SEC-Nasdaq, Morgan Stanley Restitution: Compliance

The U.S. Securities and Exchange Commission rejected Nasdaq Stock Market’s request to offer clients trading algorithms that would enable them to execute buy and sell orders according to predetermined guidelines.

Nasdaq failed to specify in its proposal how it would ensure that orders generated under its plan would comply with rules requiring risk checks on buy and sell requests before they are sent to markets, the SEC said in a Jan. 11 notice. It also didn’t respond to criticism by the Securities Industry and Financial Markets Association that the offering would compete unfairly with algorithms supplied by brokers, the SEC said.

In delaying action on the proposal in August, the SEC said Nasdaq hadn’t made clear how pretrade risk and capital checks would be conducted on parts of its algorithms known as child orders, which are pieces of the larger buy or sell request that is submitted for execution. The SEC approved a regulation known as the market-access rule in 2010 mandating risk checks on any order sent for execution.

In addition, Nasdaq didn’t respond to concerns raised by Sifma, the broker-dealer trade group, that allowing Nasdaq to offer algorithms would place “undue burden” on competitors given rules that limit exchanges’ legal liabilities, the SEC wrote in the rejection notice.

Sifma criticized Nasdaq’s proposal in October on the grounds of “regulatory disparities,” according to a letter by Theodore R. Lazo, associate general counsel at Sifma. The group also said it sought to offer a commercial service that would benefit from the exchange’s limitation on financial liability.

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Compliance Policy

China’s Banking Regulator Warns About Wealth Management Products

China’s banking regulator told the nation’s lenders to “strictly” supervise the design, sale and investment of their wealth management products as it seeks to curb rising risks from banks’ off-balance sheet businesses.

Banks are banned from selling wealth management products without authorization, and should stop selling private-equity related products or misleading customers into buying such products, the China Banking Regulatory Commission said in a statement on its website yesterday. Lenders are also required to separate accounting and management of products that offer fixed and floating returns, the regulator said.

Chinese banks have been relying on wealth management products, which offer higher returns than benchmark deposit rates, to dissuade households from moving their savings elsewhere over the past few years.

The outstanding balance of banks’ wealth management products may have reached 13 trillion yuan ($2.09 trillion) by the end of last year, compared with 8.5 trillion yuan the previous year, according to Fitch.

The regulator also forbade lenders and their employees from participating in underground lending, and banned their customers from using bank borrowings for re-lending, according to the statement.

Japan to Allow In-Kind Benefits From Life Insurers, Nikkei Says

Japan’s financial regulators will reduce restrictions on insurers to allow nursing care and other services in place of cash benefits, Nikkei reported.

New insurance products are to be offered next year, according to Nikkei. Insurers’ subsidiaries and vendors will be allowed to offer in-kind services, the newspaper said.

A similar proposal, intended for implementation in 2007-2008, was resisted by consumer groups, according to the Nikkei report.

Compliance Action

JPMorgan’s London Whale Trading Losses Probe Begun by Regulator

An investigation of JPMorgan Chase & Co. was opened by the U.K.’s finance regulator as to whether traders in London broke any rules related to wrong-way bets on credit derivatives that lost their unit $6.2 billion.

The Financial Services Authority said yesterday in an e-mailed statement that it’s probing the losses suffered by JPMorgan in the chief investment office, or CIO, at the firm’s London offices. Other agencies already investigating the matter include the U.S. Justice Department and Securities and Exchange Commission.

Bruno Iksil, the U.K. trader nicknamed the London Whale because he was responsible for a trading book large enough to move the market, made a wrong-way bet on credit derivatives that led to the company’s biggest trading loss. At one point, as much as $51 billion in shareholder value was erased by the trades.

New York-based JPMorgan was ordered by U.S. regulators to strengthen risk and auditing controls. The firm also promised to bolster systems to prevent money laundering. After reviewing the unit that suffered the losses, the Federal Reserve faulted JPMorgan’s management and modeling of risks, as well as its auditing functions and the process for communicating problems to the board of directors.

The OCC is preparing a cease-and-desist order requiring New York-based JPMorgan to fix internal controls that contributed to its wrong-way bet on credit derivatives, a person familiar with the matter said last month.

