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Goldman Disclosure, Money Fund Rules, ESMA: Compliance

Jan. 12 (Bloomberg) -- Goldman Sachs Group Inc. is changing the way it discloses financial information, breaking up the unit known as trading and principal investments that has dominated revenue in recent years.

A new division called institutional client services will report revenue and pretax earnings from bond, currency, commodity and stock trading as well as prime brokerage, New York-based Goldman Sachs said in a report yesterday. A unit called investing and lending will show results from investments with the firm’s own money.

Under the previous reporting system, Goldman Sachs said third-quarter 2010 pretax earnings from trading and principal investments were $2.37 billion, or 84 percent of the total. Under the new reporting system, institutional client services accounted for $1.5 billion of pretax earnings and investing and lending accounted for $846 million, New York-based Goldman Sachs said in a regulatory filing yesterday.

Fixed-income, currencies and commodities, known as FICC, the company’s largest revenue source, shrinks under the new reporting system, and equities-trading revenue increased under the new disclosures. Investment-banking revenue that totaled $1.12 billion under the old reporting system changes to $1.16 billion.

The changes were part of a series of recommendations prepared by a committee of employees created after the U.S. Securities and Exchange Commission sued the firm for fraud last year.

The report makes 39 recommendations about how Goldman Sachs should change its business practices.

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

Compliance Policy

Money Funds Push $24 Billion Backstop as Rules Clash Looms

The mutual-fund industry fleshed out a plan for a private backstop to money-market funds, rejecting alternatives considered by U.S. regulators that include abolishing the funds’ stable $1 net asset value.

The industry’s plan, proposed in a letter by the Washington-based Investment Company Institute, calls for fund companies to finance a private bank with $350 million in assets that would grow to $24 billion after 10 years. Other options are impractical, unworkable or fail to address the most important risk to money funds, the ICI said in its letter.

The rejection puts the fund industry on a collision course with officials from the Treasury Department and the Securities and Exchange Commission, who said several ideas laid out in October by a White House advisory body remain on the table. Regulators last year enacted one round of rule changes for the funds to prevent a repeat of the run on money funds that followed the collapse of the Reserve Primary fund in the financial crisis.

The ICI’s submission included a new outline for a private liquidity facility, first pitched in March. The plan would create an emergency pool of cash, chartered as a bank or trust, that would buy commercial paper at full value from prime funds in the event of another crisis. All prime funds would be required to participate.

The Dodd-Frank financial overhaul signed into law in July has made it more difficult for the Fed to make similar emergency bailouts, and the Troubled Asset Relief Program, under which the Treasury insured money funds, has expired.

Following the public comment period that ended Jan. 10, the issue goes to the Financial Stability Oversight Council.

For more, click here.

U.S. Government Contractors Face New Minority Hiring Mandate

U.S. financial regulators are required to open 20 offices this month endowed with new powers to force government contractors and subcontractors to diversify their staffs or risk losing federal business.

The Dodd-Frank law orders U.S. financial regulators to set up Offices of Minority and Women Inclusion to monitor whether they and their contractors are hiring enough women and minorities -- a mandate that could have far-reaching effects on public and private-sector hiring.

The offices are being established at agencies ranging from the Federal Deposit Insurance Corp. to each of the 12 Federal Reserve banks. Among other duties, staff will scrutinize hiring at firms that do business with the regulators and take steps to terminate contracts if the companies haven’t made an adequate effort to employ women and minorities.

Congressional Democrats pushed to include the new offices in the law because some were unhappy that few of the major contracts awarded by government agencies in the aftermath of the 2008 financial crisis went to minority-owned firms.

The law requires each new office to develop and apply a policy that will ensure “to the maximum extent possible the fair inclusion” of women and minorities in the contracting process. The federal government defines a minority-owned business as one that is at least 51 percent-owned and operated by U.S. citizens who are Asian, black, Hispanic or American Indian.

For more, click here.

Wall Street Lobbyists Fight Ownership Caps on Swaps Exchanges

Capping banks’ ownership stakes in clearinghouses, exchanges or so-called swap execution facility would have “potentially profound implications for future market structure,” financial-industry lobbyists said yesterday.

They made the statement in a letter to regulators drafting rules to govern derivatives markets.

The letter was written in response to Justice Department support for “more stringent” regulation and urges the Commodity Future Trading Commission and Securities and Exchange Commission “in the strongest possible terms to forego the adoption of any aggregate ownership limits.” It was signed by groups including the Securities Industry and Financial Markets Association, International Swaps and Derivatives Association and Financial Services Roundtable.

Christine A. Varney, assistant attorney general in the Justice Department’s antitrust division, expressed support for aggregate ownership caps in a Dec. 28 letter to regulators.

The CFTC is scheduled to meet on Jan. 13 to complete a proposal for ownership and governance limits as part of new regulations required under the Dodd-Frank Act.

