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Shadow Banks, Dodd-Frank, UBS Notice: Compliance

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Global regulators will develop international rules for so-called shadow banks by the middle of the year to ensure companies from hedge funds to securities brokers aren’t excluded from efforts to prevent another crisis.

The Financial Stability Board is working to “map” or “define” shadow banks, Svein Andresen, its secretary general, said in an e-mail. The FSB will hold a teleconference on Feb. 7 to review the overhaul of international regulatory standards, according to two people familiar with the discussions, who couldn’t be identified because the talks aren’t public.

The shadow banking system had liabilities of about $16 trillion in the first quarter of 2010, the Federal Reserve Bank of New York said in a report last year. Examples of shadow banks include structured investment vehicles, credit hedge funds and money market mutual funds, it said.

The FSB, set up in 2009 by the Group of 20 countries to spearhead changes to financial rules in the wake of the crisis, is turning its attention to shadow banks to ensure that they can’t be used by their owners and investors to escape supervision. The issue is on the agenda for the FSB meeting this week, according to one of the people.

Compliance Policy

SEC’s Casey, CFTC’s Gensler Raise Dodd-Frank Deadline Concerns

The U.S. Securities and Exchange Commission may not have enough time to do a thorough job writing the financial-regulation rules required by the Dodd-Frank Act, SEC Commissioner Kathleen Casey said.

Casey made the comments in prepared remarks for the Practising Law Institute’s SEC Speaks conference Feb. 4 in Washington.

Dodd-Frank, the regulatory overhaul enacted in response to the worst financial crisis since the Great Depression, calls for the SEC to approve more than 100 rules and conduct 20 studies. The agency has proposed 24 rules and adopted six so far, SEC Chairman Mary Schapiro said in a speech at the same conference.

The agency is struggling to cope with budgetary constraints as it faces the Dodd-Frank rulemaking requirements and a full pipeline of cases stemming from the financial crisis, said Schapiro, who also spoke at the PLI conference Feb. 4. The budgetary problems are “a strain” on the agency’s “core mission,” Schapiro said.

Casey, one of two Republicans among the five commissioners and the panel’s longest-serving member, said the burden on the agency is six times what was imposed by the Sarbanes-Oxley Act, making that 2002 law seem “almost quaint in comparison.”

Separately, the U.S. Commodity Futures Trading Commission may stagger the effective dates for Dodd-Frank Act rules to govern the $583 trillion swaps market to allow more time for comment, CFTC Chairman Gary Gensler said Feb. 4 in a speech to an American Bar Association law committee that met in Naples, Florida.

Gensler delivered the speech by teleconference because of the agency budget strains, he said.

The CFTC and the SEC are leading efforts to write rules for the swaps market after largely unregulated trades helped fuel the 2008 credit crisis. Dodd-Frank gives the agencies until mid-July to approve the final rules and allows at least 60 days after that before they must be implemented by swap-market participants such as Wall Street banks, hedge funds and clearinghouses.

Gensler’s comments come after 11 financial-industry trade associations urged regulators in a Dec. 6 letter to slow the pace of rulemaking.

For more on the SEC budget, click here.

Danish Objections to Basel Covered-Bond Limits Considered

Danish objections to covered bond liquidity limits under new Basel III rules are being considered by European lawmakers who will advise member states whether to adopt the new rules, Othmar Karas, an Austrian official said.

Karas is a European Union lawmaker who guides work on Basel III in the European Parliament. A report due in June showing how Basel III will affect European banks will clarify the matter, he said Feb. 4 at a press briefing in Vienna.

Basel III will require banks to hold a buffer of highly liquid assets, but the extent to which it can be filled with covered bonds will generally be capped at 40 percent, with the bonds subject to a cut in value. The minimum liquidity requirement is set to be introduced at the start of 2015.

The Danish government has said that Basel III will force banks to dump covered bonds. Danish economy Minister Brian Mikkelsen has raised the matter with the commission.

CoCos Market May Reach 700 Billion Euros, Barclays Says

The contingent convertible bond market could increase to as much as 700 billion euros ($950.3 billion) during the next seven years as European banks seek to bolster capital, Barclays Capital analysts said.

The yield on the securities may attract hedge funds and high-net-worth investors, while investment banks may include CoCos in employees’ pay, analysts led by Simon Samuels and Mike Harrison said in a report to clients today.