The chief investment office within JPMorgan’s national bank suffered from “inadequate risk management,” Comptroller of the Currency Thomas Curry said during U.S. Senate testimony in June.

The move to a formal enforcement proceeding by the FSA typically indicates the agency found sufficient evidence of financial rule violations.

Joe Evangelisti, a spokesman at JPMorgan, Robert Garsson at the OCC, Barbara Hagenbaugh at the Federal Reserve and Christopher Hamilton at the FSA all declined to comment on the regulatory actions.

The bank’s board of directors is also considering releasing an internal report that faults Dimon’s oversight of the division when the company announces fourth-quarter earnings on Jan. 16, two people with direct knowledge of the matter have said.

DNB Separates Personal and Corporate Banking Amid Rule Changes

DNB ASA, Norway’s largest bank, will separate its personal-and corporate-banking businesses into two new units to boost competitiveness amid regulatory changes.

The new Personal Banking Norway division will serve the lender’s personal clients in Norway, while Corporate Banking Norway will provide services to small and medium-size companies, Oslo-based DNB said in a statement yesterday. Trond Bentestuen will head Personal Banking Norway and Kjerstin Braathen will lead Corporate Banking Norway. The firm will also start a wealth-management unit, including private banking, and said it will establish risk management as a separate support arm.

Nordic banks face stricter capital rules as governments move to safeguard taxpayers against potential losses in the financial industry. Banking clients’ behavior is also changing, with more and more customers using the Internet for their banking needs.

RBS May Face $800 Million Libor Fine as Soon as Next Week

Royal Bank of Scotland Group Plc may pay as much as 500 million pounds ($804 million) in fines next week to settle allegations traders tried to rig interest rates, two people with knowledge of the matter said.

Investment banking chief John Hourican and Peter Nielsen, the head of markets, may also be asked to leave because they had responsibility for the parts of the company where the alleged wrongdoing occurred, even though they may not have had direct knowledge of the behavior, said two people, who declined to be identified because the talks are private.

The rate-rigging allegations are the biggest blow to Chief Executive Officer Stephen Hester’s attempt to overhaul the Edinburgh-based lender after it took 45.5 billion pounds from taxpayers in the largest bank bailout in history in 2008.

The size of the fine and the date of the settlement aren’t yet fixed and the final details are still to be agreed, the people cautioned.

RBS will claw back payments made in previous years to people involved in the rigging and cut the investment banking bonus pool by between 100 million pounds and 150 million pounds, one of the people said. RBS paid its investment bankers about 390 million pounds in bonuses for 2011, the bank said in February.

Officials at RBS, the U.K. Financial Services Authority and the U.S. Commodity Futures Trading Commission and the Justice Department declined to comment. Nielsen didn’t respond to an e-mail and Hourican didn’t reply to a voice-mail message seeking comment.

Deutsche Bank Libor Report Should Be Public, Lawmakers Say

Deutsche Bank AG and Germany’s finance regulator are under pressure to publish findings of a probe into whether the lender rigged interest rates, with lawmakers saying a secrecy rule meant to protect banks is crippling efforts to explore what’s wrong with financial markets.

Unless a bank allows publication, German law bans the regulator, known as Bafin, from disclosing facts from reviews if it would be contrary to the lender’s interest. Lawmakers claim the practice, aimed at protecting business secrets, hinders effective controls.

Regulators from Canada to Switzerland are investigating whether more than a dozen banks including Deutsche Bank colluded to rig the London interbank offered rate, the benchmark for more than $300 trillion of securities. The U.S. Justice Department is conducting a criminal probe in parallel with civil investigations by the Commodity Futures Trading Commission and the U.K. Financial Services Authority.

Deutsche Bank denies any wrongdoing by its executives. Christian Streckert, a company spokesman, declined to comment on whether the bank will allow the Libor probe results to be disclosed.

Bafin, like its counterparts in other countries, is bound by the law not to disclose business matters of lenders it supervises, said Ben Fischer, the regulator’s spokesman.

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Morgan Stanley Seeks $10.2 Million From Convicted Ex-Trader

Insider traders like Joseph F. “Chip” Skowron III must be held responsible for the harm they cause their employers, Morgan Stanley lawyers told an appeals court in a bid to recover $10.2 million.

