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ABS Ratings, Insider Trading, FHLB Mergers: Compliance

Nov. 24 (Bloomberg) -- The U.S. Securities and Exchange Commission extended the ability of asset-backed bond issuers to omit credit ratings from filings to comply with the Dodd-Frank financial reform act that became U.S. law in July.

Pending further notice, the SEC won’t recommend enforcement action if an asset-backed issuer doesn’t include the ratings disclosure required by the legislation, according to a letter yesterday from Katherine Hsu, senior special counsel.

Issuers received a six-month reprieve from the legislation in July after ratings firms balked at allowing companies to include their rankings in public documents. That stemmed from concern that firms such as Moody’s Investors Service, Standard & Poor’s and Fitch Ratings would be vulnerable to lawsuits when underwriters include their assessments in sale documents.

For more, click here.

Compliance Policy

U.S. Oversight Council Begins Weighing Risk of Clearing Firms

A council of U.S. regulators charged with preventing another financial crisis yesterday started considering which clearinghouses and exchanges are systemically important and require additional oversight.

The Financial Stability Oversight Council voted at a meeting in Washington to request public comment on how it should designate such firms for Federal Reserve supervision. The council, which is led by Treasury Secretary Timothy F. Geithner and includes Fed Chairman Ben S. Bernanke, is also analyzing which non-bank financial companies could pose a potential risk to economic stability. It will propose a rule in January guiding that process, Geithner said.

The Dodd-Frank financial overhaul law, which created the council, aims to stem systemic risk by requiring that most interest-rate, credit-default and other swaps be processed by clearinghouses after being traded on exchanges or swap-execution facilities.

The group won’t begin designating specific companies until after the first quarter of 2011, according to the council’s website.

For more, click here and for the video, click here.

German Bank Group Demands Savings, Co-op Lenders Pay Levy

The Association of German Banks, which represents companies including Deutsche Bank AG and Commerzbank AG, said savings banks and cooperative lenders must contribute to a levy to fund future bailouts.

The institutions would pose systemic risks in the event of a crisis, including in areas such as real-estate lending, the banking association said in a statement yesterday. Excluding these banks from the levy being considered by lawmakers isn’t justified or constitutional, the group said.

The upper chamber, known as the Bundesrat, will vote on Germany’s bank restructuring bill this week. The legislation, which will require German banks to contribute to a bailout fund, aims to switch the cost of managing future bank crises to lenders after taxpayers put up 480 billion euros ($652 billion) for the government’s Soffin fund in 2008.

Federal Housing Finance Agency Proposes Merger Rule

The Federal Housing Finance Agency proposed a rule that permits any Federal Home Loan Bank to enter a voluntary merger with another, so long as it gets permission from its board of directors, members and FHFA director, according to a statement yesterday on the website of the National Association of Federal Credit Unions.

The proposed rule “would establish the conditions and procedures for the consideration and approval of voluntary bank mergers,” the agency said in the proposed rule.

The FHFA regulates Federal Home Loan Banks, which are member-owned institutions that provide funds to lending institutions under the Federal Home Loan Bank Act of 1932.

The rule is subject to a 60-day comment period.

EU Seeks Views on Impact of Insurance Regulations on Economy

European Union regulators are seeking views on the impact of proposed solvency rules for insurance companies on consumers, insurance markets and the wider economy.

The deadline for comments on the consultation is Jan. 26, the European Commission, the EU’s executive arm, said in an e-mailed statement from Brussels today.

Solvency II , the new rules for European insurers including Allianz SE and Axa SA, is being developed by the Frankfurt-based Committee of European Insurance and Occupational Pension Supervisors, or Ceiops, and scheduled for introduction at the beginning of 2013. The rules are being tested in a fifth quantitative impact study, named QIS5.

India Panel Suggests Bourse Ownership-Rule Change, Standard Says

An Indian panel, headed by former Reserve Bank of India Governor Bimal Jalan, has recommended changes in ownership rules for the nation’s stock exchanges, including allowing anchor investors to hold a 24 percent stake, the Business Standard reported, citing the panel’s report submitted to the market regulator Securities and Exchange Board of India.

Compliance Action

Ex-SAC Capital Traders Implicated, Insider Probe Widens

SAC Capital Advisors LP received a government request for documents as the U.S. widens a probe of Wall Street insider trading that has implicated former traders at the firm.

The request came from U.S. officials, according to a person familiar with the matter.

Bloomberg’s Su Keenan and Carol Massar report.

SAC’s federal government subpoena is “extraordinarily broad,” Dow Jones reported, citing a letter sent to investors yesterday. The subpoena doesn’t focus on individual securities and sectors. It may focus on the use of consultants and soft dollars, the news service said in its report. SAC will respond “in a professional and cooperative manner,” Dow Jones reported.