European Union rules on UCITs, a type of regulated fund, that hamper holdings of convertible securities, and uncertainty around how the Solvency II insurance rules will be implemented may hinder sales of the securities to traditional fixed income investors, the analysts said. CoCos will need to be included in fixed income indexes to attract buyers, they said.

Global regulators are pushing banks to issue CoCo bonds which automatically convert into equity when capital falls below a pre-set level, to lessen the potential burden of bank failure on taxpayers. Lenders are also weighing plans to include CoCos in investment bankers’ pay to align remuneration and risk.

Compliance Action

UBS May Be Sued by SEC Over Puerto Rico Closed-End Bond Funds

UBS AG may be sued by the U.S. Securities and Exchange Commission over the sale of mutual funds that bought $1.5 billion in bonds Switzerland’s largest bank had underwritten in Puerto Rico.

The SEC’s Miami office issued a Wells notice to UBS Financial Services Inc. of Puerto Rico and UBS Financial Services Inc. regarding “secondary market trading and associated disclosures” of closed-end funds sold in the Caribbean island in 2008 and 2009, the Zurich-based company said in a report to investors. The notification typically lets recipients respond to investigators’ claims before the agency approves legal action. The SEC may decide to not pursue a case.

UBS, a former financial adviser to the Employees Retirement System that provides pensions for the island’s government workers, led the 2008 sale of $2.9 billion in bonds by the pension fund. The bonds represented about 17 percent of the funds’ $8.9 billion in assets at the time.

“UBS believes the funds have been excellent long-term investments for investors and has submitted a formal response outlining the reasons why it believes no enforcement action is warranted,” Karina Byrne, a spokeswoman for UBS, said in an e-mailed statement. She also said the negative financial results, if any, to the shareholders who traded their shares through UBS during the relevant periods were less than $5 million in the aggregate. That amount is less than 1 percent of the value of the funds purchased in the secondary market, Byrne said.

John Nester, a spokesman for the SEC in Washington, declined to comment.

For more, click here.

SEC Probe of China-Based Firms Led to Delistings

The U.S. Securities and Exchange Commission’s probe of possible accounting fraud at China-based companies listed on U.S. stock exchanges has prompted some of the firms to delist, an agency official said.

The SEC, which is also probing U.S.-based firms that review those companies’ disclosures, sanctioned a California auditor in December for signing off on fraudulent financial statements by a Chinese energy company.

Regulators have targeted companies that obtained U.S. listings through so-called reverse mergers, transactions in which a closely held firm acquires one that is publicly traded and becomes able to sell shares without an initial public offering. About 370 Chinese firms have obtained listings through reverse mergers since 2004, according to DealFlow Media Inc.

The SEC launched its probe amid concerns that some of those firms may be doctoring their financial statements to attract investors. Some U.S. auditors may be signing off on financial statements without due diligence, letting fraud go undetected, Wayne Carnall, chief accountant of the SEC’s Division of Corporation Finance, said last April.

The Public Company Accounting and Oversight Board, created by the Sarbanes-Oxley Act of 2002 to oversee auditors of public companies, is blocked from inspecting audit firms in some countries, including China.

Citigroup Fined by Japan Financial Regulator Over Late Reports

Citigroup Inc., the third-largest U.S. bank, was fined 23 million yen ($282,000) by Japanese financial regulators for filing late and erroneous reports.

The fine was announced in December and handed down Feb. 4, according to a statement on the Financial Services Agency’s website.

Germany Can’t Freeze CO2 Permits as Czechs Warn of Contagion

The German carbon registry said it can’t freeze permits despite reports that it received stolen allowances from the Czech Republic.

German law allows permits to trade freely unless there is legal action, said Julie Steinen, spokeswoman for the German emissions-trading authority DEHSt. She declined to say whether permits reported missing from the Czech registry were found in Germany.

The Berlin-based national registry, which keeps tabs on emission allowances, reopened Feb. 4 after a 15-day halt imposed by the European Union. The suspension followed hacking attacks in January that left about 2 million permits missing. The Czech registry said permits were stolen from its accounts and illegally transferred to Germany, the U.K. and Estonia.

For more, click here and click here.

BlueNext SA, the Paris-based spot carbon exchange, resumed trading Feb. 4 in one of the first attempts to restore a market marred by 15 days of suspension. Opening alongside BlueNext and the registry in Germany were registries that keep tabs on emission allowances in France, the U.K., the Netherlands and Slovakia. Most of Europe’s 30 national registries remain closed as they await European Commission approval of reports showing they have adequate security.

