Taxing Severance, Iceland Bank Tax, CFTC: Compliance

The U.S. Supreme Court agreed to consider whether companies and employees must pay Social Security taxes on severance compensation, accepting a case that may force the Treasury to give billions of dollars in refunds.

The justices yesterday said they will hear the appeal from President Barack Obama’s administration in a case involving Quality Stores Inc., once the country’s largest agricultural specialty retailer.

The issue has grown in importance with the layoffs that have accompanied the economic slowdown over the past five years. The administration says that more than 2,400 refund claims, seeking more than $1 billion, are already in the pipeline and those figures will increase.

The question for the Supreme Court is whether severance payments qualify as “wages,” making them subject to tax, under the Federal Insurance Contributions Act, or FICA.

The administration contends that FICA defines “wages” broadly to include compensation for services of any type. The Quality Stores payments were compensation to employees for service they had rendered, U.S. Solicitor General Donald Verrilli argued for the administration.

Quality Stores contends that the payments represented supplemental unemployment compensation, not wages. The payments “are not made for employment but rather for the elimination of employment,” Quality Stores argued in court papers.

The company, which had sales of $1.1 billion in 2000, closed more than 300 stores in 2001 and 2002 and fired its remaining employees, making severance payments to 3,100 people.

The company paid the disputed taxes and then sought a $1 million refund. Some of that money would go to former employees if the company prevails in the case.

The court will hear arguments early next year and rule by July. The case is U.S. v. Quality Stores, 12-1408.

Compliance Policy

BOE May Seek Management Change at Banks Failing Stress Tests

The Bank of England said regulators may take steps to remove bank executives if stress tests reveal weaknesses in their governance and capital-planning processes.

In a discussion paper on planned tests, the BOE said financial institutions should have at least enough capital to absorb losses in a stressed scenario, and that this could be higher than international minimums. Banks that fail may be forced to limit bonuses and dividend payments, issue equity or other capital instruments, or reduce certain risk exposures.

The BOE’s Financial Policy Committee, set up as part of an overhaul of banking regulation, recommended earlier this year that banks be tested for resilience to shocks. The first tests will take place next year and cover Britain’s eight biggest lenders. The central bank said today that institutions are making progress toward meeting regulators’ capital requirements and that it will continue to monitor the situation.

In the discussion paper, the BOE said during previous stress tests, the Prudential Regulation Authority noted “insufficient engagement” by banks’ boards and senior management as well as evidence that the scenarios set by lenders were too weak.

The BOE also said it expects the stress tests to take place on an annual basis. A more frequent program would “entail material resource costs” and could compromise the quality of the process. It also said there are both “benefits and costs” to publishing the detailed results of stress tests. It is seeking responses to its paper by January 2014.

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Dark Pools Face Finra Requirement to Report U.S. Market Share

U.S. securities regulators issued a proposal requiring private venues including dark pools to release more data, including weekly volume reports and disclosures on how much trading of each stock they handle.

The rules, if approved by the U.S. Securities and Exchange Commission, would shed light on operators that have historically faced no obligation to publicly report their market share, so information has either been self-reported or estimated by analysts. The shift applies to dark pools and venues known as alternative trading systems, not the transactions broker-dealers handle within their walls via a process called internalization.

The Financial Industry Regulatory Authority, the private-sector overseer of U.S. brokerages, announced the proposed rules in a filing dated Sept. 29. If approved, Finra would start releasing data to the public on a two- or four-week delay depending on the stock.

Bloomberg News parent Bloomberg LP runs an alternative trading system called Bloomberg Tradebook.

Under existing rules, Finra can’t be sure which private venue handled a given trade. The new system would introduce unique identifier codes for each market.

Finra said it may consider expanding disclosure. The proposed rules would take effect 90 days after publication of a notice announcing SEC approval.

Finra’s decision comes with the SEC poised to issue research from its new system for monitoring markets, including a look at practices that some blame for giving high-speed traders an unfair edge.

SEC Once Slowed by Data Gap to Report High-Speed Trader Research

The U.S. Securities and Exchange Commission will soon issue research from its new system for monitoring markets, including a look at practices that some blame for giving high-speed traders an unfair edge.

The reports will use data from the SEC’s Midas market-surveillance system, according to two people briefed on the plans. The findings could help inform whether new regulations are needed to address strategies such as canceling a high percentage of orders, said the people, who asked not to be identified because the plan isn’t ready to be announced.

The SEC lacked such a tool during the May 2010 plunge known as the flash crash, when the agency was criticized for taking four months to report the cause of turbulence that erased about $862 billion in U.S. equity value in minutes before share prices recovered.

