SEC Proposal, CFTC Rules, BB&T, Monte Paschi: Compliance

U.S. Securities and Exchange Commission Chairman Mary Jo White, responding after system errors caused a three-hour halt on the Nasdaq Stock Market last week, said she will push to adopt proposed automated-trading rules.

The failure that affected Nasdaq’s system for reporting quotes and trades bolsters the case to pass a proposal issued in March, White said in an Aug. 22 statement. Advancing it will require the regulator to face down opposition by exchanges, which have pushed the SEC to limit the scope of the rule, including how much information about glitches they must be provide.

“I will work to advance rules that the commission proposed earlier this year regarding new standards for the trading and other systems that are central to the integrity of our markets,” White said.

White, who told Congress earlier this year that she would scrutinize market stability efforts, also said she would “convene a meeting of the leaders of the exchanges and other major market participants to accelerate ongoing efforts to further strengthen our markets.”

The failure stemmed from “a connectivity issue between an exchange participant” and the system for disseminating quotes and prices, known as a securities information processor, or SIP, Nasdaq said in an Aug. 22 statement.

The SEC’s proposal, Regulation SCI, would require self-regulatory organizations such as exchanges, clearing firms, and SIPs to adopt policies to prevent failures, stress test their systems to ensure trading continues through a disruption, and report glitches to regulators. The rule also would cover exchange competitors known as alternative trading systems, or dark pools. The SEC has said 10 dark pools are large enough to be subject to the regulation, based on data from 2012.

The rule would replace a voluntary program created after the stock market crash of 1987. Requiring compliance through a rule that would authorize the SEC to respond to compliance failures with penalties such as fines and sanctions.

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Compliance Policy

CFTC Said Near Releasing Plans for Regulating High-Speed Trading

The top U.S. derivatives regulator is poised to announce a range of potential methods for overseeing automated and high-frequency trading, according to four people with knowledge of the matter.

The Commodity Futures Trading Commission’s four members are within days of approving the concept release, according to the people who spoke on condition of anonymity because the document isn’t yet public. Approval of the release, a step prior to proposing new rules, would trigger a public-comment period.

The agency, along with the Securities and Exchange Commission, has scrutinized high-frequency and algorithmic trading since May 6, 2010, when $862 billion in equity value was erased in 20 minutes before share prices recovered. The CFTC’s release, which has been debated for more than a year, would seek comment on new testing, supervision and risk controls for automated trading, CFTC Chairman Gary Gensler said in April.

A number of recent computer malfunctions have raised questions about the reliability of electronic markets.

Dennis Holden, a CFTC spokesman, declined to comment on the concept release. The CFTC has scheduled a technology advisory committee meeting on Sept. 12 to discuss the automated trading concept release as well as swap-trading and record-keeping.

Dijsselbloem Seeks Tighter Leverage Rule for EU Banks Than Basel

Dutch Finance Minister Jeroen Dijsselbloem, who leads the group of 17 euro finance ministers, will seek stricter rules on leverage for banks across Europe.

Banks considered too big to fail should aim for a ratio of capital to assets of at least 4 percent, exceeding the 3 percent threshold proposed by the Basel Committee on Banking Supervision for 2018, Dijsselbloem said in a letter to the Dutch parliament published on the government’s website on Aug. 23.

The Netherlands will seek permission for governments to apply the rules nationally should they fail to agree on the common framework, Dijsselbloem said. “Further steps are needed to make the banking industry more solid and stable to ensure it can perform its role in the economy adequately,” he said.

Regulators are facing resistance from lenders including Deutsche Bank AG and Societe Generale SA, who have issued stock, sold units or hoarded earnings to increase a different measure of financial strength known as the Basel III Tier 1 capital ratio which allows banks to weight their assets according to risk.

The leverage ratio for the biggest U.S. lenders would rise to 5 percent for parent companies and 6 percent for their banking units under a proposal by regulators in July.