Basel to Set Rules on Debt Securities for Bank Rescues

Global banking regulators may decide as soon as this week on criteria that debt securities must meet to count as capital, ensuring they contribute to rescuing international lenders on the brink of failure.

The Basel Committee on Banking Supervision is seeking to ensure the instruments can absorb losses or be converted to common equity to aid a bank in distress when they are counted as part of a lenders’ capital. The proposals are scheduled to be published “in the next few days,” the Basel group said in an e-mail yesterday.

Regulators are aiming to avoid a repeat of the financial turmoil that followed the 2008 failure of Lehman Brothers Holdings Inc. The European Commission on Jan. 6 proposed that authorities may be allowed to write down senior debt before relying on the taxpayer to save a failing lender.

It’s “a likely outcome” that this month’s proposal will include the main ideas of a draft version that was put out for consultation last August, according to Jonas Niemeyer, who represents the Swedish central bank at the Basel committee. He made the remarks in a telephone interview.

For more, click here.

Compliance Action

SEC Inspector General Probes Khuzami’s Role in Citi Settlement

The U.S. Securities and Exchange Commission’s internal watchdog is reviewing an allegation that Robert Khuzami, the agency’s top enforcement official, gave preferential treatment to Citigroup Inc. executives in the agency’s $75 million settlement with the firm in July.

Inspector General H. David Kotz opened the probe after a request from U.S. Senator Charles Grassley, an Iowa Republican, who forwarded an unsigned letter making the allegation. Khuzami told his staff to soften claims against two executives after conferring with a lawyer representing the bank, according to the letter. Jon Diat, a Citigroup spokesman, declined to comment.

Citigroup agreed in July to pay $75 million to resolve SEC claims that the bank understated investments linked to subprime mortgages as the housing crisis unfolded. The two men settled without admitting or denying the SEC’s allegations.

“The settlement appropriately held the company and individuals accountable,” John Nester, an SEC spokesman, said Jan. 10 in a statement issued after Khuzami was asked to comment. “We stand ready to assist and cooperate with the IG’s review.”

The agency’s settlement was questioned in August by U.S. District Judge Ellen Huvelle, who eventually approved it.

For more, click here.

Bangladesh Relaxes Credit Rules After Stock Market Slide

Bangladesh Securities and Exchange Commission eased some credit and investment rules to increase liquidity after the Dhaka Stock Exchange’s benchmark General Index fell the most in five years, Chairman Ziual Haque Khondker said in a telephone interview Jan. 10.

Shanghai Removes Exchange Hurdle for Foreign Private Equity

Shanghai’s government said it will allow foreign private-equity firms to convert money raised overseas into yuan for local investments, removing a key hurdle for firms including Blackstone Group LP and Carlyle Group.

The pilot program will initially be open to qualified foreign investors with at least $1 billion of assets under management or $500 million of “owned” assets, according to a statement on the website of the Shanghai Financial Services Office.

Foreign private-equity investors have been faced with restrictions on buying in China, which limits access to industries it designates as strategic and imposes capital controls.

Korea Tightens Derivatives Rules After Nov. 11 Tumble

South Korea’s financial regulators will limit the number of derivative equity contracts an investor can hold as authorities continue investigating the cause of a plunge in the Kospi Index on Nov. 11.

Institutional investors will be allowed a maximum of 10,000 futures and options contracts in any “speculative,” or open and unhedged transaction, the Financial Services Commission, the government’s policy-making body, said in an e-mailed statement, without saying when the new rule will become effective. While institutions are now limited to 7,500 futures contracts and individuals can hold 5,000 futures contracts, there are no limits on options.

Laos Regulator Expects Companies to Raise $8 Billion

Laos, Southeast Asia’s smallest economy, expects private companies and state-run enterprises to raise at least $8 billion in equity and bond sales in the next five years to fund investments, the market regulator said.

The communist country opened a stock exchange yesterday, aiming to integrate with the global economy and join the World Trade Organization. The exchange will facilitate trading of government and corporate debt under its five-year plan, allowing bonds and equities to replace bank loans as the biggest source of capital for local companies, said Vathana Dalaloy, the acting secretary general of Laos’s Securities and Exchange Commission.

Swiss Banks See Tax as Bigger Threat Than Basel, Survey Finds

Swiss banks see measures to curb secrecy and tax evasion as a bigger threat in 2011 than higher capital-adequacy requirements, according to a survey by Ernst & Young AG.

Twenty-four percent of the lenders consider Switzerland’s double-tax and fiscal information-sharing agreements to be their biggest concern, the consultants’ firm said in a study released yesterday in Zurich. That compares with 5 percent who cited new capital and liquidity rules.

Switzerland has signed information-exchange treaties with countries wanting to know about their nationals’ holdings in Swiss banks, and agreed to start talks on taxing the Swiss assets of people living in the U.K. and Germany. Moves to end Switzerland’s bank secrecy will force shareholders to accept lower returns, said Iqbal Khan, an Ernst & Young partner.

