White Testimony, Basel Leverage, Money Funds: Compliance

Mary Jo White, President Barack Obama’s choice to run the U.S. Securities and Exchange Commission, told lawmakers that her work for Wall Street firms won’t affect her ability to be a zealous advocate for investors.

The scope of any conflicts of interest is “quite narrow” and would mostly affect SEC enforcement cases, White, 65, said yesterday at a Senate Banking Committee hearing on her nomination. Her participation in writing regulations will be unaffected by her previous representation of clients such as JPMorgan Chase & Co., Morgan Stanley and UBS AG as a defense lawyer, she said.

White told the panel she was “exceptionally aggressive” against large institutions when she was a U.S. attorney from 1993 to 2002, and said public investors “should know I am their advocate.”

“While I will have recusals, as many nominees, mine are not out of the ordinary in scope,” White said. “In general, I’m not recused from any SEC rulemaking or policy matters.”

White drew bipartisan support at the hearing before the Democrat-led panel. Senator Charles Schumer, a New York Democrat, trumpeted White’s record as a former U.S. attorney who prosecuted terrorists, mobsters and inside traders.

She told the committee that the SEC, not the banking regulators who are members of the Financial Stability Oversight Council, should write new rules for money-market mutual funds.

Money funds are “in the heartland of the SEC’s expertise,” she said.

White was the focus of most questions at the hearing, where senators also questioned Richard Cordray, Obama’s nominee to be director of the Consumer Financial Protection Bureau. Republicans are blocking full Senate consideration of Cordray, looking to restructure the bureau’s leadership and gain oversight over its budget before voting on a permanent director.

Senate Republicans haven’t publicly expressed reservations about White’s nomination.

For video of the hearings, click here.

Compliance Policy

Fidelity Sees Consensus on Limiting Scope of Money-Fund Overhaul

Fidelity Investments, the biggest U.S. manager of money-market mutual funds, said there is growing agreement among company leaders and regulators to limit any new rules for the products to those eligible to buy corporate debt.

Fidelity, JPMorgan Chase & Co. and BlackRock Inc. are among companies that have urged regulators to exclude money-market mutual funds that invest solely in government-backed or municipal securities if they introduce new rules for the product that houses $2.6 trillion in assets.

The presidents of all 12 Federal Reserve regional banks also signed a letter on Feb. 12 that, while calling for tougher rules, said changes should initially focus on so-called prime funds, or those that can buy corporate debt.

The U.S. Securities and Exchange Commission is expected to take up as early as this month a proposed overhaul being prepared by the agency’s staff. Commissioners are under pressure from the Financial Stability Oversight Council, a panel of senior regulators charged under the Dodd-Frank Act with identifying systemic financial risks, to re-examine proposals they declined to take up in August.

Regulators have debated how to make money funds safer since the September 2008 collapse of the $62.5 billion Reserve Primary Fund.

The biggest money-fund providers fought a 2010 proposal by former SEC Chairman Mary Schapiro that introduced minimum liquidity levels. Schapiro later shelved her plan.

For more, click here.

Banks’ Debt Addiction Said to Face Scrutiny at Basel Group

A planned international limit on bank indebtedness will be on the agenda of every meeting of the Basel Committee on Banking Supervision this year as regulators seek to wean lenders off their addiction to debt, according to three people familiar with the talks.

Regulators are preparing to fight lenders over the details of the so-called leverage ratio as they seek to toughen rules on the minimum amount of capital they must use to back their investments. The Basel group, which brings together supervisors from 27 nations, will meet in the Swiss city today, according to the people, who asked not to be identified because the meetings are confidential.

Concern over how banks calculate reserves has led U.K. bank regulator Adair Turner and U.S. Federal Deposit Insurance Corp. board member Jeremiah Norton to call for tougher leverage ratios. Global supervisors in 2010 included a draft leverage ratio in an overhaul of rules, known as Basel III, drawn up in response to the financial crisis that followed the collapse of Lehman Brothers Holdings Inc.

Leverage ratios force banks to hold capital equivalent to a percentage of the value of their assets. Settling the details of the leverage ratio is a priority for the Basel committee because of a Jan. 1, 2015, deadline for large banks to begin disclosing how well they measure up to the rule. The Basel leverage ratio would be a minimum standard for banks from 2018, with national regulators free to set tougher rules.

