CoCos Rule-Sale, U.K. Fund Bills, Money Funds: Compliance

Banco Santander SA is selling $1.5 billion of contingent convertible notes to comply with new capital regulations, in its first sale of the riskiest bank debt in the U.S. currency.

Spain’s biggest bank will price the additional Tier 1 notes to yield 6.375 percent, according to a person with knowledge of the matter, who asked not to be identified because they’re not authorized to speak about it. The undated notes will convert to equity if the bank’s capital falls to 5.125 percent of assets weighted by risk and the company has the right to buy them back after five years, the person said.

Sales of the bonds that can be written off or converted to shares in a crisis are increasing as lenders move to comply with new European Union regulations that aim to pass bailout costs from troubled banks to investors rather than taxpayers.

Compliance Policy

Fund Managers’ Complex Bills Targeted in Regulatory Review

The U.K. markets regulator is targeting the way asset managers bill clients with a second review of the industry after the watchdog said funds shouldn’t pass all their research costs on to customers.

The Financial Conduct Authority issued rules yesterday barring investment managers from using dealing commissions to bill for anything beyond the cost of executing orders, while allowing costs for “substantive research” to be passed on, after finding clients were often overcharged. As soon as next week, the FCA may recommend greater fee transparency following a yearlong review of the industry.

Yesterday’s rule change allows fund managers to bill clients for research through the trading commission if it is original, has critical analysis and adds value to trading decisions. The FCA estimates that trading commissions total about 3 billion pounds ($5.1 billion) a year in the U.K., half of which has been allocated to research.

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Muni-Bond Regulator to Seek U.S. SEC Approval of Pricing Rules

A regulator of the $3.7 trillion municipal-debt market will seek approval for rules aimed at preventing investors from being shortchanged by brokers when trading state and local-government bonds.

The Municipal Securities Rulemaking Board, which drafts regulations for the bond industry, said in a statement May 6 that it will ask the U.S. Securities and Exchange Commission to impose the requirements on trading firms.

The rules, proposed in February, would require brokers to seek the most favorable prices possible while trading on behalf of individual investors in the municipal-bond market, which lacks a centralized exchange. The MSRB said the step may boost competition and lower trading costs for investors.


Broker Role as Order Router Should Be Reviewed, SEC’s Stein Says

Investors should be given more information about where brokers send a stock order to be filled and whether that decision yielded the best price, a member of the U.S. Securities and Exchange Commission said yesterday.

Additional disclosure would help investors know whether their broker is serving their best interest or routing orders to avoid fees or capture rebates, Commissioner Kara M. Stein said at a Washington conference sponsored by the Council of Institutional Investors. The SEC is weighing such a plan as part of a review of how stocks are traded, according to three people familiar with the matter.

The SEC is facing pressure to overhaul trading rules after publication of “Flash Boys,” by Michael Lewis, a columnist for Bloomberg View. The book alleged that high-frequency traders benefited from exchange rules to take advantage of slower investors.

U.S. Risk Council Says Money Funds Can Be Vulnerable During Runs

A U.S. council of regulators said money-market funds can be vulnerable to runs during periods of volatility when shareholders perceive “worrisome risk exposures” in the funds, the group said in a report.

The Financial Stability Oversight Council described the findings in its annual report released May 7 in Washington.

FSOC has been studying whether the largest asset managers, such as BlackRock Inc. and Fidelity Investments, could be systemically important and need Federal Reserve supervision. Any decision on whether to designate asset managers as potentially risky may be months away.

The Securities and Exchange Commission is weighing a rule that could require a class of money-market funds to float their share price, abandoning a stable $1 target that makes them appear riskless to many investors.

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