“Neither the subpoena nor any other information of which we are aware suggests that anyone at SAC has engaged in any wrongdoing,” SAC stated, according to the news service.

Federal Bureau of Investigation agents Nov. 22 searched the offices of Level Global Investors LP and Diamondback Capital Management LLC in probing illegal trading by hedge funds. Both firms were founded by former SAC employees. Wellington Management Co., the Boston-based money manager that oversees $598 billion, also got a request for documents from U.S. investigators, according to a person familiar with the firm.

There has been no allegation of wrongdoing at Stamford, Connecticut-based SAC, which manages $12 billion. Jonathan Gasthalter, a spokesman for the firm, declined to comment.

Wellington said on an internal conference call Nov. 22 that it is reviewing its records and that it didn’t engage in illegal trading, according to the person, who asked not to be named because the firm is private.

In a call yesterday, Wellington officials disclosed the document request, without specifying what kind of data investigators are seeking, the person said. Sara Lou Sherman, a spokeswoman for Wellington, declined to comment.

Separately, Richard Choo-Beng Lee, the co-founder of Spherix Capital LLC and a SAC alumnus, has pleaded guilty and is cooperating with prosecutors in its probe of the Galleon Group hedge fund. Portfolio manager Richard Grodin, who left SAC to start Stratix Asset Management LLC in 2004, also has received a subpoena, according to a person familiar with the investigation.

Steve Bruce, a spokesman for Diamondback, and Andy Merrill, a spokesman for Level Global, confirmed that the FBI searched their offices and said their firms are cooperating.

Separately, Janus Capital Group Inc. received a request for general information regarding the Wall Street insider trading investigation and said it intends to cooperate in full with the inquiry.

“Janus maintains rigorous compliance procedures and Janus has confidence in the integrity of its processes and its people,” the company, based in Denver, said yesterday in an e-mailed statement. Shelley Peterson, a spokeswoman for Janus, declined to comment beyond the statement.

For more, click here, and see Interviews section, below.

Direct Edge Adds Auctions to Flash Orders That Schumer Opposed

Direct Edge Holdings LLC, the fourth-largest U.S. equity exchange, is changing the way it handles flash orders, the split-second requests to buy or sell stock that regulators proposed banning last year.

Flash trades drew scrutiny from the Securities and Exchange Commission because they allow participants on a trading venue to see equity orders before they are sent to rival markets. Under Direct Edge’s plan, buy and sell requests that were previously flashed would be held for a fortieth of a second while an auction is held to fill them.

Calls in Congress 16 months ago to ban the practice showed growing public concern over U.S. exchange structure following a decade of legislation that reduced the role of humans in making markets. Direct Edge, which has resisted calls to outlaw flash orders, outlined its plan in a government filing published on Nov. 18 as a way to improve pricing for investors.

The SEC proposed prohibiting the orders in securities markets in September 2009 after complaints that they disadvantaged some investors.

For more, click here.

China to Crack Down on Drug Sales by Internet, Xinhua Reports

China’s State Food and Drug Administration has started a campaign against the sale of fake and inferior-quality drugs over the Internet, Xinhua News Agency said, citing Shao Mingli, the regulator’s head.

Of 196 websites monitored, 96 percent didn’t have or failed to show certificates authorizing them to conduct medicine-related trading or other services, Xinhua said.

FCC Delays Meeting and Possible Vote on Internet-Service Rules

The U.S. Federal Communications Commission delayed by six days, to Dec. 21, a meeting at which it may vote on rules governing how companies led by AT&T Inc. and Comcast Corp. provide Internet service.

The agency announced the change yesterday in an e-mailed news release.

The FCC, which proposed rules last year, may vote on the regulations next month, Paul Gallant, a Washington-based analyst with MF Global, said in a Nov. 19 note to clients.


Barclays Transfers From Lehman May Have Broken Law, SEC Says

Barclays Plc got two transfers totaling about $1.3 billion from Lehman Brothers Holdings Inc. in September 2008 that may have violated securities laws, the U.S. Securities and Exchange Commission said.

The U.K. bank got $769 million in securities held in the Lehman brokerage’s reserve bank account, and $507 million in assets listed as a debit item in the brokerage’s customer reserve, when it bought defunct Lehman’s brokerage, Lehman Brothers Inc., the SEC said in a filing yesterday in U.S. Bankruptcy Court in Manhattan.

The transfers would violate securities law if they increased the deficiency in the accounts, “and LBI would not have sufficient funds to satisfy all claims of the remaining customers,” the SEC said.