Work on the measure should “be largely completed this year,” Stefan Ingves, the Basel committee’s chairman, said in a speech in Basel yesterday. The group’s activities will be focused on defining how assets are captured by the leverage ratio, he said.

For more, click here.

Swap Traders Seeking Help in Exiting Positions Under Dodd-Frank

New rules mandating that swaps be backed by clearinghouses and executed on regulated systems are complicating investors’ ability to exit the derivatives trades, according to money manager AllianceBernstein Holding LP.

Regulation created by the 2010 Dodd-Frank Act will require that most swaps be traded on exchanges or similar electronic systems known as swap-execution facilities. Investors who want to terminate contracts that are no longer the most actively traded, such as a five-year interest-rate swap with only 3 1/2 years left before expiration, are still required to use those systems rather than negotiate a price directly with dealers as they typically would.

Reforms related to swap-execution facilities and other changes to the $639 trillion over-the-counter derivatives market will be discussed this week in Boca Raton, Florida, at the annual conference of the Futures Industry Association. Executives from BlackRock Inc., Nasdaq OMX Group, Vanguard Group, and trueEX, are expected to speak in panel discussions.

Under the new regulations, the process for exiting a portfolio of such trades should be similar to how block futures trades are negotiated off exchange, Sunil Hirani, chief executive officer of trueEX, said in a telephone interview.

The CFTC and U.S. Securities and Exchange Commission are writing Dodd-Frank rules for swap execution facilities that compete with exchanges, including those operated by CME Group and Intercontinental Exchange Inc., for trading of interest rate, credit and other swaps. The rules are meant to reduce risk and boost transparency.

The five-member CFTC has been negotiating since late last year on final regulations for trading platforms.

ASIC Welcomes ASX’s Updated Guidance on Continuous Disclosure

ASX Ltd., Australia’s primary stock exchange, and the Australian Securities & Investments Commission share responsibility for regulating the continuous disclosure framework that applies to ASX-listed entities.

Updated rules were lodged with ASIC today, ASIC said on its website. Unless disallowed, ASIC understands ASX will have the updated rules and the guidance note take effect about May 1.

Compliance Action

Deutsche Bank Top Tax Manager Said to Be Suspect in CO2 Probe

Deutsche Bank AG’s head of tax for continental Europe is among the suspects in Frankfurt prosecutors’ investigation of carbon-emission certificate trades, two people familiar with the matter said.

The executive and a tax-compliance manager are being probed in the case over evading value-added tax, said the people, who declined to be identified because the suspects haven’t been disclosed publicly. German financial regulator Bafin is also looking into the case, they said.

Investigators in December raided Deutsche Bank’s Frankfurt headquarters, arresting five employees.

Deutsche Bank spokesman Ronald Weichert said the bank was cooperating with prosecutors and declined to comment on the identity of any suspects. An e-mail and call to the tax executive wasn’t immediately returned.

The lender, its executives and employees have denied the allegations. The five arrested employees were released within a week.

Bafin asked Frankfurt prosecutors to give them access to their case files, according to one of the people. While the request was denied, the regulator asked the bank to be kept updated, the person said. A request for information is the first step the regulator takes when an issue needs closer scrutiny.

Bafin spokesman Sven Gebauer declined to comment, as did Guenter Wittig, a spokesman for Frankfurt prosecutors.

For more, click here.

U.K. Agency Probing Autonomy Says Software Use May Pose Conflict

U.K. fraud prosecutors’ use of Autonomy Corp. software may present a conflict of interest that could stop their investigation of claims by Hewlett-Packard Co. that Autonomy managers misrepresented results.

The U.K. Serious Fraud Office, which informed Hewlett-Packard last month that it had opened an investigation into allegations of wrongdoing against Autonomy managers, is “making inquiries” on whether they can continue the probe because it uses Autonomy’s Introspect product, the agency said yesterday.

The U.K. probe follows one by the U.S. Justice Department, Hewlett-Packard said in a filing March 11 with the U.S. Securities and Exchange Commission.

Hewlett-Packard booked an $8.8 billion writedown last year tied to its $10.3 billion 2011 buyout of Autonomy. It said more than $5 billion of that resulted from the U.K. company’s accounting practices and that about $200 million of Autonomy’s revenue was prematurely or improperly recorded.

Former Autonomy executives, including Mike Lynch, the ex-chief executive officer, sought a meeting with the SFO in December, and the office later contacted them, according to a representative of Lynch.