A panel appointed by the Swiss government last year proposed that UBS AG and Credit Suisse Group AG should have capital equivalent to at least 19 percent of their assets, compared with the 10.5 percent needed under the Basel III rules.

Banks Said to Face EU Tests on Capital, Liquidity

European Union regulators are scheduled to discuss plans to conduct separate stress tests on bank capital and liquidity provisions at a meeting today, a person familiar with the negotiations said.

Supervisors at the European Banking Authority in London will decide what sort of information lenders should provide for this year’s EU-wide stress tests on capital, as well as possible exams on liquidity, said the person, who declined to be identified because the meetings are private. Regulators will also choose an interim chairman to manage the EBA until a permanent chief is installed later this year.

The 2010 European stress tests were criticized for not being stringent enough because lenders were shown by regulators to need only 3.5 billion euros ($4.5 billion) of new capital, about a 10th of the lowest analyst estimate. The European Commission is pushing to include tests on bank liquidity in this year’s stress tests in the wake of Ireland’s financial turmoil.

Lenders may escape examination of their sovereign debt holdings in this year’s round of European stress tests, according to a document from the Committee of European Banking Supervisors.

For more, click here.


Schwab Agrees to Pay $119 Million to Settle SEC Claims

Charles Schwab Corp. will pay $119 million to settle U.S. regulatory claims that the San Francisco-based brokerage misled investors in its YieldPlus Fund and changed investment strategy without shareholder approval.

The YieldPlus Fund fell to $1.8 billion in assets in 2008 from a peak of $13.5 billion in 2007 after deviating from its stated policy by investing more than 25 percent of fund assets in private-issuer, mortgage-backed securities, the Securities and Exchange Commission said yesterday in a complaint filed at federal court in San Francisco. Schwab executives Kimon Daifotis and Randall Merk committed fraud in offering, selling and managing the fund, the SEC said.

Schwab, the largest independent brokerage by client assets, settled the regulator’s claims without admitting or denying wrongdoing. The case against Daifotis and Merk is continuing, said the SEC, which is seeking unspecified fines and disgorgement of any ill-gotten profits from the two men.

Daifotis’s attorney David Bayless said his client plans to contest the SEC’s allegations in court. Merk also plans to fight the SEC’s claims, his attorney Susan Brune said in a statement.

“Schwab would never seek to profit at the expense of its own clients,” and will continue to work to bring the matter to a conclusion, the company said in a statement.

The SEC settlement also resolves related claims by the Financial Industry Regulatory Authority and Illinois regulators.

For more, click here.


Cohan, Levitt Comment on Goldman Revenue Disclosure Plan

William Cohan, author of “House of Cards” and a Bloomberg Television contributing editor, talked about Goldman Sachs Group Inc.’s reported decision to disclose more about how it makes money as part of an effort to repair a reputation blemished when a U.S. regulator sued the firm for fraud last year.

Cohan, who spoke with Deirdre Bolton on Bloomberg Television’s “InsideTrack,” said “real change takes time” and the current development is “mostly PR.”

Arthur Levitt, former U.S. Securities and Exchange Commission chairman and a policy adviser to Goldman Sachs, said it’s doubtful its disclosure plan would be adopted by other Wall Street financial firms.

Levitt talked with Bloomberg’s Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.”

For the Cohan video, click here.

For the Levitt audio, click here.

For more, see top section, above.

Roebuck Says Bonus Debate Favors U.K. Banks; Diamond Testifies

Chris Roebuck, a professor at Cass Business School, talked about U.K. regulation of bank bonuses, commenting on banks’ “political calculations.” He spoke with Maryam Nemazee on Bloomberg Television’s “Countdown.”

Separately, Barclays Plc Chief Executive Officer Robert Diamond talked about bankers’ remuneration and whether he will forgo a bonus this year.

Diamond testified before U.K. parliamentarians on the Treasury Select Committee at the House of Commons in London.

For the Diamond video, click here.

For the Roebuck video, click here.

Comings and Goings

Portugal’s Tavares Chosen as Acting EU Market-Regulation Chief

European Union securities regulators voted to install Portugal’s Carlos Tavares as acting chief of the European Securities and Markets Authority.

Regulators from the 27 EU member states met in Paris yesterday to decide on a temporary chairman for the agency, which was established Jan. 1 to replace the Committee of European Securities Regulators. Tavares was previously chairman of CESR.

The European Parliament voted last year to establish authorities in London, Paris and Frankfurt to regulate the banking, securities and insurance industries respectively, which would have the power to mediate between national supervisors and write rules that apply across the EU.

Shanghai CBRC Head Yan to Become Assistant Chairman, Caixin Says

The Shanghai head of the China Banking Regulatory Commission, Yan Qingmin, will become assistant chairman of the regulator, Caixin Online reported yesterday, citing a person it didn’t identify.

CBRC’s Beijing-based office director Liao Min will succeed Yan as head of its Shanghai branch, the report said.

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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