SEC Tech Update, Money-Fund Tax, NFL Adviser: Compliance

March 8 (Bloomberg) -- Exchanges and clearinghouses would be required to maintain adequate technology systems and report disruptions under a U.S. Securities and Exchange Commission plan for the first update of automation principles in 22 years.

SEC commissioners were set to vote at a meeting yesterday on measures that could also include large brokerages and dark pools in the requirement to regularly audit information systems for safety and stability. Companies would be required to stress test their automated systems for how they react to crises.

The SEC is working to minimize damage from failures caused by automated system errors such as the trading malfunction by Knight Capital Group Inc. in August, which almost bankrupted the firm and led to its sale to Getco LLC. Exchanges and clearinghouses for more than 20 years have been subject to a voluntary program relying on self-audits and SEC inspections.

The SEC has said it accelerated the proposal after the Knight Capital malfunction. The agency already has enacted rules requiring broker checks against erroneous orders and circuit breakers that halt trading during periods of extraordinary volatility.

The new rule could expand the program’s reach beyond exchanges and clearinghouses to large brokers and dark pools, David Shillman, associate director in the SEC’s division of trading and markets, said in September.

In a speech two weeks ago, SEC Chairman Elisse B. Walter said significant alternative trading systems probably would be included in the proposal.

The SEC last issued policy guidance about the program to exchanges and clearing firms in May 1991.

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Compliance Policy

SEC Staff Said to Review Floating Money-Fund Values With IRS

Staff of the U.S. Securities and Exchange Commission have met with the Internal Revenue Service to discuss tax implications if money-market mutual funds were to adopt a floating share price, two people familiar with the talks said.

Discussions have centered on the tax treatment of small gains and losses for investors in funds, said the people, who asked not to be named because the talks weren’t public. IRS officials have told the securities regulator that they don’t have much flexibility to interpret current tax law, one of the people said.

The discussions suggest SEC staffers are developing a more detailed proposal to force money funds to adopt a floating share price, a move the industry has said would destroy their appeal. One such proposal prepared last year under the direction of former SEC Chairman Mary Schapiro was rejected by three of her four fellow commissioners in August, even before they were presented with a formal draft.

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

Regulators have worked to impose tighter restrictions on money funds since the September 2008 collapse of the $62.5 billion Reserve Primary Fund. Schapiro’s plan aimed to make funds less susceptible to runs and better able to absorb losses. It would have offered funds a choice of replacing their fixed $1 share price with a floating price that reflects the market value of holdings, or creating capital reserves and restricting redemptions.

Following the rejection, Schapiro appealed for help from the Financial Stability Oversight Council, whose job it is to identify systemic financial threats. The council acted in November, pressuring the SEC to revisit the issue and recommending several reform options, including a floating share value and capital buffers.

Republican Commissioner Daniel M. Gallagher said in a Jan. 16 speech that SEC staff were preparing a rule-making proposal he expected to see before the end of March.

CME Swap-Data Routing Plan Backed by CFTC Over Rivals’ Objection

CME Group Inc. won regulatory approval to have information about swaps routed to its own database over the objections of the Depository Trust and Clearing Corp. and banks including JPMorgan Chase & Co.

The Commodity Futures Trading Commission voted 4-0 to grant Chicago-based CME, owner of the world’s largest futures exchange, the authority. New York-based DTCC, operator of a rival database, has said it might sue the CFTC if the CME’s proposal was approved.

Dodd-Frank, the 2010 regulatory overhaul, gave the CFTC and Securities and Exchange Commission authority to write rules requiring swap data to be reported to the agencies and the public. The law, enacted in response to the 2008 credit crisis, set up so-called swap data repositories as record-keepers for information about buyers and sellers, volume and prices.

The DTCC has said the CME plan fails to comply with more than a year of CFTC rulemaking and would lead to worse oversight of the market because data will be fragmented.

Larry Thompson, DTCC’s general counsel, said in an e-mailed statement that the CME rule is anticompetitive. DTCC and other market participants are considering possible responses, he said.

JPMorgan in a Jan. 11 letter to the CFTC said the CME proposal is an anticompetitive arrangement between clearing and data record-keeping. The proposal also will hurt the Dodd-Frank Act goal of increasing swaps-market oversight, Alessandro Cocco, a JPMorgan managing director, said in the letter.

Scott O’Malia, a Republican CFTC commissioner, abstained from the vote because he said the agency’s underlying regulations should be amended.

India’s Central Bank Signs Currency Swap Agreement With Bhutan

The central bank of India signed a three-year currency swap agreement with Bhutan, according to an e-mailed statement.

