European Union proposals to make pension funds bolster their capital may trigger a flight from private-equity firms, the European Private Equity and Venture Capital Association said.
The EU is considering plans to apply capital adequacy rules designed for insurers to pension funds, a move that will penalize investments in private-equity funds because they are illiquid, said the Brussels-based lobby group, which represents about 850 firms.
Regulators are forcing insurers and banks to put more capital aside for investments considered risky to avoid a repeat of the 2008 financial crisis. Pension funds, which have accounted for a third of funds raised by European firms since 2006, would follow insurers and lenders in selling private equity assets because those holdings would become too expensive to hold under the new rules, the EVCA said.
“In their efforts to minimize systemic risk, regulators are in danger of negating the stabilizing effect of long-term investors,” the EVCA said in a statement yesterday.
Banks have sold about 20 billion euros ($26 billion) of holdings in private-equity funds in recent years for discounts of as much as 20 percent because of the “exaggerated” risk-weightings applied to the asset class, the EVCA estimated.
Banks Must Hold Capital for Sovereign Risk, EU Lawmaker Says
Banks should be forced to hold reserves to guard against possible losses on sovereign debt, according to a lawmaker overseeing Europe’s implementation of Basel capital rules.
The region’s fiscal crisis, which has involved bailouts of Greece, Portugal and Ireland has shown that a zero capital requirement for sovereign debt “no longer corresponds with economic reality,” said Othmar Karas, an Austrian member of the European Parliament, in a draft report published on the EU assembly’s website.
His demand echoes international calls to toughen rules that allow lenders to apply zero risk-weightings to government bonds issued in a bank’s home currency when calculating capital ratios. Lenders don’t need to hold any capital against possible losses on the securities, even after the cost of insuring government bonds against default rose to a record last year.
The European approach “is not in line with the spirit” of global measures endorsed by the Basel Committee on Banking Supervision, Herve Hannoun, deputy general manager of the Bank for International Settlements, said in October. The U.S. “situation regarding the treatment of sovereign risk is also unsatisfactory,” he said. The BIS is the Basel committee’s parent institution.
Karas is in charge of drafting the parliament’s opinion on last year’s proposals by the European Commission to implement the Basel capital and liquidity measures in the EU. The lawmaker’s office in Brussels didn’t respond to a call seeking comment on the plan.
Indian Bid to Lure Investors May Be Undermined by Europe
India’s bid to lure overseas capital by loosening curbs on stock investments may be undermined by Europe’s debt crisis, according to a strategist who predicted a year-end drop for the nation’s equities.
Indrajit Sen, a Mumbai-based derivatives strategist at Fortune Financial Services India Ltd. described the proposed change in rules as a “desperate attempt by the government to bring dollar flows to stabilize the rupee. Overseas retail investors may not invest aggressively.”
India’s government said on Jan. 1 it will allow overseas individual investors to buy local equities directly in a move to broaden foreign flows into the nation’s $1 trillion stock market. The new policy may take effect by Jan. 15, the government said. Currently, overseas retail investors can only buy Indian shares through participatory notes, derivative products held offshore by investors or hedge funds not registered with the regulator.
Foreign institutional investors pulled out $512 million from local equities last year, compared with a record inflow of $29.4 billion in 2010, as Europe’s debt crisis threatened the global economy and reduced demand for emerging-market assets. The withdrawals contributed to a 25 percent slide in the BSE India Sensitive Index and the S&P CNX Nifty Index in 2011, the second worst annual decline for both gauges, and helped send the rupee to an all-time low.
While individual foreign investors may not rush in, the new rule allows them to take bets on small and medium-sized companies usually overlooked by large investors, Chokkalingam G, chief investment officer at Centrum Broking Pvt., said by phone from Mumbai Jan. 2.
Indian equities are influenced by offshore flows.
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Derivatives, Credit-Rating Rules Delayed in SEC Dodd-Frank Plan
The U.S. Securities and Exchange Commission is delaying action on rules for regulating derivatives and credit-rating firms until the second half of 2012, according to an updated calendar.
The agency’s revised schedule shifts expected approval of a number of Dodd-Frank Act rules from a January-June time frame to July-December. The revision also removed two items from the calendar: a proposal on defining the fiduciary duty of broker-dealers and adoption of a conflicts-of-interest ban in asset-backed securities deals. Those rules moved to an undetermined-date category.