BB&T Wins Federal Reserve Approval for New 2013 Capital Plan

BB&T Corp., North Carolina’s second-biggest bank, won the Federal Reserve’s approval for a new 2013 capital plan after its original proposal was rejected in March.

BB&T will continue paying a 23-cent quarterly dividend, the Winston-Salem-based bank said in an Aug. 23 statement. The Fed didn’t object to its payment of preferred dividends, the firm said.

The lender’s initial capital plan was shot down based on a qualitative assessment, the central bank said at the time. The Fed didn’t provide information on how the new plan differed from the earlier one, when it announced its decision in an Aug. 23 statement.

BB&T changed how it calculates risk-weighted assets to conform with regulatory guidance, the Fed said when it objected to the plan on March 14. The adjustments increased those assets and triggered a drop in BB&T’s risk-based capital ratios, according to the Fed.

“In light of several factors, we approached the resubmission conservatively and did not request a further increase in capital deployment at this time,” Chief Executive Officer Kelly King said in the statement.

Regulators have run annual stress tests on the biggest U.S. banks to see how they would weather an economic shock, a strategy to prevent a repeat of the 2008 financial crisis. The banks submit capital plans, which are proposals of dividend payouts and share buybacks that were curtailed during the crisis.

Merkel Says G20 Needs to Push Harder to Control Hedge Fund Risks

German Chancellor Angela Merkel told voters at an election rally that she’ll push for greater regulation of hedge funds at next month’s Group of Twenty meeting.

Addressing a crowd of about 2,000 in the Rhine city of Bonn, Merkel said she hoped European members of the G20 would “speak with one voice” at a meeting in St. Petersburg, amid slow progress on tightening controls on hedge funds. “It’s not enough to regulate just banks but not hedge funds and shadow banks and I’ll fight for that,” she said.

Shanghai Exchange Mulls Circuit Breaker After Everbright Error

The Shanghai Stock Exchange is considering setting up a circuit-breaking mechanism as part of efforts to avoid a repeat of a trading error on Aug. 16 that triggered the biggest swing in its benchmark index since 2009.

The exchange will also study the possibility of allowing the cancellation of trades during incidents similar to the erroneous buy orders made by Everbright Securities Co., an unidentified spokesman from the stock exchange said Aug. 25 in comments on its Weibo, Sina Corp.’s Twitter-like microblogging platform.

Everbright’s 23.4 billion yuan ($3.4 billion) of erroneous buy orders caused the biggest swing in the Shanghai Composite Index since 2009, threatening to further erode confidence in a market that’s tumbled about 40 percent in the past four years. The China Securities Regulatory Commission banned the firm from proprietary trading for three months and pledged to examine risks in brokerages’ trading systems to prevent such an error from happening again.

The exchange is also looking into allowing a “T+0” trading mechanism for the spot market, which allows investors to buy and sell the same stock on the same day, to protect the rights of small investors, according to the spokesman.

China currently operates a “T+1” trading mechanism in the spot market, which is dominated by retail investors, and a “T+0” mechanism in the futures market that is traded mostly by institutional investors.

Under the current system, most individual investors are unable to minimize their losses in the event of a big decline in the benchmark index by selling the stocks that they bought on the same day, while large institutional investors are able to mitigate their risk by hedging their positions on the futures market, according to the spokesman.

Compliance Action

Italy’s Consob Claims Monte Paschi Obstructed Regulator in 2012

Banca Monte dei Paschi di Siena SpA’s management was accused by Italy’s market regulator Consob of obstructing its supervisory duties last year by giving incorrect or incomplete information on past financing and derivatives deals that led to a fraud probe.

Consob wrote in a note to prosecutors in Siena dated Feb. 15 that the bailed-out bank misled the regulator between April 2012 and July 2012 in response to Consob request for information on the financing of Banca Antonveneta SpA’s purchase in 2008, according to a document reviewed by Bloomberg News and originally obtained by consumer group Codacons.

Monte Paschi also withdrew information on a derivative contract with Nomura Holdings Inc. in its communications to the regulator from November 2011 through October 2012, Consob said in the document. The Rome-based agency asked prosecutors to start a probe into alleged regulator obstruction, the document said.

