SEC Rules, Madoff Mercy, Threatened Reforms: Compliance

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The U.S. Securities and Exchange Commission is preparing a sweeping set of rules to target mutual funds whose rapid growth and migration into more complex strategies could pose risks to the financial system, the agency’s chairman said.

The measures outlined yesterday by Mary Jo White at an industry event in New York are the fullest description yet of how the SEC plans to address concerns that regulations haven’t kept pace with the evolution of the $30 trillion industry. Among the rules being developed is a plan to limit funds’ investments in harder-to-sell assets and derivatives, she said.

Federal banking regulators and the International Monetary Fund have questioned whether the SEC’s regulation of mutual funds and asset managers is sufficient. They say funds with holdings in less-liquid assets, such as bank loans or junk bonds, might have to sell investments at a loss to raise cash to meet redemption requests.

Mutual funds have come under particular scrutiny because they are open to retail investors and required to return funds within seven days to those who redeem shares. Funds forced to sell assets quickly could push down prices, creating spillover effects that hurt other investors, White said.

To guard against that outcome, the SEC is looking at requiring funds to ensure they have plans in place to meet investor demands without stressing markets.

In remarks to reporters after her speech, White declined to say when the agency will propose the rules, saying only that 2015 will be a “very active year” for those rules.

Compliance Policy

Wall Street’s Win on Swaps Rule Shows Resurgence in Washington

Wall Street is re-emerging as a force in Washington as it closes in on one of its biggest wins against regulation since the financial crisis.

With must-pass spending legislation making its way through Congress this week, banks seized on an opportunity to attach a measure that would halt a planned restriction on derivatives trading they had long opposed. The industry’s lobbying extended to the highest levels of finance with JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon pressing lawmakers to support the change.

Wall Street’s success, after four years of struggling to persuade Congress to ease the Dodd-Frank Act, is a precursor to more fights next year against some of the law’s hallmarks: the consumer protection bureau and stiff oversight of big financial companies whose failure could threaten the financial system.

The $1.1 trillion spending measure cleared its biggest hurdle when the House passed it last night and sent it to the Senate for consideration today.

The derivatives provision would let JPMorgan, Citigroup Inc., Bank of America Corp. and other banks trade almost all swaps in divisions that have government backstops like deposit insurance. It would repeal a requirement that some of the trades be pushed out to separate units, which Wall Street argued would drive up costs for clients and increase risk in the financial system by moving the trades to firms less regulated than banks.

For more, click here, and see Interviews, below.


Madoff Prosecutors Lament Mercy Shown Con Man’s Associates

The mercy shown by a judge this week to former aides of Ponzi scheme mastermind Bernard Madoff risks hindering justice for victims of his $17.5 billion fraud, and sets a dangerous precedent for white-collar prosecutions, a government lawyer said at a sentencing hearing.

U.S. District Judge Laura Taylor Swain in Manhattan Dec. 10 gave one of the con man’s former computer programmers, George Perez, 2 1/2 years behind bars for helping automate the biggest Ponzi scheme in U.S. history. The court’s probation office had recommended eight years; prosecutors wanted even more.

Perez, 48, is the fourth defendant in the trial to receive leniency this week from Swain, who has meted out prison terms averaging just over five years. Swain has called the terms “serious and significant sentences” that took into account the role played by each former Madoff worker. Joann Crupi, 54, who managed large accounts at the firm, is set to be sentenced Dec. 15.

Before Perez’s prison term was announced, Assistant U.S. Attorney Matthew Schwartz took what he called an unusual step for a prosecutor -- speaking at a sentencing hearing. He asked Swain to break her leniency streak and give Perez a harsher term behind bars. Schwartz said he was seeking “justice on behalf of victims.”

If the trend in the Madoff case continues, Schwartz told Swain, judges in future cases may have to explain to “small-time crooks” why they’re getting harsher sentences than Madoff’s inner circle. He also cautioned that serious white-collar criminals may win shorter sentences by arguing their frauds weren’t nearly as extensive as Madoff’s.

The case is U.S. v. O’Hara, 10-cr-00228, U.S. District Court, Southern District of New York (Manhattan).


How a U.S. Spending Bill Might Gut Financial Reform

Former Commodity Futures Trading Commissioner Bart Chilton and Sir Martin Sorrell, chief executive officer at WPP LLC, talked about provisions in a spending bill to fund the U.S. government that could have a major impact on financial regulations, including a possible repeal of a provision that requires banks to trade derivatives without government bailout protection.

They spoke on “Bloomberg Surveillance.”

For the video, click here.

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