Skowron, 43, who is serving five years in prison, was a hedge fund manager at Morgan Stanley’s FrontPoint Partners LLC until he was charged in April 2011 with using inside information to avoid $30 million in losses.

The U.S. Court of Appeals in Manhattan heard arguments yesterday in Skowron’s appeal of a judge’s order that he pay $10.2 million in restitution to the New York-based bank, which closed FrontPoint after the scandal. Morgan Stanley and prosecutors argued in support of the judge’s order, saying he hid his activities from his employer and the government.

The bank has also brought a civil suit against Skowron.

Joshua Epstein, Skowron’s lawyer, told the appeals panel yesterday that Morgan Stanley is entitled to file a lawsuit to seek the money it paid his client. The firm isn’t entitled to restitution in the criminal case, he said.

Skowron, a doctor who trained at Harvard and Yale, is completing his first year at the U.S. prison camp in Minersville, Pennsylvania.

The case is U.S. v. Skowron, 12-1284, U.S. Court of Appeals for the Second Circuit (Manhattan). Morgan Stanley’s suit is Morgan Stanley v. Skowron, 12-cv-8016, U.S. District Court, Southern District of New York (Manhattan).

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Exxon Knew in 1984 MTBE Would Triple Contamination, State Says

ExxonMobil Corp. knew in 1984 that adding a chemical to gasoline that makes it burn more thoroughly would triple incidents of ground contamination, lawyers for New Hampshire said at the opening of an $800 million trial.

ExxonMobil and Citgo Petroleum Corp. are the last holdouts in the suit by New Hampshire alleging oil companies knew the chemical would contaminate groundwater. The trial, which began yesterday in state court in Concord, pits the state’s environmental claims against company claims they were simply complying with federal pollution standards. It’s one of scores of cases involving the additive methyl tertiary butyl ether, or MTBE, that have been filed since 2000 against oil refiners, fuel distributors and chemical makers.

New Hampshire contends ExxonMobil and Citgo knew MTBE would pollute water supplies. The companies said the federal Clean Air Act overrides the state claims and they were complying with federal mandates.

Jessica Grant, a lawyer for the state, said in her opening statement yesterday that Exxon decided “to disregard the recommendation of its own employees and put MTBE in gasoline,” even while it anticipated that the number of contamination incidents would triple. Grant said each cleanup at that time would have cost as much as $7 million.

In 2003, New Hampshire sued ExxonMobil and Citgo, along with other oil companies, which have since settled. New Hampshire is seeking $816 million to cover cleanup and monitoring costs, Grant said at a pretrial hearing.

The state is “second-guessing decisions made by Congress, the EPA and by the state’s own officials to rely on gasoline with MTBE as the solution to air pollution,” Claire Hassett, a spokeswoman for ExxonMobil, said in an e-mail. “Gasoline with MTBE was a product that worked as it was intended -- it provided significant health benefits by helping gasoline burn cleaner, thereby reducing smog.”

Citgo said in an e-mailed statement that its “strong safety and environmental record speaks for itself.”

Exxon and Citgo have not yet addressed the jury.

The case is State of New Hampshire v. Hess Corp., 03-C-0550, State of New Hampshire Superior Court (Merrimack County). The federal cases are consolidated as In re MTBE Products Liability Litigation, 00-11898, U.S. District Court, Southern District of New York (Manhattan).

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Comings and Goings

Promontory’s Friend Rejoins OCC as Bank Regulator’s Top Counsel

Amy Friend, a former Senate Banking Committee lawyer who helped craft the Dodd-Frank Act, is rejoining the Office of the Comptroller of the Currency as the agency’s top counsel, the agency said yesterday.

Friend, who joined Promontory Financial Group LLC in January 2011, will fill a vacancy at the OCC left by longtime chief counsel Julie Williams, who was hired by Washington-based Promontory after leaving the national-bank regulator last year.

Friend, who starts work at the OCC next month, was assistant chief counsel at the agency before she was hired by then-Senator Chris Dodd in 2008 to be the Senate Banking Committee’s top lawyer.

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