Magistrates are accusing former executives, including ex-chairman Giuseppe Mussari and General Manager Antonio Vigni of withholding information from regulators about how the bank financed its purchase of Antonveneta. Prosecutors are also probing whether former managers at Monte Paschi, which piled up losses of 7.9 billion euros ($10.5 billion) in the past two years, used derivative contracts to obscure more than 700 million euros of losses.

A Consob spokesman declined to comment. A Monte Paschi spokeswoman wasn’t available for a comment.

Six U.K. Furniture Stores Mislead With Fake Prices, OFT Says

Carpetright Plc and five other U.K. carpet and furniture retailers are misleading consumers by inflating prices before offering discounts, the Office of Fair Trading said as it asked the stores to stop the practice.

Using so-called reference pricing, companies tout a “higher artificial price when advertising the current price of a product,” the OFT said in an Aug. 23 statement. “There were a significant number of products amongst certain high street retailers where no sales at all took place at the artificially inflated reference price.”

The regulator has asked the retailers to sign legally enforceable agreements to stop the practice, which it said infringes consumer protection regulations. The allegations come as Britons prepared for a three-day holiday weekend that is traditionally a busy time for sales promotions.

“There is no suggestion in the letter of Carpetright having behaved in a manner which breaches competition law,” the retailer said in a statement after receiving the request from the OFT. The regulator declined to name other retailers who received the letter.

EverBank to Pay Borrowers $37 Million Over Foreclosure Missteps

EverBank Financial Corp. will make $37 million in cash payments to past mortgage borrowers to settle claims it improperly handled foreclosures, the Office of the Comptroller of the Currency said in a statement.

With the agreement, EverBank joins 14 other loan servicers that struck similar deals with the OCC and Federal Reserve this year, including JPMorgan Chase & Co., Bank of America Corp. and Ally Financial Inc.’s GMAC Mortgage, which settled last month. EverBank will send payments ranging from $1,050 to $125,000 to 32,000 eligible borrowers, the OCC said in the Aug. 23 statement.

Settlements reached since January with 15 of the largest U.S. mortgage servicers, totaling more than $3.8 billion, will close the books on complaints over mishandled foreclosures after the 2008 credit crisis. The deal with Jacksonville, Florida-based EverBank ends a process the company agreed to in 2011 to have individual foreclosures reviewed for harm.

The company also agreed to pay about $6.3 million to groups that provide help with affordable-housing and foreclosure assistance.


AMR Seeks November Trial for US Airways Merger Lawsuit

AMR Corp.’s American Airlines and US Airways Group Inc. are seeking a trial as early as Nov. 12 to combat the government’s lawsuit to block their $12.1 billion merger, while the Justice Department is pushing for a February date.

A February trial would “cause serious harm and cannot be justified,” the airlines said in an Aug. 22 joint filing. The carriers and the department asked U.S. District Judge Colleen Kollar-Kotelly in Washington for a hearing to resolve the dispute over timing. The judge set an Aug. 30 hearing to address the trial schedule and asked both sides to file a joint report by Aug. 28.

“The parties’ urgency to complete their transaction is far greater here than in ordinary merger cases,” the airlines said. “American’s ongoing bankruptcy proceedings compound the costs and uncertainties associated with the delays caused by the government’s lawsuit, including approximately $500,000 in bankruptcy-related professional fees alone every day that the bankruptcy continues.”

Gina Talamona, a Justice Department spokeswoman, said by e-mail that “the timing proposed by the department is typical in a merger transaction of this magnitude, which affects so many consumers.”

The suit is an obstacle to American’s plans to exit bankruptcy through a deal that would create the world’s biggest airline. The planned merger, the Justice Department said in its lawsuit filed Aug. 13, would hurt competition in the airline industry and remove the incentive for US Airways to offer lower prices.

The airlines aren’t engaged in talks to settle the lawsuit, a person familiar with the situation said last week.

