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from Financial Regulatory Forum:

Client funds, net capital among hot topics for SEC 2012 exam program

By Nick Paraskeva, Thomson Reuters Accelus contributing author

NEW YORK, May 18 (Thomson Reuters Accelus) -  The SEC has new priorities in its 2012 exam program, including verifying firms’ holding of client funds and their net capital calculations.

The changes follow the collapse of MF Global, which revealed that client funds were missing despite regulations requiring that they be segregated. The revisions also reflect top findings found during the 2011 exam program, and follow major reforms to the SEC’s exam office.“Events at MF Global led to greater concerns on how firms are calculating their reserve formula, their net capital computations, and custody of customer assets,” said Carlo di Florio, director of the SEC Office of Compliance Inspections and Examinations (OCIE). Di Florio was speaking at a meeting of the Securities Industry and Financial Markets Association (SIFMA) Compliance and Legal Society in New York.

Exam program developments

The compliance inspections office has moved from a confederation of 12 autonomous regional programs to building a national exam program. This includes consistent policies and procedures and recruitment of a Chief Compliance Officer.

New management in the last year includes Julius Leiman-Carbia to lead the national broker-dealer exam program and Drew Bowden to lead the national investment adviser/Investment company exam program. The exam office has also recruited specialists with PhDs in math, quantitative analytics and models.

The office moved from a manual process to an automated exam system on an Oracle platform, which is flexible and better analyzes exam results, di Florio said. A new Office of Risk Analytics and Surveillance identifies those firms with higher-risk attributes for the SEC to review. An Office of Data Analytics can further investigate the firms so identified, where there is a lot of data to analyze.

from Global Investing:

Three snapshots for Monday

Spanish 10-year bond yields hit 6%, around the levels seen in Ireland/Portugal and Italy/Spain at the start and resumption of ECB bond purchases.

U.S. retail sales rose more than expected in March as Americans shrugged off high gasoline prices.

Currency speculators boosted their bets against the euro in the latest week. Figures from the Commodity Futures Trading Commission released on Friday showed a jump in euro net shorts of 101,364 contracts this week from 79,480 previously.

from MuniLand:

Troubles in Volcker land?

My post last week about ditching the Volcker Rule and returning to some form of Glass-Steagall got a lot of positive responses. Back then I wrote that the Volcker Rule, which requires regulators to cleave risky trading for a bank's house account from deposits insured by the FDIC, is immensely complex and that it will never be properly defined or enforced. Several regulators in the past week have agonized publicly over the need to get the rule "right."

First among them was Fed Chairman Ben Bernanke. In the three minutes of C-Span video above, Bernanke says: "We are going to try and do our best to clarify the distinction between proprietary trading and market making." It's clear that even to our top banking regulator, defining Volcker properly is nearly impossible.

SEC Chairman Mary Schapiro had this to say on Volcker, via The Hill:

When asked by Rep. Mario Diaz-Balart (R-Fla.) if regulators would be better off scrapping the proposal and starting over, Schapiro was noncommital.

“Whether we start right from the beginning again or not, I can tell you we will and are reviewing all the comments letters carefully and rethinking how we should approach the statutory requirement,” she said. “We have a lot of issues to work through.”

And here's SEC Commissioner Dan Gallagher, via Reuters:

Dan Gallagher, a Republican commissioner at the U.S. Securities and Exchange Commission, said on Monday that a quick review of the thousands of [Volcker] comment letters revealed widespread fears about the rule's potential impact.

"These comments provide powerful evidence that the benefits the proposed rule was designed to provide may come at an unacceptably high cost," Gallagher said in prepared remarks for a speech at the Institute of International Bankers conference in Washington.

He said regulators must be willing to re-examine their initial efforts and "if necessary" go back to the drawing board on the proposal.

from Breakingviews:

New US finance sheriff carves out shadowy domain

By Rob Cox and Daniel Indiviglio The authors are Reuters Breakingviews columnists. The opinions expressed are their own.The American banking industry has had a rough few years. The subprime meltdown, financial crisis and economic hardship have slammed stocks, slashed bonuses and crunched jobs. But life has been pretty sweet for a motley crew of companies - from cash checkers and credit bureaus to money wirers and debt collectors - operating on the edges of the regulated financial services industry. That may be about to change.

The recent recess appointment by President Barack Obama of Richard Cordray to lead the newly formed Consumer Financial Protection Bureau will, for the first time ever, throw a federal regulatory lasso around the biggest players in the shadows of finance. In the same way that enhanced regulation has curbed many of the excesses on Wall Street, so, too, may the increased scrutiny of this netherworld of the money industry.

