Easing SEC Regulations, Volcker Rule, UBS Trader: Compliance

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House Republicans have embraced at least one proposal in President Barack Obama’s jobs package: changing the rules to make it easier for closely held companies to raise money without going public.

Republicans have already lined up with hearings and bills to support expanding exemptions from U.S. Securities and Exchange Commission rules for companies trying to raise capital, and two lawmakers introduced legislation Sept. 15.

The idea was contained in a single line from the president’s Sept. 9 speech to Congress, in which he pledged “to cut away the red tape that prevents too many rapidly growing start-up companies from raising capital and going public.”

“While there may be disagreements about the broader Obama proposals, one thing we can all agree on is the need to alleviate the burden of onerous SEC regulations for those small businesses looking to access capital,” said House Majority Whip Kevin McCarthy.

Currently, closely held companies are restricted from offering more than $5 million in securities or advertising such securities unless they register the offering with the SEC.

The legislative proposals include: exempting the practice of “crowdfunding” or soliciting small investments from the public, often over the Internet or through social media; raising the size of exempted securities offerings to $50 million from $5 million; and allowing companies to advertise the offering.

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Compliance Policy

Volcker Rule May Extend to Overseas Banks with U.S. Operations

Regulators writing a rule limiting proprietary trading by U.S. banks are considering extending the restrictions to overseas firms with operations in the country, according to four people familiar with the proposal.

Officials next month will issue a proposal to carry out provisions of the so-called Volcker Rule, part of the Dodd-Frank financial-regulation law. The proposal would clarify what types of offshore trading are exempt from the Volcker Rule, the people said.

The Volcker Rule, designed to reduce the types of risky investments blamed for triggering the financial crisis, has prompted U.S. banks such as Goldman Sachs Group Inc. to close proprietary-trading operations. Overseas banks say that a strict interpretation of the rule may also force them to fire or relocate U.S. employees who are involved in proprietary trading, even if no American money is at risk.

“There is no question that we would lose jobs,” said Wayne Abernathy, vice president of the American Bankers Association in Washington. “A lot of what the banks have been doing in recent years to diversify their services are activities that can easily be done by foreign competitors.”

The rule, named for the former Federal Reserve Chairman Paul Volcker, includes exemptions for government-guaranteed investments, hedging, market-making and insurance-company transactions. It also exempts proprietary trading conducted “solely” outside of the U.S.

The language of the bill is subject to interpretation by regulators at agencies including the Federal Reserve and the Federal Deposit Insurance Corp. Dodd-Frank, signed into law by President Barack Obama last year, requires regulators to adopt rules to carry out the provision by Oct. 18.

Regulators are considering how to define operations conducted “solely” outside of the country. Trading managed in the U.S. or involving U.S.-based advisers may be subject to the rule even if it takes place overseas and has no U.S. investors, the people said.

The proposal may still change, the people said. Five regulators, including the Fed, the Office of the Comptroller of the Currency and the Securities and Exchange Commission and the Commodities Futures Trading Commission, must approve the proposal separately. The Treasury Department is responsible for coordinating the regulation. The proposed rule will be released for public comment and can be changed before it becomes final.

Colleen Murray, a spokeswoman for Treasury, and Barbara Hagenbaugh, a spokeswoman for the Fed, declined to comment. Andrew Gray, a spokesman for the FDIC, also declined to comment.

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Compliance Action

SEC Watchdog to Refer Ex-Counsel’s Madoff Work to Justice

The U.S. Securities and Exchange Commission’s inspector general plans to ask the Justice Department to review whether the agency’s former top lawyer violated conflict of interest laws, according to three people with knowledge of the watchdog’s findings.

H. David Kotz, the inspector, is completing his report on ex-general counsel David Becker’s possible conflicts and it is expected to be released next week, said the people, who spoke on condition of anonymity because the matter isn’t public. Kotz and congressional investigators have been probing why Becker was allowed to work on SEC policies related to the Bernard Madoff fraud after inheriting profits from the Ponzi scheme.

Becker and his brothers are being sued by the court-appointed trustee in the Madoff bankruptcy case to recover $1.5 million in what he termed fictitious profits. Becker raised the issue with the SEC’s ethics officer and was told his inheritance wasn’t a conflict.

Becker, who left the SEC in February, declined to comment Friday, as did SEC spokesman John Nester.

