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Structured-Note Fees, EU Fund ‘Honesty,’ Swaps: Compliance

The U.S. Securities and Exchange Commission is asking banks that issue structured notes to boost disclosures to investors, including the banks’ own estimates for the securities’ market value at the time of sale.

The regulator sought the changes in a letter to banks it didn’t identify that was posted on its website April 13. The agency also asked the issuers to explain how they set up a secondary market for the notes, how they use the proceeds raised from sales and how important the business is to their funding needs.

The U.S. structured note industry, which sells bank bonds bundled with derivatives for customized bets, has come under scrutiny from regulators for the securities’ complexity and lack of transparency. Some notes have higher fees than their potential returns. Banks sold $45.9 billion of SEC-registered securities in 2011, down from a record $49.5 billion a year earlier, according to data compiled by Bloomberg.

In sale prospectuses for the securities, banks disclose certain fees, such as those paid to distributors, though they aren’t required to estimate the value of the products at issuance.

Florence Harmon, a spokeswoman for the SEC, declined to comment.

The letter was sent by the Office of Capital Market Trends with a request for a written reply within 10 days. The office, created in July 2010 and headed by Amy Starr, is within the Division of Corporation Finance.

For more, click here.

Compliance Policy

Hedge Funds Face ‘Honesty’ Rule in Expanded EU Law, Group Says

The European Commission has added rules on honesty, client-asset segregation and conflicts of interest to measures to regulate hedge funds, an industry group said.

The commission, the European Union’s executive arm, has added a provision saying fund managers must act with “honesty, integrity and independence of mind to effectively assess and challenge” senior management decisions, according to the Alternative Investment Management Association, or AIMA.

Fund managers also face tougher rules on protecting client assets, use of debt and conflicts of interest in rules that differ from those proposed by the European Securities and Markets Authority, AIMA said.

The draft rules are part of the commission’s work to implement a hedge-fund law from 2011. The legislation, known as the Alternative Investment Fund Managers directive, sets rules on management and information disclosure for funds across the 27-nation region.

The group warned earlier this month that the rules could harm asset managers. Michel Barnier, the EU’s financial services chief, responded by saying he won’t be “intimidated” by what he described as “rearguard lobbying.”

Chantal Hughes, Barnier’s spokeswoman, declined to comment further yesterday.

U.S. Regulators Set Vote on Which Companies are Swaps Dealers

U.S. regulators are poised to take a step forward this week in overhauling derivatives markets by completing a linchpin rule defining which companies are at the center of the $708 trillion global swaps market.

Fourteen months after the regulation was first proposed, the U.S. Commodity Futures Trading Commission and Securities and Exchange Commission are preparing to cast final votes on a rule determining which banks, energy companies and other firms will meet one of two definitions: swap dealers or so-called major swap participants.

The designations, part of a series of rules required by the Dodd-Frank Act and revised in recent months, have been eased so that they will apply to fewer firms than the original version of the regulation issued in 2010. Those firms that meet the revised definitions will face the highest capital and collateral requirements for participants in the swaps market.

The regulations are aimed at reducing risk in the market after largely unregulated swaps helped fuel the 2008 crisis.

Wall Street banks dominate dealing of swaps and other derivatives. JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Morgan Stanley and Goldman Sachs Group Inc. control 95 percent of cash and derivatives trading for U.S. bank holding companies as of Dec. 31, according to the Office of the Comptroller of the Currency.

The proposed rule spurred opposition from Wall Street and beyond. The agency’s commissioners and staff have had hundreds of meetings with companies including BP Plc, ConocoPhillips, Vitol Inc. and DRW Holdings LLC that have sought changes in the proposal. Thousands of pages of comment letters have been filed with the agency.

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EU Pension Proposals Could Curb Investment, U.K.’s Hoban Says

European proposals to model financial rules for pensions on those established for insurers could stymie investment and make the plans more expensive, according to Mark Hoban, the U.K.’s financial secretary.

Applying capital requirements originally directed by the European Union at insurers to pension funds, “carries a strong risk of locking capital in pension schemes, reducing investment in growth and significantly reducing the affordability of pensions,” Hoban said in a letter to the British Bankers’ Association that was obtained by Bloomberg News.

The so-called Solvency II rules are scheduled for introduction in 2013 and require insurers to retain more high-quality assets.

Prudential Plc’s Chief Executive Officer Tidjane Thiam said last month that tougher capital rules for insurers in Europe mean they won’t be able to compete in the U.S., which may force the U.K.’s biggest insurer to leave the country.

Regulators and the European Union have agreed to postpone full application of the rules until 2014, following discussions with the industry.

Compliance Action

UBS Unit Will Cooperate With French Tax-Evasion Investigation

UBS AG’s French unit said it is prepared to cooperate with French investigators looking into tax-evasion allegations.

UBS, which hasn’t been contacted by investigators, “has taken note of” French press reports about the probe and “will of course fully collaborate with the authorities,” the Zurich-based bank’s French unit said in an e-mailed statement yesterday.

Paris prosecutors opened a formal investigation April 12, after conducting a preliminary inquiry with the customs service into a complaint by France’s Prudential Control Authority in February 2011 over the bank’s practices in France. The probe, which doesn’t name a target, is led by an investigating judge, Guillaume Daieff, the Paris prosecutors office said yesterday, confirming a report in Les Echos.

French banking regulator ACP began looking into questions about the bank’s internal controls and transfers between French accounts and undeclared ones in Switzerland, according to the French business newspaper.