To measure the CFPB’s impact, Breakingviews has created a proxy equity index of companies who may now fall under the purview of the agency. The “Cordray Index” consists of 15 publicly traded companies. It comprises big firms like $11 billion Western Union and $15 billion credit scorer Experian (the one non-U.S. component of the index) and those with market caps below $1 billion, such as repo-man Portfolio Recovery Associates and Advance America, a chain of stores making cash advances.

Taken as a whole, this non-bank universe has had a lucrative crisis. The index, in which we have given equal weighting to the stocks, has returned some 25 percent since the beginning of 2007, when the first rumbles of the subprime crisis began to hit the markets. By comparison, the S&P 500 Index is just now returning to its 2007 levels and banking stocks are down by nearly two-thirds.

It’s not hard to explain these divergent fortunes. For starters, few members of the Cordray Index have credit exposure. So, unlike banks, they have not had to work through piles of crummy loans. And as chartered banks pulled back, that pushed millions of customers - particularly those labeled subprime - into the arms of the alternative financiers. Economic distress, in short, has given this industry a whole new slug of newly impoverished customers.

New rules included in the Dodd-Frank Act, however, put them under a national regulatory spotlight for the first time. Just last week the CFPB announced its first formal plans to oversee some players in the non-bank financial sector. It proposed supervising debt collectors with more than $10 million in annual receipts and consumer credit reporting firms with more than $7 million in annual receipts. Additional non-bank sub-sectors will be added to this list.

Even if these companies already eschew rotten practices, with new cops on the beat, it’s hard to imagine they won’t be sweating a little more and increasing their compliance procedures. The bureau’s consumer protection mission is broadly defined, so what may seem perfectly legal to these firms might appear unfair to the watchdog. Its new oversight introduces a layer of regulatory risk that these companies have never experienced on a national level.

from Financial Regulatory Forum:

Evidence, access aid job security when compliance staff raise a red flag

By Emmanuel Olaoye

NEW YORK, Feb. 9 (Thomson Reuters Accelus) - Two vivid reminders of the job-security perils faced by compliance officers and others who sound alarms at company practices were provided last week by a congressional hearing into the MF Global bankruptcy and a federal appeals court ruling on whistleblower law.

The risks may be part of the job, but skillful management of internal policies and wise self-protection can help avoid career-threatening retaliation, experts said."If you uncover a problem and you complain about it you are going to do so in jeopardy. Once you walk into that room, you could be fired or made a scapegoat if they can't contain it," New York-based securities industry lawyer Bill Singer said.

In the first case, MF Global's former chief risk officer, Michael Roseman, told a U.S. House Financial Services subcommittee hearing last week that his repeated warnings about the firm's aggressive trading strategy may have led to his firing.

MF Global collapsed in late October amid market alarm over its bets on European sovereign debt – the same investments Roseman said he had warned chief executive officer Jon Corzine about. Roseman said the firm had continued the strategy with the apparent approval of its directors.

Roseman said he was asked to leave MF Global in January 2011. "My views on risk certainly played a factor in that decision," he testified.

Also last week, the U.S. First Circuit Court of Appeals ruled that a U.S. law protecting whistleblowers at publicly traded companies does not cover employees of private companies who are working on contract with a public company. In a case involving two former Fidelity Investments employees, the court overturned a Boston federal judge's decision to apply the provisions of the Sarbanes-Oxley Act to private companies serving under contract.

from Financial Regulatory Forum:

Global regulation 2011: a review of policies that shaped the business world

Jan. 10 (Business Law Currents) -- Global regulators have been anything but idle in 2011. Predictably, the U.S. regulatory landscape was dominated by the 800-lb. statutory gorilla, the Dodd-Frank Act. Canada busied itself trying to accommodate Basel III’s coming capital requirements. Anti-bribery regulation managed to elbow its way into UK headlines in spite of a phone hacking scandal and a royal wedding. China cracked down on loopholes for variable interest entities, while Australia’s new tax regime found few friends in the mining sector down under.

U.S.

DODD-FRANK

Covering everything from incentive-based compensation to credit ratings to the Volcker Rule, Dodd-Frank’s fingerprints touched a seemingly endless string of new regulations in the financial sector.

Passed in 2010, the Act’s operative provisions — or at least those able to be completed within the statute’s own 360-day mandate — became operative this year. Domestically, perhaps no one topic dominated regulatory discussions more than the Volcker Rule. Named for one-time Fed Chairman and current economic consigliere, Paul Volcker, the eponymous rule rolled back the calendar to the days of Glass-Stegall when proprietary trading by banks had worn out its Main Street welcome. (See Banking on Volcker: Big crisis, big rule.) The rule, a 298-page slab, represented the collective efforts of the SEC, the Fed, the FDIC and the Treasury department to implement §619 of the Dodd-Frank Act, which itself added a new §13 to the Bank Holding Company Act of 1956 (the BHC Act). The rule attempts to harmonize a proscription against prop trading with exceptions for underwriting, market making, and other activities.