The SEC acquired its Midas system last year from high-frequency trading firm and technology vendor Tradeworx Inc. Midas, an acronym for Market Information Data Analytics System, collects about 1 billion trading records a day from 13 U.S. equity exchanges, which sell similar data to high-speed firms and brokers that want information milliseconds before the public.

Midas provides the regulator with more complete data than traders and researchers can see from the public feeds operated by NYSE Euronext and Nasdaq OMX Group Inc., SEC Associate Director Gregg E. Berman has said.

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Iceland Sees Budget Surplus in 2014 After Taxing Failed Banks

Iceland’s government predicted it will be able to balance its budget next year raising taxes on the lenders that failed in its 2008 collapse.

The budget will show a surplus of 500 million kronur ($4.2 million) in 2014, the Finance Ministry in Reykjavik said yesterday. Income will reach 587.6 billion kronur and spending

587.1 billion kronur. The ministry expects a surplus of 2.6 billion kronur, or 0.1 percent of gross domestic product, in

2015. That compares with an estimated 31.1 billion-krona deficit this year.

The new government, which was elected in April on pledges to boost economic growth and complete the island’s re-emergence from the 2008 economic collapse, also said it will cut income taxes next year.

Iceland is struggling to remove capital controls put in place in 2008 after the krona plunged as much as 80 percent against the euro offshore. The restrictions are stopping as much as $8 billion in kronur assets from being exchanged, according to an estimate by Arion Bank hf.

The government will raise the tax on bank assets to 0.145 percent, which will also be imposed on the failed banks in winding-up proceedings, increasing revenue by 13 billion kronur. Kaupthing Bank Hf, Glitnir Bank Hf and Landsbanki Islands hf all defaulted on a combined $85 billion in 2008, forcing the island to seek an economic bailout.

Finance Minister Bjarni Benediktsson introduced his proposed 2014 budget to parliament yesterday.

Compliance Action

Whistle-Blower Awarded $14 Million in Largest-Ever SEC Payout

The U.S. Securities and Exchange Commission awarded more than $14 million to a whistle-blower whose tip allowed regulators to recover investor funds through an enforcement case, the agency said in a statement yesterday.

The award is the largest ever made by the SEC, which was given authority in the 2010 Dodd-Frank financial regulation law to reward people who come forward and provide original information that leads to successful enforcement actions. The agency can issue awards that are between 10 and 30 percent of the money collected from the wrongdoer.

The SEC’s announcement didn’t name the whistle-blower or the case that resulted from the tip.

The agency received 3,001 whistle-blower complaints last year.

Japan to Raise Limits on ATM Fees using Sales Tax, Jiji Says

Japan’s Financial Services Agency will begin amending regulations that set limits on automated teller machine fees because the government has decided to raise the sales tax, Jiji reported, without citing anyone.

Fee limits are to be raised to 108 yen from 105 yen on deposits or withdrawals of 10,000 yen or less. Fee limits will be raised to 216 yen from 210 yen on transactions of more than 10,000 yen, Jiji reported.

Prime Minister Shinzo Abe said yesterday the government will raise the sales tax to 8 percent in April from the current 5 percent.

South Africa Investigates 12 Possible Cases of Insider Trading

The South Africa Financial Services Board is investigating 12 possible cases of insider trading, according to an e-mailed statement from the regulator.

The board is also looking into eight possible cases of market manipulation and three possible instances of false or misleading reporting, the regulator said in the statement. The probes into trading concern shares on the Johannesburg Stock Exchange.


Reserve Fund Judge Imposes $750,000 in Civil Penalties

Two companies that managed Reserve Primary Fund, the $62.5 billion money-market fund that “broke the buck” and failed in 2008 when its net asset value fell below $1, were ordered to pay part of $750,000 in civil penalties.

U.S. District Judge Paul Gardephe in Manhattan Sept. 30 imposed a $100,000 fine against former Reserve president Bruce R. Bent II and fines of $325,000 each on Reserve Management Co. Inc. and Resrv Partners Inc. The SEC had asked for more than $130 million in penalties.

In a series of rulings in the case Sept. 30, Gardephe declined to order Bent and the two companies to disgorge any money and said he won’t enter a permanent order barring them from violating securities laws in the future.

In November, a jury in Manhattan found Bruce Bent II negligent on a single claim of violating securities law while absolving his father, Bruce R. Bent, of all claims in the SEC’s suit. The jury of six women and one man cleared both Bents of claims they defrauded investors.

