High-Frequency, Private-Equity Fees, Basel: Compliance

Scrutiny of high-frequency trading is stirring memories among investment veterans of earlier scandals when the government targeted price-fixing and fraud in U.S. equity markets.

Michael Lewis’s book “Flash Boys” and probes by the New York attorney general and Federal Bureau of Investigation are spurring outcry from Washington to Newport Beach, California, as investors and politicians ask whether exchanges are rigged. Nasdaq OMX Group Inc. and IntercontinentalExchange Group Inc. have fallen at least 8.8 percent in 2014 after each posted their best annual gains since 2007 and 2006, respectively.

The pitch rose at the end of last week as Pacific Investment Management Co.’s Bill Gross warned on Bloomberg Radio with Tom Keene that speed traders give the equity market a “negative cast” and investor Mario Gabelli said on Bloomberg Television that it rips off consumers. The week topped off on April 4 when U.S. Attorney General Eric Holder promised an investigation into whether HFT violates insider-trading laws.

All the attention reminded hedge fund manager Buzzy Geduld, 70, of an earlier era when allegations of misconduct by Nasdaq traders and New York Stock Exchange floor specialists shook public confidence.

Spokesmen for Nasdaq OMX and IntercontinentalExchange’s NYSE declined to comment on parallels between HFT and earlier investigations.

Advocates for HFT say its ability to reduce the so-called market spreads lowers costs to investors and shows how much better markets are today compared with the past.

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Basel Findings of U.S.-EU Bank Rule Compliance Set for September

The Basel Committee on Banking Supervision said it’s seeking to publish by September the findings of probes into how well the European Union and U.S. have implemented international bank capital rules.

Reports will follow an assessment of Canada to be published in June, the Basel group said in a statement on its website.

Compliance Action

Bogus Private-Equity Fees Said Found at 200 Firms in SEC Review

A majority of private-equity firms inflate fees and expenses charged to companies in which they hold stakes, according to an internal review by the U.S. Securities and Exchange Commission, raising the prospect of a wave of sanctions by the agency.

More than half of about 400 firms that the SEC staff examined have charged unjustified fees and expenses without notifying investors, according to a person with knowledge of the SEC’s findings who asked not to be named because the results aren’t public. While some of the problems appear to have resulted from error, some may have been deliberate, the person said.

Private-equity firms buy companies using a combination of investor capital and debt, with the goal of selling them or taking them public for a profit.

The SEC’s review of the $3.5 trillion industry began after the 2010 Dodd-Frank Act authorized greater oversight of money managers, putting many firms under the agency’s scrutiny for the first time.

John Nester, an SEC spokesman, declined to comment on the exams.

Retail Investment Firms Failed to Advise on Costs, U.K. FCA Says

The U.K. Financial Conduct Authority said 73 percent of firms didn’t give clients required information on how much advice would cost them.

The regulator also found that 34 percent of firms didn’t give clients a clear explanation of the service they were offering and the clients’ right to cancel it, the FCA said in a thematic review published on its website.

More than half of the firms failed to say how much additional charges would cost.


SEC Goldman Lawyer Says Agency Too Timid on Wall Street Misdeeds

James Kidney, a Securities and Exchange Commission trial attorney who retired this month after serving since 1986, said his bosses were too “tentative and fearful” to bring many Wall Street leaders to heel after the 2008 credit crisis, echoing the regulator’s outside critics.

Kidney, 66, offered the critique in a speech at his goodbye party. His remarks hit home with many in the crowd of SEC lawyers and alumni thanks to a part of his resume not publicly known: He had campaigned internally to bring charges against more executives in the agency’s 2010 case against Goldman Sachs Group Inc.

“On the rare occasions when enforcement does go to the penthouse, good manners are paramount,” Kidney said, referring to the executive suite. “Tough enforcement, risky enforcement, is subject to extensive negotiation and weakening,” he said, according to a copy of his remarks obtained by Bloomberg News.

SEC spokesman John Nester declined to comment.

Andrew Williams, a spokesman for Goldman Sachs, declined to comment.

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