Dodd-Frank also signaled the likely decline of credit ratings agencies’ role on Wall Street. Amending the Investment Company Act of 1940, Rules 2a-7, 3a-7, 5b-3 and 10f-3 will no longer require money market funds to operate using Nationally Recognized Statistical Ratings Organization (NRSRO) ratings. (See Dodd-Frank and SEC Blaze New Trail for Credit Ratings.)

Dodd-Frank’s §922 amended the Securities Exchange Act of 1934 to include a new section, 21F, entitled “Securities Whistleblower Incentives and Protection.” (See Whistling Past the Graveyard: SEC Offers Final Rule on Dodd-Frank Whistleblower Program.) The rule’s complexities, however, may be making foreign companies extremely wary of the program’s reach. (See Dodd-Frank's whistleblowing rule presents new compliance concerns for foreign firms.)

from The Great Debate:

The Trojan Horse of cost benefit analysis

By John Kemp The writer is a Reuters market analyst. The views expressed are his own.

LONDON - Should federal government agencies have to prove the benefits of new regulations outweigh the costs before introducing them?

It sounds like a simple question with an obvious answer. But the role of cost-benefit analysis in writing federal regulations (and even laws) is shaping up to be one of the biggest battles between the Obama administration and business groups in 2012.

On one side are business groups such as the U.S. Chamber of Commerce and the International Swaps and Derivatives Association (ISDA), backed by conservative lawyers such as Eugene Scalia (son of Supreme Court Justice Antonin Scalia) and a group of judges on the U.S. Court of Appeals for the District of Columbia Circuit who oversee most federal rule-writing.

On the other is the White House, the Treasury and a host of agencies stretching from the Securities and Exchange Commission (SEC) to the Commodity Futures Trading Commission (CFTC).

QUEST FOR QUANTIFICATION

What was once an esoteric legal dispute is turning fiercely political.

from Financial Regulatory Forum:

Regulatory round-up — U.S. rules to know in 2012

By Nick Paraskeva

NEW YORK, Dec. 16 (Thomson Reuters Accelus) - Several recently adopted rules in the U.S. are going into effect for specific types of firms in 2012. These rules include ones released by the Securities and Exchange Commission, Commodity Futures Trading Commission and Federal Reserve, issued to implement the Dodd-Frank Act and as a response to market developments.

The SEC-adopted rules requiring reporting by advisers to hedge funds and by large traders of securities are explained below. We also cover the CFTC final rules on derivative clearing firms in the swaps market and provide a summary of the Fed’s final rules on living wills for large banks, and non-bank systemically important financial institutions (SIFIs), under the Dodd-Frank Act.

SEC PRIVATE FUND SYSTEMIC RISK REPORTING

The SEC issued rules requiring advisers to private funds, such as hedge funds, private equity funds and liquidity funds, to submit new reports on their potential systemic risks under the Dodd-Frank Act as of October 26. The rule revises the SEC’s proposed rules that were issued in January 2011, following industry comment.

The new information reported by the fund advisers will be used by the SEC to provide information to the Financial Systemic Oversight Council (FSOC), which was created under Dodd Frank to monitor systemic risk in the U.S. financial system. The information will be reported to the SEC using a new Form PF by specified advisers to private funds, and it will remain confidential rather than being published.

Reporting will be required for large private fund advisers that are managing hedge funds, liquidity funds and private equity funds. A large adviser is one that manages a hedge fund that has $1.5bn assets, or that manages liquidity funds with $1bn assets, or a private equity fund with $2bn assets. The SEC estimates that only 230 of U.S. hedge fund advisers and 155 private equity advisers are in the large category, which comprises 80 percent of market share.

from MuniLand:

Lessons from MF Global

The October bankruptcy of MF Global has been the subject of several Congressional hearings recently. 38,000 MF Global clients lost $1.2 billion in the collapse, and numerous regulators, as well as the Department of Justice, have been trying to unravel hundreds of thousands of transactions to discover how this client money disappeared. Weeks later, it's still unknown whether clients will have their funds returned or whether any laws were broken. What is certain, though, is that even after the passage of Dodd-Frank, our regulatory system has large supervisory gaps.