Meantime, futures for later delivery dates haven’t been affected by the halt and continue to trade on ICE Futures Europe and other exchanges.

For more, click here.

Clearwire Is Latest Stock Halted by Circuit Breakers

Clearwire Corp., a provider of wireless broadband services, had its trading halted Feb. 4 by U.S. circuit breakers, making it the latest among 19 companies to be subject to the regulatory action since it was implemented in June, according to data compiled by Bloomberg.

The curbs were created after the 20-minute rout on May 6 erased $862 billion from the value of U.S. shares before prices rebounded. The pause lasts five minutes for Standard & Poor’s 500 Index and Russell 1000 Index companies as well as more than 300 exchange-traded funds when they rise or fall at least 10 percent within five minutes.

For a table listing the companies, click here.

FSA Fines Corporate Finance Adviser $242,000 for Market Abuse

The U.K. Financial Services Authority fined a former corporate-finance executive at Zimmerman Adams Intl. 150,000 pounds ($242,000) for breaching market-abuse rules.

The FSA also banned David Massey from “performing any role in regulated financial services” after he made a profit of 100,000 pounds by short-selling shares of Eicom, a digital broadcaster, knowing that the company “was prepared to issue 3 million shares to him at a substantial discount,” the FSA said in an e-mailed statement today.

The FSA has stepped up its efforts against market abuse, making it an agency priority.

Atlantic Law LLP, a London-based law firm which the FSA said represented Massey, didn’t immediately respond to a call seeking comment.


Picard Seeks $295 Million From Mets Owners in Lawsuit

The trustee in the Bernard Madoff bankruptcy is seeking more than $295 million from the owners of the New York Mets, claiming they ignored warnings of the fraud because they were “in too deep” financially.

In a complaint unsealed Feb. 4, the trustee, Irving Picard, is seeking to recover alleged phony profits from Madoff’s scheme from Sterling Equities Inc., which owns the Mets baseball team, along with Mets LP, Mets Chairman Fred Wilpon, Mets president Saul Katz and chief operating officer Jeff Wilpon, and almost 100 related parties. Picard also claims an unspecified amount of principal from the Sterling defendants.

The complaint was filed under seal Dec. 7, to facilitate settlement negotiations in the case, the trustee and the owners said. On Feb. 3, both sides sent letters to U.S. Bankruptcy Judge Burton R. Lifland in Manhattan telling him that the talks had ended amid media disclosure of some of the contents of the complaint.

The Sterling partners had more than $500 million in their Madoff accounts at the time of his failure, their lawyers said in a statement Feb. 4.

Wilpon and Katz said that none of the Sterling partners ever suspected Madoff was running a fraud.

According to the complaint, the Mets used $90 million in Madoff profits to help fund the team’s day-to-day operations.

Sterling also used Madoff profits to meet capital commitments for its real estate funds, Picard said in the filing. In addition, Madoff profits provided cash flow for Sterling’s internal bank, “a clearing house” for funds and obligations among Sterling partners, their families and trusts, he said.

Sterling, founded in 1972, opened its first Madoff account in 1985. Madoff held Mets season tickets with seats close to Fred Wilpon and Saul Katz.

The case is Picard v. Katz, 10-AP-5287, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

For more, click here.

Comings and Goings

SEC Names Cahn Top Lawyer to Replace Departing Becker

The U.S. Securities and Exchange Commission promoted Mark D. Cahn to general counsel as the agency fulfills the mandates of the Dodd-Frank regulatory overhaul to write more than 100 rules and issue 20 studies.

Cahn, 49, who has been deputy general counsel, has worked at the SEC since 2009, the agency said in a statement Feb 4. He will replace David M. Becker, whose departure at the end of the month was announced Feb. 1.

The general counsel plays a central role evaluating rules, advising the commissioners and representing the SEC in legal disputes. Cahn already has counseled the commissioners on litigation, appellate and enforcement matters, according to the statement.

Dutch Minister Names Top Civil Servant to Lead Regulator AFM

Dutch Finance Minister Jan Kees de Jager named his top civil servant, Secretary-General Ronald Gerritse, to lead financial-industry regulator AFM.

Gerritse, a secretary-general since 2003, will succeed outgoing AFM Chairman Hans Hoogervorst on May 1, ministry spokeswoman Karin Donk said by telephone Feb. 4.

The Amsterdam-based Authority for the Financial Markets regulates business at banks and securities firms, while the Dutch central bank, led by Nout Wellink, oversees systemic risks in the country’s financial industry.

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