UBS Trader Charged, Third-Party Investigator Retained

Kweku Adoboli, the trader arrested Sept. 16 after UBS AG said it discovered unauthorized trades that caused a $2 billion loss, was charged with fraud and two counts of false accounting dating back to 2008 by London police.

The 31-year-old was remanded in custody at a magistrates court in London until Sept. 22, when he can make an application for bail. Adoboli’s false accounting offenses started in October 2008, according to the court charge sheet. He is also charged with fraud dating back to January 2009.

Adoboli “dishonestly abused” his position as a senior trader, which required him “to safeguard, or not to act against, the financial interests of UBS,” according to court documents.

Adoboli worked for UBS’s investment bank on its Delta One desk, which handles trades for clients, typically helping them to speculate on or hedge the performance of a basket of securities. The group also takes risks with the bank’s own money in arranging trades. UBS has said that no client positions were affected.

He hired criminal law firm Kingsley Napley LLP in London to represent him. Lawyers from the same firm advised Nick Leeson, the former derivatives trader who caused the collapse of Barings Plc with $1.4 billion in losses in 1995.

The U.K. Financial Services Authority and the Swiss Financial Market Supervisory Authority said they would also investigate the UBS trading losses.

The investigation, to be carried out by a third party will focus on “the control failures which permitted the activity to remain undetected” and “will include an assessment of the overall strength of UBS’s controls to prevent unauthorized or fraudulent trading activity in its investment bank,” the FSA said in an e-mailed statement.

Richard Morton, a spokesman for UBS, declined to comment on the charges.

UBS Chief Executive Officer Oswald Gruebel called the loss “unauthorized” and “distressing” in an e-mail to employees, without giving details.

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Separately, U.K. and Swiss regulators’ use of a third party to investigate UBS’s trading loss was called “bizarre” by an analyst who said the agencies should have the expertise to conduct the probe on their own.

“It’s a bit bizarre,” Fred Ponzo a former trader at Societe Generale SA and a capital markets adviser at Greyspark Partners in London, said in a telephone interview. The activities “were a bit more exotic than share trading, but the FSA should be able to carry out the investigation.”

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For commentary by Vince Cable and Jacob Schmidt, see Interviews section, below.

SocGen Says It’s Cooperating With U.S. in Stanford Case

Societe Generale SA’s private banking unit is cooperating with the U.S. Department of Justice as part of a case involving R. Allen Stanford.

SG Private Banking “is cooperating with the Department of Justice with regard to the request which has been made,” Jolyon Barthorpe, a Paris-based spokesman for the bank, said by phone Friday. He declined to make any further comment.

The Department of Justice is investigating whether the French bank helped facilitate Stanford’s alleged $7 billion investment-fraud scheme by ignoring suspicious transactions, the Wall Street Journal reported Sept. 16, without saying where it got the information.

The U.S. government claims Stanford defrauded investors by deceiving them about the liquidity and oversight of more than $7 billion in certificates of deposit issued by his Antigua-based Stanford International Bank Ltd. Stanford denies all wrongdoing.

MetLife Pressed by SEC on Reserve Shortfall at Ex-AIG Unit

MetLife Inc., the biggest U.S. life insurer, was pressed by regulators to give more details on the causes of reserve shortfalls at the non-U.S. unit acquired from American International Group Inc. last year.

MetLife agreed to disclose which products provoked the deficiencies and the periods of time over which costs will be amortized, Executive Vice President Peter Carlson told the Securities and Exchange Commission in a July 22 letter, released Sept. 16. Carlson was responding to questions raised by the SEC on May 27 amid a regulatory review of the New York-based insurer’s 10-K annual filing.

MetLife Chairman Robert Henrikson bought American Life Insurance Co. from AIG in November for about $16 billion. The deal led to a negative $4.4 billion adjustment to MetLife’s so-called value of business acquired, or VOBA, the insurer said in its annual report.

“We always welcome the interaction with the SEC staff on our 10-K filing,” Christopher Breslin, a spokesman for MetLife, said in an e-mail. “The exchange of letters with the SEC related to a 10-K filing is a routine and typical interaction between the SEC and all large publicly traded companies. The SEC comments regarding MetLife’s 10-K were innocuous and did not result in any changes in MetLife’s accounting.”