The agreement allows the Royal Monetary Authority of Bhutan to withdraw as much as $100 million in dollars, euros or rupees in multiple tranches, the Economic Times reported.

Special Section: Senate Banking Committee Hearing

U.S. Bank Agency Wants to Ease Ejection of Secrecy Act Violators

The U.S. regulator of national banks is weighing changes to make it easier to eject from the industry bankers who knowingly skirt money-laundering rules, said Comptroller of the Currency Thomas Curry.

When bank regulators issued a record fine against HSBC Holdings Plc in December, some lawmakers and consumer groups complained that individual bankers weren’t held to task by the government for allowing terrorists and drug cartels access to the global financial system. Curry said his agency is exploring ways to make it easier to expel officials who knowingly violate the Bank Secrecy Act.

Curry made the remarks in testimony prepared for a Senate Banking Committee hearing yesterday.

In his testimony, Curry also argued for improving the information shared between the government and financial institutions and called for legislation to expand what can be swapped between the firms themselves.

The Bank Secrecy Act was meant to curtail criminals from injecting the proceeds of their crimes into the legitimate financial system. It has since been used as a tool to combat international drug cartels and terrorist groups. Nine federal agencies monitor the act.

Warren Pans U.S. Agencies’ Light Touch on Money-Laundering

U.S. Senator Elizabeth Warren asked regulators how badly a bank would have to break laws before they’d weigh pulling its charter, citing HSBC Holdings Plc services for drug cartels and skirting sanctions against Iran.

“What does it take?” the Massachusetts Democrat asked a panel of banking regulators testifying at a Senate Banking Committee hearing yesterday. “How many billions of dollars do you have to launder for drug lords and how many economic sanctions do you have to violate before someone will consider shutting down a financial institution like this?”

Comptroller of the Currency Thomas Curry and Federal Reserve Governor Jerome Powell explained that a charter revocation process would depend on a bank being convicted of a crime, for which Powell said the Justice Department has “total authority.” London-based HSBC settled for $1.92 billion in December and promised to fix its operations.

“Banks are much farther along than they were,” James Freis, a former chief of Treasury’s Financial Crimes Enforcement Network who is now a partner at Cleary Gottlieb Steen & Hamilton LLP in Washington, said in an interview before the hearing. “Compliance in the past was considered to be kind of a back-office issue.”

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Fed Devoting ‘Substantial Resources’ to Bank Secrecy Act

The Federal Reserve has issued 113 enforcement actions relating to the Bank Secrecy Act, the Treasury’s Office of Foreign Assets Control compliance in past five years, Fed Governor Jerome Powell said in prepared testimony for Senate Banking Committee hearing.

The Fed has levied “hundreds of millions of dollars in penalties” and brings “every instance of an anti-money laundering deficiency or violation” to the attention of Treasury’s Financial Crimes Enforcement Network. It also shares information with the Justice Department, state authorities and federal banking agencies.

Compliance Action

Fed Stress Tests Show 17 of 18 Banks Weathering Severe Slump

The Federal Reserve said 17 of the 18 largest U.S. banks could withstand a deep recession and maintain capital above a regulatory minimum, a sign of how higher standards and supervisory prodding are strengthening the financial system.

Only Ally Financial Inc., the auto lender majority-owned by U.S. taxpayers, fell below a 5 percent Tier 1 common ratio, a regulatory minimum and measure of financial strength, according to data released yesterday by the central bank in Washington. Morgan Stanley showed a minimum Tier 1 common ratio of 5.7 percent in the test and Goldman Sachs Group Inc. a ratio of 5.8 percent.

Since the 2008-2009 financial crisis, U.S. regulators have tried to minimize the odds of another taxpayer rescue, compelling banks to retain some earnings and reinforce their buffers against possible losses. New international and domestic banking rules are also guiding banks toward stronger capitalization.

Ally disputed the Fed’s results, calling the analysis “inconsistent with historical experience” and “fundamentally flawed.”

Citigroup Inc., the only U.S. bank among the six biggest to have its capital plan rejected last year, said yesterday that it asked the Fed for permission to repurchase $1.2 billion of shares without seeking a dividend increase.

The bank’s submission “underlines management’s commitment to build and sustain robust levels of capital,” Citigroup said in a presentation on its website. “At the core of Citi’s capital assessment framework is a focus on safety, soundness, credibility and confidence.”

Spokesmen for other banks declined to comment on their firms’ views of the Fed’s estimates or didn’t respond to requests for comment.

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Banks Said to Weigh Disregarding Fed by Disclosing Dividends

The largest U.S. banks are weighing whether to disregard a Federal Reserve request and announce their dividend plans shortly after the central bank’s stress tests are released, people with knowledge of the process said.

