara said yesterday.
Prosecutors alleged that Rengan, while working as a fund manager at Galleon, made almost $1.2 million from trades that occurred on March 24 and March 25 of that year based on tips provided by his brother and his Rolodex of insiders. He was implicated during his brother’s trial, where wiretapped conversations between the two men were played in court.
The U.S. Securities and Exchange Commission also filed a parallel insider-trading suit against Rengan Rajaratnam, describing a conspiracy that the agency said began in 2006 and lasted until 2008. Rajaratnam reaped more than $3 million in illicit gains for Galleon and Sedna, the SEC alleged. The SEC said its investigation is continuing.
David Tobin, an attorney for Rengan Rajaratnam, didn’t immediately return a call seeking comment on the charges.
The criminal case is U.S. v. Rajaratnam, 13-cr-00211, U.S. District Court, Southern District of New York (Manhattan); the civil case is SEC v. Rajaratnam, 13-cv-01894, Southern District of New York (Manhattan).
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Ex-Goldman Employee Must Arbitrate Sex-Bias Case, Court Says
Goldman Sachs Group Inc. (GS) won an appeal in a sex- discrimination case, forcing a former managing director to arbitrate her claim rather than sue.
The federal appeals court in New York yesterday ruled against Lisa Parisi, one of three women who sued in 2010 claiming they faced discrimination in pay and promotion at Goldman Sachs.
Parisi argued that she has a right to present her claim that the firm had a pattern and practice of discrimination against female managing directors, vice presidents and associates that can be litigated only as a class action in federal court. Parisi’s employment contract contained an arbitration clause, the court said.
The court reversed a decision by a lower-court judge who denied Goldman Sachs’s request that it order Parisi’s case to arbitration. The appeals court said Parisi may present to the arbitrators any evidence of discriminatory practices or policies at Goldman Sachs that affected her employment.
The case is Parisi v. Goldman Sachs & Co., U.S. Court of Appeals for the Second Circuit (Manhattan).
Two RBS Traders Sue Bank, Claiming Unfair Dismissal
A former Royal Bank of Scotland Group Plc trader, who was criticized by a judge for giving dishonest testimony on behalf of the bank in a 2010 trial, sued at a London tribunal saying he was unfairly fired.
Sam Griffiths, a former leveraged-loan trader at RBS, testified in a lawsuit brought by Highland Capital Management LP accusing the lender of fraudulently terminating a collateralized-debt obligation at the height of the 2008 credit crunch. Judge Michael Burton said Griffiths tried to hide information and gave misleading evidence about the bank’s conduct.
At a tribunal hearing yesterday, lawyers for Griffiths contested the use of privileged evidence ahead of the official start of his unfair-dismissal case. No further information about the claim was given at the hearing and Griffiths’s lawyer Raja Nadarajan didn’t immediately respond to an e-mail seeking comment.
Separately, a second trader from RBS’s collateralized debt obligation desk sued the bank at a London tribunal, saying he was unfairly fired.
Wai Kin Hui was dismissed for gross misconduct in July after an internal investigation found he had been involved in attempts by the desk to manipulate the bank’s pricing system. Hui told the tribunal yesterday he didn’t know of any wrongdoing.
RBS spokeswoman Sarah Small and Hui’s lawyer Andrea Randall declined to immediately comment on the case.
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While damages in unfair-dismissal cases are capped at about 70,000 pounds ($106,000), bank employees can seek to reclaim lost or withheld bonuses if a tribunal rules they were dismissed improperly.
OCC Chief Raises Question on Banks, Community Reinvestment Act
U.S. Comptroller of the Currency Thomas Curry said one of most important issues his agency still must address is whether banks that do robust business beyond their geographic branch- based network should have “increased responsibilities” under the Community Reinvestment Act, or CRA.
“The question is whether lending alone creates a greater CRA obligation,” Curry said in speech before the National Community Reinvestment Coalition in Washington this week.
“Some banks gather deposits from areas far beyond their brick-and-mortar offices,” Curry said.
The CRA bars “redlining,” the practice of discriminating against borrowers in low-income, minority neighborhoods, and encourages efforts to meet credit needs of all residents.
Levitt Says Executive Pay Is More Linked to Performance
Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission, said the non-binding votes of shareholders have “motivated companies” to link chief executive officers’ compensation to performance.
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