BTG Gives IPO Investors 5 Days to Cancel After Esteves Fine

Banco BTG Pactual SA is giving investors in its initial public offering five business days to cancel their orders after controlling shareholder Andre Esteves was fined in Italy for insider trading.

Investors who have already placed orders can back out until April 23, the day before shares will be priced, according to a statement published in Valor Economico newspaper yesterday.

Consob fined Esteves 350,000 euros ($459,000) and is seizing 4.2 million euros in assets, according to a filing. Esteves denied he had “any personal or professional contact” with people “directly or indirectly” involved in the transaction, according to Consob’s filing. Esteves, who is also BTG’s chief executive officer, plans to appeal the fine, the Sao Paulo-based bank said in a statement April 16.

The shares will start trading in Sao Paulo on April 26, as previously scheduled, according to yesterday’s statement.

U.K. Banks Said to Have to Meet Unwritten FSA Living-Will Rules

The U.K.’s biggest banks will need to write and submit so-called living wills by the end of June, even though the Financial Services Authority missed its own deadline to set final rules on the plans, two people familiar with the situation said.

The agency is awaiting delayed proposals from the European Commission on how to deal with a potential cross-border banking crisis, as well as a report from the U.K. Treasury, before publishing its own living-will guidelines, said the people, who declined to be named because the talks are private.

The FSA said in August that banks should start preparing living wills, which describe wind-down plans for how they could be broken up quickly if they collapse.

Hector Sants, the FSA’s outgoing chief executive officer, said earlier this year the regulator would rely more on subjective assessments of banks’ compliance with rules, rather than a “tick-box” style of supervision.


CFTC Sued by Fund Industry to Overturn Registration Rule

The U.S. Commodity Futures Trading Commission was sued by two business groups seeking to overturn a rule requiring mutual funds with commodities investments to register with the agency.

The CFTC didn’t properly assess the costs and benefits when it imposed the regulation in a 4-1 vote in February, the U.S. Chamber of Commerce and the Investment Company Institute argue in a lawsuit filed yesterday in federal court in Washington. The measure is unnecessary, they said, because mutual funds are already overseen by the U.S. Securities and Exchange Commission.

The case is one of several brought by the financial industry as it pushes back against tighter regulations passed in the wake of the 2008 credit crisis. CFTC commissioners who approved the registration requirement said it would increase investor protections and eliminate a decade-old loophole that let funds investing in futures and swaps tied to commodities evade their oversight.

Investment companies have “increased significantly” their use of commodity futures, swaps and options since the agency determined in 2003 that they didn’t need to register as “commodity pool operators,” CFTC Chairman Gary Gensler, a Democrat, said when the rule was passed.

Under the rule, funds would have to file reports with the CFTC about their use of leverage, exposure to risk from counterparties and other investment trading data.

The case is Investment Company Institute v. U.S. Commodity Futures Trading Commission, 1:12-cv-00612, U.S. District Court, District of Columbia (Washington).

For more, click here.


Sperling Says Oil Market Supervision Needs More Staff

Gene Sperling, White House director of the National Economic Council, talked about President Barack Obama’s plan to bolster federal supervision of oil markets.

He spoke with Adam Johnson and Stephanie Ruhle on Bloomberg Television’s “Street Smart.”

For the video, click here.

Schapiro Says SEC Will Change Calculation of Rule-Writing Costs

The U.S. Securities and Exchange Commission is developing a new method for calculating the cost of rule-making in response to challenges from courts and lawmakers, Chairman Mary Schapiro told a House panel yesterday.

Schapiro has instructed SEC staff to consider the cost of both congressional mandates and rules the agency is developing through its own authority, she said in testimony before the House Oversight and Government Reform subcommittee hearing in Washington. The move is in response to an SEC inspector general report that suggested the agency doesn’t consider the economic effects of rules mandated by the Dodd-Frank Act.

The report released in January recommended that the SEC use a pre-Dodd-Frank baseline whenever possible to determine the cost of imposing a new rule on financial markets.

Schapiro is facing questions about what House Republicans call the SEC’s “aversion” to studying the cost for companies to comply with the agency’s rules. The role of cost-benefit studies has gained prominence inside the agency after a July 2011 ruling from the U.S. Court of Appeals rejecting an SEC rule that would have made it easier for shareholders to insert board candidates onto public-company ballots. The court said the agency failed to adequately assess the costs of the rule.

For more, click here.

HSBC Chairman Says Bank Regulation Leading to ‘Protectionism’

HSBC Holdings Plc Chairman Douglas Flint said that regulation of the financial system had led to “protectionism” as banks focus on implementing changes in their domestic operations.

Flint made the statements in prepared remarks for a speech to be delivered at a conference in Liverpool yesterday.

Regulators worldwide are demanding banks bolster capital to guard against future losses after governments were forced to bail out lenders during the 2008 financial crisis. The Basel Committee on Banking Supervision will require lenders to more than triple the core reserves they must hold to protect themselves from insolvency by 2019.

“Higher capital ratios lead to home bias in branch-based organizations,” Flint said, according to a copy of the speech. “The risk to treasurers is that funding availability from foreign branches will likely be at risk if the domestic operations are troubled or capital requirements are raised.”

The U.K. government-appointed Independent Commission on Banking recommended in a Sept. 12 report that lenders insulate consumer banking units with higher capital. The ICB said that banks’ consumer units should have a “loss-absorbing capacity” of at least 17 percent to 20 percent.

When regulators in the U.S. demanded banks report their investments in European financial institutions at the height of the region’s sovereign debt crisis it prompted many U.S. firms to restrict lending, Flint said.

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