The derivatives and futures businesses in which MF Global operated are complex, and it's easiest to understand the firm as a large transaction processor that served its futures clients by connecting them to exchanges around the world. MF Global was both a broker-dealer and a futures commission merchant, meaning it was regulated by the SEC as well as the CFTC. In addition, MF Global was overseen by the Financial Industry Regulatory Authority (FINRA) and the CME, two self-regulatory organizations empowered by the SEC.

The big problem with oversight of MF Global within the U.S. is that there were too many regulators with only a small window into the firm's activities and none with the ability to see the full scope of risks and capital of the holding company. How can we fix this?

The U.S. Chamber of Commerce recently put out a report by a long-time SEC official that recommended a number of softball procedural and structural changes for the SEC, like increasing the number of Commissioners from 5 to 7 and appointing a deputy chairman who would be responsible for operations and management. The report also recommended using cost-benefit analysis at the beginning of the rule-making process and after a rule had been implemented. It was thoughtful and well-meaning but wholly overlooked the fact that modern-day financial firms are geographically unbounded and make their profits often by arbitraging the regulations of one country against another. Big financial firms have enormous legal departments to beat back regulators and ride as close to the law as possible.

There are other, harder-edged ideas floating around about what is needed to regulate sophisticated, globe-spanning firms. From the blogger Epicurean Dealmaker:

... I fleshed out my proposal by suggesting regulators get hired from Wall Street banks, big law firms, and elsewhere. An effective wholesale financial regulator should be comprised of forensic accountants, corporate and securities lawyers, investment bankers, derivative structurers, and the like. They should all be paid market rates for their services, which will make their compensation much, much closer to that of the people they regulate. They should be prohibited from accepting positions in private financial industry—and, most especially, at any individual firm they ever directly or indirectly regulated—or firms working for financial firms (law firms, accountancies, etc.) for a minimum of at least three years after they leave government service. Five would be preferable.

While individually expensive, I don't believe you would need to hire many such people to make this kind of regulatory regime work. Given that you really only need high-powered regulators for the very biggest institutions, I am guessing you could get away with fewer than 100 to start. In fact, it might be less, because you really only need these people to direct and train their junior staff, and to interface directly with senior executives of the regulated entities. Fully loaded, I imagine you could fund a financial regulatory SWAT team like this for less than $150 million per year. That's a drop in the bucket compared to the financial losses these supposedly regulated institutions have already inflicted on the American taxpayer, not to mention in comparison with the normal run rate of your average stodgy, inefficient, and ineffective government bureaucracy. Even better, you could fund such an agency with a levy indexed to the size of each financial institution under its jurisdiction. The larger and more complex a bank, the more fire-breathing, table-throwing, nail-spitting investment bankers and lawyers you could afford to throw at it. Talk about an incentive to shrink your balance sheet.

from Financial Regulatory Forum:

Cost-benefit lawsuits snarl Dodd-Frank implementation

By Nick Paraskeva

NEW YORK/WASHINGTON, (Thomson Reuters Accelus) -- A financial industry lawsuit seeking to block new U.S. rules on commodity position limits on the grounds that they lack an adequate cost-benefit analysis could cause regulators to slow their implementation of the Dodd-Frank financial regulatory overhaul and be an indicator of more such challenges. Meanwhile, the Obama administration is saying it will resist efforts to block the law. 

The lawsuit was filed last Friday by the Securities Industry and Financial Markets Association and the International Swaps and Derivatives Association against the U.S. Commodity Futures Trading Commission. It was filed in federal court in the District of Columbia.

“The Position Limits Rule as adopted by the CFTC was poorly crafted based on an incorrect reading of the law, and absent any sound economic or cost benefit analysis,” said ISDA CEO Conrad Voldstad, and SIFMA CEO Timothy Ryan in a joint statement. The trade groups, representing U.S. securities firms and international swap dealers, are concerned of the adverse impact of the rule on liquidity and price volatility.

“Generally speaking, regulators have historically paid lip service to cost benefit analysis” said Ira Hammerman, SIFMA senior managing director and general counsel. “This is not sufficient, as the law requires it to be done robustly for rulemaking.”

The day before the filing, Treasury Secretary Tim Geithner warned of “efforts to use cost-benefit analysis as roadblocks to reform, and other efforts to slow the pace of implementation of regulation in the hopes of watering it down.” He said the Administration is “going to fight to preserve” essential Dodd-Frank reforms.

Other obstructionist measures Geithner referred to include blocking the appointments of new regulators, cutting funding, adding policy provisions to funding bills and pursuing new legislation to repeal Dodd-Frank or key pieces of it. The White House also began a new campaign to confirm Richard Cordray as head of the Consumer Financial Protection Bureau, with a Senate vote Thursday, saying the lack of a director limits the agency’s authority over non-banks.