On Aug. 23 the Justice Department named David Gelfand, a partner at Cleary, Gottlieb, Steen & Hamilton LLP in Washington, as head of litigation for the antitrust division.

The antitrust case is U.S. v. US Airways Group Inc., 13-cv-01236, U.S. District Court, District of Columbia (Washington). The bankruptcy case is In re AMR Corp., 11-bk-15463, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Ex-SAC Manager Martoma Tipped by Second Doctor, U.S. Says

Former SAC Capital Advisors LP manager Mathew Martoma, charged with trading on illicit tips from a physician about an Alzheimer’s drug, was accused by prosecutors of getting inside information from a second doctor.

U.S. Attorney Preet Bharara’s office in Manhattan filed a revised indictment Aug. 22 claiming the second source, identified only as “Doctor-2,” did paid consultations with Martoma, which were arranged through an unidentified “financial services firm” that provided expert networking services to SAC, the hedge fund company founded by Steven A. Cohen.

“Doctor-2 provided confidential information about the drug trial and other Alzheimer’s disease drug trials to Martoma with the expectation that Martoma would assist Doctor-2 in obtaining additional clinical trial business,” according to the new indictment.

The U.S. claims Martoma used the information from the two doctors, who were involved in the trial of bapineuzumab, or “bapi,” to help the hedge fund make $276 million by trading in shares of Elan Corp. and Wyeth. The government has called it the biggest criminal insider-trading case against an individual in history.

Martoma pleaded not guilty to the charges in the superseding indictment during an Aug. 22 hearing before U.S. District Judge Paul Gardephe in Manhattan. He is scheduled to go to trial Nov. 4.

If convicted, Martoma faces as much as 20 years in prison on the securities fraud charges and five years on the conspiracy charge.

The case is U.S. v. Martoma, 12-cr-00973, U.S. District Court, Southern District of New York (Manhattan).

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Apple Duels With U.S. Over E-Book Price-Fixing Remedies

Apple Inc. and the U.S. Justice Department filed dueling proposals for a court order that will cover the company’s conduct in e-book sales after a judge found the government’s original recommendations were too harsh.

Under the department’s revised proposal filed Aug. 23, an injunction against Apple for its role in fixing e-book prices would expire in five years instead of 10 as in the original plan. The U.S. still seeks a court-appointed external antitrust monitor, a measure Apple objects to.

“This is unreasonable and unjustified and exceeds the bounds of even criminal price-fixing cases,” Orin Snyder, a lawyer for Apple, said in an Aug. 23 letter to U.S. District Judge Denise Cote in Manhattan.

“The purpose of the remedy is to fix the competitive problems, restore competition to the marketplace and to prevent the illegal behavior from continuing in the future,” Gina Talamona, a spokeswoman for the Justice Department, said in an e-mail.

Cote ruled after a non-jury trial in July that Apple, the maker of the iPhone and iPad, had conspired with five book publishers to fix e-book prices. At an Aug. 9 hearing on the government’s initial proposal, Cote said she didn’t want to over-regulate Apple’s businesses. She told the parties to discuss new remedies and return for another hearing tomorrow.

The case is U.S. v. Apple Inc., 12-cv-02826, U.S. District Court, Southern District of New York (Manhattan).

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Whitney Says ‘Wouldn’t Want to Be’ JPMorgan Amid Probes

Meredith Whitney, chief executive officer of Meredith Whitney Advisory Group, talks about the shutdown of the Nasdaq Stock Market, regulatory probes of U.S. banks and the outlook for Ben S. Bernanke’s successor at the Federal Reserve.

She speaks with Sara Eisen and Michael McKee in Jackson Hole, Wyoming, on Bloomberg Television’s “Surveillance.”

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Lew Doesn’t Think Nasdaq Halt Had ‘Frightening Aspects’

Treasury Secretary Jacob J. Lew speaks about the Nasdaq Stock Market halt, the U.S. economy and fiscal policy.

Lew, speaking in Mountain View, California, also comments on U.S. banking rules and China’s currency policies.

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