The Fed has asked 18 firms, including JPMorgan Chase & Co. and Goldman Sachs Group Inc., to wait until next week, even though the lenders were expected to get preliminary word yesterday about whether their capital plans were approved. Bank executives are concerned that investors could be confused and are considering whether securities laws may require prompt disclosure of their plans for dividends and share repurchases, the people said.

The debate reflects pressure from stockholders to restore dividends and buybacks to levels that prevailed before the 2008 credit crisis, when payouts were cut to token amounts to preserve capital. Now, after the second-most profitable year on record for U.S. banks, investors in the six largest lenders are anticipating increases that could total $41 billion.

The U.S. Securities and Exchange Commission requires that once material nonpublic information has been shared with a subset of market participants, it must be released so that no one gets an unfair advantage.

Bank lawyers are pressing management to disclose plans this week to avoid running afoul of securities laws, according to one of the people. Some bankers are resisting because the Fed results will be preliminary and regulators could still change their minds, according to three people, who asked for anonymity because the discussions are private.

The banks’ dilemma stems from the latest round of Fed stress tests. Banks are allowed to disclose their own report cards showing how they think they fared under the stress tests. They’re required to release those assessments by March 31.

Spokesmen for the six biggest banks -- JPMorgan, Bank of America Corp., Citigroup Inc., Wells Fargo & Co., Goldman Sachs and Morgan Stanley -- said their companies had no comment on their payouts. The Fed’s Barbara Hagenbaugh declined to comment.

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Terrell Owens Adviser Banned After NFL Players Lose $40 Million

Jeffrey Rubin, a Florida broker, was barred from the securities industry after more than 30 National Football League players including Terrell Owens lost at least $40 million on an Alabama casino project that went bankrupt.

The Financial Industry Regulatory Authority, Wall Street’s self-funded overseer, said in a statement yesterday that one of Rubin’s clients put the majority of his cash into the project and lost about $3 million. Finra didn’t say which players were involved. Owens, the former Dallas Cowboys wide receiver, and Jevon Kearse, the former Philadelphia Eagles defensive end nicknamed “The Freak,” were among those who lost money, according to their lawyers.

Rubin, 38, agreed to the ban without admitting to Finra’s charges. Patricia Christiansen, Rubin’s lawyer in West Palm Beach, Florida, declined to comment.

Academic Use of CFTC’s Private Derivatives Data Investigated

The top U.S. derivatives regulator has suspended a program of visiting academic researchers over concerns about the handling of confidential trading data.

The Commodity Futures Trading Commission said in a statement March 6 that it began an internal management review and asked the agency’s inspector general to investigate its oversight of data used to research issues including high-frequency trading.

The commission’s concerns were initially triggered by an outside person who raised questions about academic research that referenced CFTC data, according to the statement.

The agency in December began looking at the role of non-public data in the research program, which is aimed at studying markets the CFTC regulates. The program was suspended and the agency is barring anyone other than full-time employees from access to the data, according to the statement.

Andrei Kirilenko, who oversaw the program while at the CFTC’s Office of Chief Economist, didn’t respond to a request for comment.

CFTC Chairman Gary Gensler also asked the agency’s internal watchdog to conduct a review.

The agency didn’t identify the research that sparked its concerns.


Ex-Legal & General Trader Milsom Gets 2 Years for Deal Tips

A former Legal & General Group Plc equities trader was sentenced to two years in prison for passing inside information on block trades 28 times to an independent stockbroker, giving the U.K. finance regulator the first jail term tied to its largest-ever insider-trading case.

Paul Milsom, 45, pleaded guilty in January to one count of passing inside information from October 2008 until March 2010 to Graeme Shelley, an independent broker who previously worked at Novum Securities Ltd. Shelley was charged with insider trading in companies including broadcaster ITV Plc and hasn’t yet entered a plea. He is scheduled to appear at the same court on April 9.

The case is part of the investigation into the front-running of block trades, known as Operation Tabernula, Latin for little tavern. The regulator charged five other individuals last year in the case, which it has called its “largest and most complex insider dealing investigation to date.”

Milsom received about 40 percent of the profits and Shelley took the rest, Neil Saunders, a lawyer for the FSA, said.

Legal & General said previously that it assisted the FSA and that Milsom wasn’t in control of any client funds.

Simon Ray, a lawyer for Milsom, said his client is remorseful and has spent the time since his arrest arranging his finances so he could pay back the full amount that he made.

To contact the reporter on this story: Carla Main in New York at

To contact the editor responsible for this story: Michael Hytha at

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