“We had written to them in December to request a meeting because we want to know the substance of HP’s vague allegations and want to have a chance to respond to them,” the spokesman said. “We continue to have confidence that HP’s allegations are without merit.”

David Jones, a spokesman for the SFO, confirmed that the agency opened an investigation after HP gave it a file of evidence in November. The formal probe was opened last month, he said. He declined to identify which individuals are under investigation.

For more, click here.


Germany Risks EU Fine for Failing to Comply With VW Law Ruling

Germany may be forced to pay millions of euros in penalties by the European Union’s highest court for failing to change its so-called Volkswagen law to conform to EU rules.

Germany’s changes to a law that shielded Volkswagen AG from takeovers since 1960 continue to violate the bloc’s rules because government veto powers at the company still exist, the European Commission argued in a lawsuit at the EU Court of Justice. Instead of scrapping three provisions that were ruled unlawful by the court, the country abolished two and kept the blocking minority, the commission said.

The EU’s top court in October 2007 overturned the law that protected Wolfsburg, Germany-based Volkswagen by capping shareholder’s voting rights at 20 percent, regardless of the size of their holdings. That matched the stake held during the previous four decades by the German state of Lower Saxony, where Wolfsburg is located. Germany now faces a fine for failing to end Lower Saxony’s blocking minority at the carmaker when it modified the law in 2008.

The commission, which won the 2007 case, sued Germany in 2012 again over its “piecemeal approach” to changing the law. The EU executive authority wants Germany to pay a penalty of 31,114 euros ($40,535) a day from the 2007 ruling until it complies or until the ruling in yesterday’s case, and a 282,725-euro daily fine from the ruling in yesterday’s case until the VW law is in line with EU rules.

Nils Wahl, an advocate general that advises the EU court, said he expects to finish his non-binding opinion on the case by May 29. Court rulings normally follow within four to six months after an opinion.

The case is: C-95/12, European Commission v. Federal Republic of Germany.


Bair Comments on Outlook for Banking Regulation, Taxation

Former Federal Deposit Insurance Corp. Chairman Sheila Bair talked about the outlook for bank regulations and tax changes. She also discussed U.S. House Budget Committee Chairman Paul Ryan’s budget plan for fiscal year 2014.

Bair, currently a senior adviser at Pew Charitable Trusts, spoke with Erik Schatzker and Stephanie Ruhle on Bloomberg Television’s “Market Makers.”

For the video, click here.

Levitt Calls Mary Jo White ‘Right’ Person to Head SEC

Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission, talked about the prospects that Mary Jo White will be confirmed as head of the SEC.

White, former U.S. attorney for the Southern District of New York, faced skepticism from senators about her ties to Wall Street. Levitt, a Bloomberg LP board member, spoke with Bloomberg Television’s Erik Schatzker.

For the video, click here.

U.K. FSA’s Wheatley Says Concerned by Wealth-Management Review

The U.K. finance regulator’s recent review of sales practices at six retail banks’ wealth-management divisions is “worrying,” said Martin Wheatley, a managing director at the agency.

The Financial Services Authority has “concerns both over the suitability of investment portfolios, as well as banks’ ability to demonstrate suitability, in a significant number of customer files,” Wheatley said in prepared remarks for a London speech. “We are even more worried that the firms’ own compliance departments identified a much smaller number.”

The FSA will be replaced on April 1 by the Financial Conduct Authority, which will have an increased focus on protecting British consumers, and the Prudential Regulation Authority, which will become a unit of the Bank of England, keeping watch on systemic financial issues.

Wheatley, who will lead the FCA, said he will set up a wealth-management supervision department to increase oversight.

Comings and Goings

Putin Names Kremlin Aide Nabiullina to Head Russian Central Bank

Elvira Nabiullina, a Kremlin aide and former economy minister, was nominated by President Vladimir Putin to head the Russian central bank, the first woman to take over a Group of Eight monetary authority.

Putin said yesterday that he would submit Nabiullina’s nomination to lawmakers. Chairman Sergey Ignatiev, 65, must retire June 24 when his third and final term ends.

As the first new choice in more than a decade, Nabiullina, 49, will need to cope with a deteriorating economy, accelerating inflation and the biggest-ever expansion of the regulator’s remit to create a U.K.-style mega-regulator.

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