Gardephe on Sept. 30 also denied the SEC’s request to overturn jury findings in favor of RMCI and Resrv Partners or to order a new trial.

“We are gratified that the SEC’s motion for a new trial was denied and that the penalty assessed by the judge is less than 1 percent of what the SEC sought,” Richard A. Mahony, a spokesman for the Bents, said in an e-mail. “Investors have already received more than 99 percent of their investment from


Christina A. D’Amico, a spokeswoman for the SEC, said the agency is “pleased the court rejected the defendants’ motion to overturn the jury’s verdict that the corporate entities committed fraud on investors in the wake of the Lehman collapse.”

The case is SEC v. Reserve Management Co., 09-cv-04346, U.S. District Court, Southern District of New York (Manhattan).

Fabrice Tourre Asks for Reversal, New Trial in SEC Case

Fabrice Tourre, the ex-Goldman Sachs Group Inc. vice president found liable for his role in a failed $1 billion investment, asked for a reversal of the verdict and a new trial of the U.S. Securities and Exchange Commission case.

Tourre, 34, is entitled to a judgment in his favor under civil rules if a court finds that a reasonable jury wouldn’t perceive enough evidence against him, one of his lawyers, Pamela Chepiga, said in a memorandum filed with U.S. District Court in Manhattan Sept. 30.

Chepiga said in a filing asking U.S. District Judge Katherine Forrest to dismiss the SEC claims that the agency failed to show evidence of liability, including “any intent to defraud.”

The SEC accused Tourre, a native of France, of intentionally misleading investors in a subprime mortgage entity called Abacus about the role played by the Paulson & Co. hedge fund, which helped choose the portfolio of securities and then made a billion-dollar bet it would fail.

Jurors in the case determined Aug. 1 that Tourre couldn’t hide behind his age and relative lack of stature within Goldman Sachs to avoid responsibility. Tourre faces unspecified fines and potential exclusion from the securities industry.

The case is SEC v. Tourre, 10-cv-03229, U.S. District Court, Southern District of New York (Manhattan).


Banks May Need Capital Backstops for Stress Test, Enria Says

European banks may need to raise capital after combined stress tests and asset quality reviews from the European Banking Authority and European Central Bank next year, said Andrea Enria, the EBA chairman.

The EBA’s stress test and ECB’s asset quality review will “run in the same time,” Enria told lawmakers in Brussels Sept. 30, with the two institutions preparing a “single outcome” for each bank.

As the ECB prepares to take over supervision of all euro-area lenders in 2014, it will begin a three-phased analysis of the institutions coming under its umbrella. As laid out by Executive Board member Yves Mersch in August, the central bank will start with a risk review before analyzing banks’ balance sheets and conducting stress tests in collaboration with the London-based EBA.

The Single Supervisory Mechanism is a step toward a planned European banking union that is supposed to sever the link between banks and sovereign debt.

The quality of next year’s European bank stress tests depends on how well the European Central Bank carries out its review of lenders’ balance sheets, Enria said, responding to questions from lawmakers in the European Parliament Sept. 30.

Enria, previously head of the supervisory regulations and policies department at the Bank of Italy, said he’s “still dreaming of the moment when we will have a European backstop in place.”

Vitol Sees U.S. Investment Banks Diminishing Commodity Activity

European Union draft proposals on derivatives regulation have raised concerns that commodity trading liquidity could worsen significantly, Vitol Group CEO Ian Taylor said at the Oil & Money conference in London.

“I worry it will make our business much more difficult and probably push up prices,” Taylor said.

“The U.S. should scrap Jones Act and allow crude oil exports,” Taylor added.

Comings and Goings

CFTC Enforcement Chief David Meister to Step Down This Month

The U.S. Commodity Futures Trading Commission’s David Meister, the enforcement chief who pursued investigations of MF Global Holdings Ltd. and interest-rate manipulations, plans to step down this month.

Gretchen Lowe, the enforcement division’s chief counsel, will serve as acting director after he departs, the CFTC said yesterday in a statement. Meister, who previously worked as a federal prosecutor and attorney in private practice, hasn’t announced other plans, said Steve Adamske, an agency spokesman.

The probe into manipulation of the London interbank offered rate and other benchmarks was among the widest-ranging in CFTC history. The agency began the investigation in 2008 and, on Meister’s watch, was among regulators that reached more than $2.5 billion in settlements with Barclays Plc, Royal Bank of Scotland Group Plc, UBS AG and ICAP Plc.

Meister, praised by CFTC Chairman Gary Gensler as tough and fair, said in the statement that the time had come to return full time to his family in New York.

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