Besides shifting the bulk of its derivatives and credit-ratings rule adoptions, the SEC will also be later than it had previously predicted for adopting rules for permanent registration of municipal advisers and for disclosing and clawing back executive pay, planning both for sometime between July and December 2012.
The timetable for implementing Dodd-Frank rules has slipped for the SEC and other agencies because of the number and complexity of rules tightening financial regulation in the wake of the 2008 financial crisis.
China CSRC May Ease Purchases of Stakes in Publicly Traded Units
The China Securities Regulatory Commission may allow investors to increase their stakes in publicly traded subsidiaries without receiving prior approval to make capital markets more stable.
A shareholder with at least 30 percent of a listed company would no longer need approval from the regulator to boost its stake by 2 percentage points in a year, according to draft rules posted on the regulator’s website on Dec. 30.
The new rule would “encourage controlling shareholders of listed companies to increase their interests in the company at reasonable prices, further improving the inherent stability of the capital market,” the regulator said. Investors who make such purchases might be barred from selling shares for six months, according to the statement.
Shareholders with 50 percent or more may be allowed to increase their stakes without seeking approval, according to the draft rules.
Thailand’s Regulator to Curb Bill of Exchange Sales by Banks
Thailand will curb the sale of bills of exchange by commercial banks to protect individual investors from investing in the short-term debt securities, according to the Securities and Exchange Commission.
The new rules, which will take effect July 1, are aimed at limiting bill of exchange sales by commercial banks, Vorapol Socatiyanurak, secretary-general of the SEC, told reporters in Bangkok today. Thai companies must sell at least 10 million baht of the debt securities to each investor, he said.
Separately, Thailand may scrap a tax on dividend income to help attract overseas investment into the stock market, Vorapol said. The regulator has asked the finance ministry to consider the proposal, Vorapol said. Shareholders of Thai-listed companies currently pay a 10 percent withholding tax on their dividend income, he said.
Regulators Fleeing Credit Raters Embrace Zero-Risk Greek Bonds
U.S. regulators, required by Congress to remove credit ratings from banking rules, have devised a plan anchored in a Paris-based group’s rankings that assign zero risk to most European government debt.
The Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency proposed rules last month to set bank capital levels using classifications made by the Organisation for Economic Co-operation and Development, or OECD. The intergovernmental group, two-thirds of whose members are European Union countries, considers most EU sovereign bonds risk-free, including those of Greece and Portugal.
The proposal undermines the intent of the 2010 Dodd-Frank Act, which sought to eliminate the use of ratings by companies such as Standard & Poor’s and Moody’s Investors Service that are paid by the entities they rate, said Luigi De Ghenghi, a partner at law firm Davis Polk & Wardwell LLP in New York. Regulators are just replacing one set of conflicts with another, De Ghenghi said, noting that the OECD represents the member governments.
The proposed rules could be revised after a public comment period that ends Feb. 3. A final version may be published a few months later, regulators say.
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MF Global U.K. Staff May Not Get Bonuses Pledged Before Failure
MF Global Holdings Ltd.’s U.K. employees owed bonuses by the failed broker were placed behind most other creditors in the bankruptcy process and may never receive their money.
KPMG LLP, the administrator of MF Global’s U.K. unit, said cash bonuses would be treated as unsecured claims, near the bottom of the creditor pile. Unvested share awards and stock options for the unit’s 700 employees, valued at about $62 million for the year ending in March 2011, are virtually worthless with the stock trading at less than 8 cents yesterday.
MF Global, based in New York, was the fifth-largest financial company to file for bankruptcy when it sought protection on Oct. 31 after placing losing bets on European sovereign debt. KPMG was appointed to supervise the administration of the broker’s London unit.
Under the U.K. Financial Services Authority’s new compensation rules, as much as 60 percent of bonus payouts for managers and senior staff must be deferred for at least three years, and half must be in shares.
Including wages, options, shares and bonuses, MF Global’s U.K. unit paid $232 million to its employees in the last fiscal year, according to accounts filed at Companies House. One U.K. director received $7 million.
KPMG said bonus claims for all employees, including those let go after the company collapsed and the 300 retained to work on the administration, would be treated the same.
KPMG partner Richard Heis said the remaining staff had been offered a retention bonus to work with the administrators, without commenting on how much the bonuses would be.