The VOBA adjustment was mainly tied to Alico’s business in Japan and products written over almost two decades including fixed annuities, interest-sensitive whole life policies and retirement savings products, Carlson said in a June 13 letter, which was also released Sept. 16. A decline in interest rates contributed to the VOBA adjustment, Carlson said.

The SEC told MetLife in an Aug. 2 letter that it had completed its review of the insurer’s filing. Such correspondence is typically released about 45 days after a review is completed. Mark Herr, a spokesman for New York-based AIG, declined to comment.

IRS Collects $2.7 Billion as Thousands Divulge Accounts

The Internal Revenue Service has taken in a total of $2.7 billion from holders of offshore bank accounts, the agency said as it announced that 12,000 taxpayers responded to the second round of a partial amnesty program.

IRS Commissioner Douglas Shulman said Sept. 15 that the agency’s emphasis on international tax enforcement prompted more people than anticipated to accept penalties and reveal their accounts. On a conference call with reporters he said that the results “were unthinkable just a few short years ago.”

He declined to comment on U.S. efforts to obtain account information from Swiss banks, other than to confirm that the U.S. and Swiss governments are discussing the issue.

“This effort was never about Switzerland,” Shulman said. “A lot of Swiss banks aren’t taking these kinds of accounts anymore, and they’re really trying hard to move forward.”

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AT&T, T-Mobile Lawsuit Joined by New York, Six Other States

The U.S. lawsuit seeking to block AT&T Inc.’s acquisition of T-Mobile USA Inc. was joined by seven states as their attorneys general said the proposed $39 billion deal would hurt competition and raise wireless telephone prices.

The states joining the amended complaint that the Justice Department filed Sept. 16 in federal court in Washington were New York, Massachusetts, Washington, Ohio, Pennsylvania and Illinois.

“Blocking this acquisition protects consumers and businesses against fewer choices, higher prices, less innovation, and lower quality service,” Illinois Attorney General Lisa Madigan said in an e-mailed statement.

The government’s antitrust suit claims that the merger of the two companies, which would make AT&T the biggest wireless carrier and cut the number of national competitors to three from four, is anticompetitive.

Michael Balmoris, a spokesman for AT&T, said 11 state attorneys general support the deal.

“We will continue to seek an expedited hearing on the Justice Department’s complaint,” he said. “On a parallel path, we have been and remain interested in a solution that addresses the department’s issues with the T-Mobile merger.”

The department said in a statement that the attorneys general had provided “invaluable assistance” throughout the investigation that led the antitrust division to file the lawsuit on Aug. 31.

New York Attorney General Eric Schneiderman, who helped coordinate the states’ group, said the proposed merger would “stifle competition” and reduce access to “low-cost options and the newest broadband-based technologies,” according to an e-mailed statement.

Connecticut Attorney General George Jepsen said in a statement he applauded the states joining the suit and stayed out of it to conserve his office’s resources for other matters.

The case is U.S. v. AT&T Inc., 11-cv-01560, U.S. District Court, District of Columbia (Washington).

BP Wins U.S. Dismissal of Some Investors’ Derivative Suits

BP Plc convinced a federal judge that it shouldn’t have to face some lawsuits in the U.S. brought by institutional investors on behalf of the company over last year’s Gulf of Mexico drilling-rig explosion and oil spill.

U.S. District Judge Keith P. Ellison in Houston agreed with BP’s arguments that the claims should be filed in U.K. courts because the company is based in London. Ellison said he may reverse this dismissal if English courts “refuse to accept jurisdiction” for reasons other than the plaintiffs’ failure to comply with procedural requirements.

“Because this derivative lawsuit involves the internal governance of an English corporation, the convenience of the parties and the interests of justice favor England as a more convenient forum,” Ellison said Sept. 15 in a 31-page decision.

Investors sued BP claiming that the company’s management and board caused the spill by knowingly putting profits ahead of safety. The Deepwater Horizon rig exploded in April 2010 while drilling a BP well off the Louisiana coast, killing 11 and spilling more than 4.1 million barrels of oil.

The investors’ suits, so-called derivative claims brought on behalf of the company, are combined with other shareholder actions before Ellison in Houston. Lawsuits seeking money for economic and personal injuries from the spill are consolidated before a different U.S. judge in New Orleans.