U.S. Bankruptcy Judge James Peck may rule on Lehman’s yearlong lawsuit against Barclays in January or February, said lawyers in the case.

The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).


FDIC’s Bair Says Not Time for ‘Complacency’ About Banks

Federal Deposit Insurance Corporation Chairman Sheila Bair spoke about the performance of U.S. banks in the third quarter, urging caution. “We are seeing an improving trend in credit quality,” Bair told reporters at the news conference. “Troubled loans remain near historic high levels, while the coverage ratio is still low,” she said.

The FDIC’s Richard Brown, Diane Ellis, Ross Waldrop and John Corston also participated in the news conference in Washington.

For the video, click here and for more, click here.

Rifkin, Rup, Daly Comment on Hedge Fund Probes

Mark Rifkin, an attorney with Wolf Haldenstein Adler, Freeman & Herz LLP in New York, discussed the Federal Bureau of Investigation’s raids on three hedge funds Nov. 22.

“The government has shown it is looking at a number of players in the information industry,” he said. The Galleon prosecution has led the government “in a direction it is now expanding,” Rifkin said. “It’s clear to me that we are going to see many more informants come forward and may more deals being made.”

Separately, Peter Rup, chief investment officer at Artemis Wealth Advisors LLC, talked about the government investigation and the implications for the hedge fund industry. Bill Daly, director of operations at Control Risks Group, discussed the significance of the use of search warrants and obtaining information through a raid by the Federal Bureau of Investigation, as opposed to the use of information gathering through subpoenas.

Rifkin, Rup and Daly spoke yesterday with Betty Liu on Bloomberg Television’s “In the Loop.”

For the Rifkin video, click here.

For the Rup video, click here.

For the Daly video, click here.

Steinbrugge Says Probe May Frighten Hedge Fund Managers

Don Steinbrugge, chairman of Agecroft Partners, talked about the investigation of hedge fund insider trading directed by the office of Manhattan U.S. Attorney Preet Bharara, and the implications of the probe for the hedge fund industry.

“I think there’s a lot of gray between what is material insider information and what is not insider information,” he said. Steinbrugge spoke with Deirdre Bolton on Bloomberg Television’s “InsideTrack.”

For the video, click here.

Comings and Goings

Greenhill Hired by U.S. Treasury to Help Dispose of AIG Stake

Greenhill & Co., a boutique investment bank, was hired by the U.S. Treasury Department for advice on managing and disposing of the government’s majority stake in American International Group Inc.

The department agreed on Nov. 18 to hire Greenhill for the next 18 months, according to a contract posted on the Treasury’s website Nov. 22. New York-based Greenhill will collect $500,000 a month for the first year and $175,000 a month thereafter.

Greenhill is among investment banks advising U.S. regulators on bailouts since the financial crisis threatened some of the country’s biggest institutions. The Treasury and Federal Reserve Bank of New York are working to cash out their stakes in New York-based AIG more than two years after rescuing the insurance company with a bailout that has swelled to $182.3 billion. AIG was once the world’s largest insurer.

For more, click here.

FSA’s Dan Waters Is Fourth Senior Official to Leave Regulator

Dan Waters, the U.K. Financial Services Authority’s director of conduct risk, became the fourth senior official to step down in five months as the government prepares to break up the regulator.

Waters is leaving in December to consider other opportunities, Hector Sants, the FSA’s chief executive officer, said in a statement. The FSA said in September that the uncertainty over its future was “undoubtedly” posing staff retention problems.

The U.K government plans to break up the FSA after the regulator was criticized for failing to properly police lenders in the years before the financial crisis. Sants will lead a new prudential regulator that reports to the Bank of England while other FSA functions will be assumed by a proposed Consumer Markets Protection Agency.

The FSA’s staff turnover in the 12 months to the end of August was 7.6 percent, the highest since January 2009.

Former Oklahoma Governor Keating to Head Banking Trade Group

One of the largest bank lobbying groups in Washington has named the Republican former governor of Oklahoma to lead its campaign to shape the implementation of the Dodd-Frank Act.

Frank Keating, 66, has been named the next chief executive officer of the American Bankers Association. Keating, who served in a similar capacity for the American Council of Life Insurers, will take the reins of the Washington-based trade group on Jan. 1 when Edward Yingling, the current president and CEO, retires.

The ABA, one of the most prominent industry lobbying groups in Washington, represents banks of all sizes. It is in the midst of a campaign to shape the implementation of the Dodd-Frank financial-regulation law enacted this year. The industry group opposed much of the final law, specifically the newly created Consumer Financial Protection Bureau.

To contact the reporter on this story: Carla Main in New Jersey at

To contact the editor responsible for this report: David E. Rovella at

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