WJB Capital Group Sued in New York State for Alleged Fraud
WJB Capital Group Inc., the Wall Street firm that said it’s shutting down its brokerage operations, was sued in New York by an investor over fraud allegations.
WJB Capital and Chief Executive Officer Craig Rothfeld were accused of fraud, breach of contract and other claims over a $250,000 investment in the company, according to a lawsuit filed Dec. 31 in New York State Supreme Court.
James McNally said that in exchange for a $250,000 investment he was promised “compensation for the duration of the investment.” WJB Capital failed to pay and used the money “for fraudulent purposes,” according to the complaint.
Rothfeld didn’t return a message seeking comment.
WJB Capital Group is shutting its brokerage operations amid “financial issues,” according to its main attorney.
Mark Skolnick, general counsel for the company at law firm Platzer, Swergold, Karlin, Levine, Goldberg & Jaslow LLP said “a very painful decision” was made to terminate the company’s broker-dealer operations. The firm has some non-brokerage operations and is exploring “other possibilities,” Skolnick said.
WJB Capital, founded in 1993, has offices in five cities across the U.S. and operates live trading desks for all of the nation’s major equities and options exchanges, according to its website.
The case is James McNally v. WJB Capital Group Inc., 650005-2012, New York State Supreme Court (Manhattan).
Life Partners Sued by SEC in Disclosure Case; Shares Fall 20%
Life Partners Holdings Inc., an acquirer of life-insurance policies, was sued by U.S. regulators along with three of its executives over allegations of fraudulent statements, improper accounting and insider trading.
The U.S. Securities and Exchange Commission said the Waco, Texas-based company underestimated life expectancies used in its transactions, according to a statement issued yesterday by the agency. The SEC named Chairman and Chief Executive Officer Brian D. Pardo; R. Scott Peden, who is president and general counsel; and David M. Martin, the chief financial officer.
The faulty statements and improper accounting were used to overvalue assets and create the appearance of “a steady stream of earnings,” the SEC said.
Life Partners fell 20 percent in extended New York trading yesterday after the SEC announcement. It had declined more than 60 percent in the past 12 months at the close of regular trading.
“It is very disappointing that the SEC has chosen to pursue litigation over issues that we believe have no merit and financial presentation issues that we do not believe are material,” Pardo said in a statement. “We intend to vigorously defend ourselves against these meritless claims.”
Life Partners buys the right to receive death benefits from life-insurance policyholders, who get lump-sum cash payments up front. The firm continues to pay premiums, betting it will eventually collect more than it spends. The profit decreases if the insured lives longer than expected.
A call to the company for comment wasn’t returned. Peden didn’t immediately respond to a telephone message left at a listing under his name, in Woodway, Texas. A listing couldn’t be found for Martin.
The case is Securities and Exchange Commission v. Life Partners Holdings, Inc., 12-cv-00002, Western District of Texas (Waco).
PwC’s Gray Says European Banks’ Main Concern Is Economy
Andrew Gray, a partner and U.K. financial services consulting leader at PricewaterhouseCoopers LLP, talked about the outlook for the European banking industry.
He spoke with Linzie Janis on Bloomberg Television’s “Countdown.”
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Comings and Goings
KPN CFO Smits-Nusteling Departs on Governance Disagreement
Royal KPN NV, the largest Dutch phone company, said Chief Financial Officer Carla Smits-Nusteling has stepped down because of disagreements about governance, the second departure of a board member in two months.
Eric Hageman, KPN’s head for Belgium, and Steven van Schilfgaarde, chief of the Dutch corporate business, will become interim CFOs with immediate effect, the Hague-based operator said in a statement yesterday, adding that it’s looking for a permanent replacement as soon as possible. Smits-Nusteling, 45, will leave April 1. In November, KPN said that another board member, Baptiest Coopmans, will also leave on April 1.
Under the new executive structure, announced in May, management board members meet directly with unit chiefs on matters that concern their respective business in an executive committee, said Stefan Simons, a KPN spokesman. The changes, which took effect this year, allow for more direct control and decision-making than the previous procedure, where various unit boards reported to the management board, he said.
Smits-Nusteling “has informed the supervisory board that she has ultimately come to the conclusion that she does not agree with the internal governance of the company in the new executive structure,” KPN said in the statement. Simons declined to specify the nature of the disagreement with Smits-Nusteling.
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