Mark Lebovitch, a lawyer for the investors, said in an interview Sept. 16 that his clients “continue to believe that if ever there was a case where a federal judge should retain jurisdiction over a foreign corporation’s board, this case is it.” The plaintiffs are “reviewing their options” for a response to the dismissal, he said.

BP spokesmen Daren Beaudo declined to comment.

The case is In re BP Shareholder Derivative Litigation, 4:10-cv-03447, U.S. District Court, Southern District of Texas (Houston).


Google EU Antitrust Probe Checks Company’s ‘Gate-Keeper’ Role

The European Union antitrust probe into Google Inc. focuses on whether the world’s largest Web search company has a dominant position that allows it to influence the “behavior of Internet users.”

“Google is the browser of choice for very many of us; but dominance is not the same as abuse of dominance,” Joaquin Almunia, the EU competition commissioner, said in a speech in Florence, Italy Sept. 16. “Abuse is a conduct that protects or extends dominance by illegitimate means, and we still have to conclude whether this is the case for Google.”

Google, based in Mountain View, California, is under growing pressure from global antitrust agencies probing whether the company uses its position in Web searches to thwart competition. While Microsoft Corp. and partner Yahoo! Inc. have about a quarter of the U.S. search market, Google has almost 95 percent of the traffic in Europe, Microsoft said in a blog post in March, citing data from regulators.

One aspect of the 27-nation EU probe “is determining whether Google holds a position of gate keeper and is able to influence the behavior of Internet users,” Almunia said.

Al Verney, a spokesman for Google in Brussels, declined to comment on Almunia’s speech.

The digital market is becoming part of “sophisticated strategic interactions” between companies, also in the form mergers, said Almunia. An “interesting” case in this field for the commission will be the proposed merger between Microsoft and Skype Technologies SA.

Microsoft in May agreed to buy Luxembourg-based Skype for $8.5 billion, to gain the world’s most popular Web-calling service and help it catch up in online and mobile advertising. The Brussels-based commission set an Oct. 7 deadline to rule on the deal.

“The real challenge for us in these markets is separating the potential for innovation from the potentially excessive market power a company can acquire,” said Almunia.

Bank Regulators Should Cooperate, Fortis’s Daems Says

Bank regulators need to step up their cross-border cooperation to prepare for the “extreme difficulties” of managing international fallout from a major bank failure, Fortis Bank SA/NV Chairman Herman Daems said.

Daems called for improved relations between supervisors in a bank’s home country and other nations that are host to subsidiaries and affiliates.

He made the remarks at a conference in Wroclaw, Poland.

When regulators don’t have the right relationships up front, it creates difficult problems such as those that Brussels-based Fortis experienced when it had to be rescued in 2008, Daems said last week at the conference.

“We need to make sure that home and host supervisors will develop over time sufficient experience in working with one another so that when they’re faced with one another in a period of crisis, they can work together,” Daems said. “You need to do a lot of work in the different countries so that you have the right instruments to deal with these things.”

Bankers gathered at the Eurofi financial conference in Poland Sept. 15-16, three years after Lehman Brothers Holdings Inc. failed in New York and triggered a global financial crisis. Belgium, Luxembourg and the Netherlands banded together to rescue Fortis, which also is 20th on the list of banks that borrowed the most from the U.S. Federal Reserve’s crisis liquidity programs.

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Cable Says UBS Trading Losses Underline Need for Bank Reform

U.K. Business Secretary Vince Cable said trading losses at UBS AG underline the need for banking reform and the implementation of the recommendations of the Independent Commission on Banking.

“If there were any doubts about the need for radical reform, the UBS rogue trader has dispelled them. We simply cannot have rogue institutions exposing taxpayers to the risk of exploding financial weapons of mass destruction,” Cable said in a speech to the Liberal Democrat party conference in Birmingham, central England, today.

“The Independent Banking Commission provides a means to stop this dangerous nonsense,” Cable said, according to the text of his speech. “The commission’s key findings -- to separate retail and casino banking -- must be put in place. Legislation will start soon and be completed in this Parliament.”

Schmidt Says UBS Not ‘Investable’ Until Culture Changes

Jacob Schmidt, founder of Schmidt Research Partners Ltd., talks about the reputation of UBS AG’s investment bank after the unauthorized trading loss.

Schmidt also discusses his investment strategy with Maryam Nemazee on Bloomberg Television’s “The Pulse.”

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