Financial Regulatory Forum

Can hedge funds double dip under Dodd-Frank whistleblower rules? (Westlaw Business)

By Jesse R. Morton

NEW YORK, Jan 6 (Westlaw Business) – Whistleblower provisions in Dodd-Frank may have handed hedge funds a golden opportunity and the SEC a unique challenge.

Funds have long conducted unique analyses that power their trading strategies and at times prompt quite public “revelations” of possible funny business. Think Greenlight Capital’s company-shaking revelations about Lehman Brothers in 2008 and Allied Capital in 2002.

Though the law remains unclear on this issue, its quite-intentional similarity to pre-existing approaches under the False Claims Act and the whistleblower program of the IRS may provide funds with a profitable two-fer. Though not necessarily the intent of Dodd-Frank’s enacters, one is left to wonder as to the role of shorts, touted (by shorts), as de-facto enforcement division of the SEC. (more…)

ANALYSIS-US companies tweak CEO pay packages ahead of vote

By Dena Aubin

NEW YORK, Jan. 5 (Reuters) - Corporate America is bracing for the judgment of shareholders on lucrative executive pay packages, tossing out some perks, tweaking pensions and taking pains to show how compensation is linked to performance.

Nearly half the U.S. companies surveyed by consulting firm Towers Watson were adjusting their pay-setting process ahead of the spring votes required at least every three years under the Dodd-Frank financial reform law.

The “say-on-pay” votes are non-binding and come after a strong rally in shares and two years of improved corporate earnings, perhaps blunting shareholder anger at packages that averaged $9.25 million for CEOs at S&P 500 companies in 2009. That is 263 times the average worker’s pay, according to AFL-CIO data. (more…)

U.S. budget squeeze could push investment advisers into FINRA oversight -trade group (Complinet)

By Ted Knutson,  Complinet

It is “possible” a budget squeeze could push the Securities and Exchange Commission into calling for a self-regulatory organization for investment advisers, David Tittsworth, executive director at Investment Adviser Association, told Complinet.

Tittsworth suggested that the need to outsource regulatory oversight could be avoided by assessing advisers a fee to pay for the cost of their examinations by the SEC. The most likely candidate for fulfilling an oversight function would be the brokerage industry self-regulatory organization, the Financial Industry Regulatory Authority, Tittsworth added. As Complinet has reported, FINRA chairman Richard Ketchum has repeatedly said his organization is prepared to meet the challenge. (more…)

U.S. financial regulation: Three things to watch, and two not to, in 2011 – Complinet column

MARKETS-STOCK/By Scott McCleskey, Complinet

The past year was a busy one for those interested in financial reform – you know, Dodd-Frank and all that. But the new year will be even more fateful in shaping the markets for decades to come. It is likely to be the most critical of the post-financial crisis period. The reason is that Dodd-Frank only gave the regulators their marching orders, and 2010 mostly saw just the preliminaries to the really tough regulation. It will be in 2011 that actual rules will be proposed, finalized and implemented – and all by mid-year, if deadlines are met. It will also be when the Republicans hit the beach in the House and attempt to moderate or reverse many of the reforms already underway.

There will be a tidal wave of Dodd-Frank work, and some areas of focus are already obvious. The launch and first steps of the Consumer Financial Protection Bureau will be one, and the rather iffy implementation of derivatives regulation will be another. These items have been and will continue to be covered by this organization and others. But there are other items largely outside the Dodd-Frank ecosystem which bear a close watch over the coming year – and there are also some receiving a lot of press lately which can be ignored. (more…)

Legal Opinions and Ernst & Young: The Grim Repo’s next targets? – Westlaw Business

By Erik Krusch (Westlaw Business)

Legal opinions underpin the Lehman-related lawsuit against Ernst &Young (E&Y) by New York Attorney General Andrew Cuomo, and both lawyers and auditors can’t help but take note. The AG alleges that Lehman’s then-auditor E&Y provided substantial assistance to Lehman in its perpetrating a massive financial fraud. In particular, Cuomo has charged the accounting giant with three counts of securities fraud under the Martin Act and a charge of persistent fraud and illegality brought under the Executive Law § 63(12) of New York.

The AG’s case centers on Lehman’s use of the now notorious Repo 105 to lower its leverage levels. Lehman accounted for Repo 105, which amounts to selling securities for 105% of their value to counterparties with the agreement to repurchase the securities later, as sales rather than loans. It is standard practice to account for securities repos as loans. Repo 105 allowed Lehman to shift assets (and more to the point, “net leverage”) from the curious eyes of the ratings agencies, investing public and regulators. Ernst & Young signed off on this accounting from 2001 until Lehman’s demise in 2008. For additional information on Repo 105 please see the previous Westlaw Business Currents article The Tale of the Grim Repo: Lehman’s Link to True Sales.

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US Treasury seeks new members for Bank secrecy group; lobbyists need not apply — Complinet

By Brett Wolf, Complinet

The US Treasury Department has announced that it is seeking financial industry representatives to join its 50-member Bank Secrecy Act Advisory Group. For the first time, this year’s application process has barred registered lobbyists from the group, whose duties include evaluating potential anti-money laundering and counter-terrorist financing regulations. Citing an Obama Administration Executive Order and Presidential Memorandum, the Federal Register notice submitted by Treasury’s Financial Crimes Enforcement Network stated that “member organizations may not designate a representative to participate in BSAAG plenary or subcommittee meetings who is registered as a lobbyist pursuant to 2 U.S.C. 1603(a)”. (more…)

Ernst & Young charges highlight grey area in leverage accounting – Complinet

By Emmanuel Olaoye, Complinet

Civil fraud charges against Ernst & Young LLP have raised the question of whether accounting standards have become so specific that institutions view them as obstacles to maneuver around rather than guidelines for accurate reporting. Legal and accounting experts said that the suit filed by Andrew Cuomo, New York attorney general, was likely to mean the end for transactions such as the “Repo 105″ device at the center of the controversy, particularly if it led to a settlement. It could break new ground in the liability of accounting firms, they added.

The lawsuit has accused E&Y with improperly allowing Lehman Brothers to use a complex accounting transaction known as “Repo 105″ to reduce the apparent debt level of the failed investment bank, giving investors the impression that it had a lower level of debt than it actually did. The lawsuit has claimed that E&Y knew Lehman was treating the transfer of billions of dollars of securities in “Repo 105″ transactions as asset sales rather than loans. “Repo 105″ is the name of the accounting transactions that Lehman used to classify its short-term borrowings as sales. Lehman collapsed in September 2008, at the height of the global financial crisis.

“If there is a settlement this type of transaction would not be used again. The ‘Repo 105′ is radioactive. I don’t think accounting firms will be allowing their clients to use them again,” said Howard Schilit, founder and chief executive of the Financial Shenanigans Detection Group LLC.

ANALYSIS-CFTC speculation limits may pass quietly, unchanged

U.S. Commodity Futures Trading Commission Chairman Gary GenslerBy Christopher Doering

WASHINGTON, Dec 17 (Reuters) – New U.S. rules to limit speculation in commodity markets could move forward quickly, and with few alterations, after objections by the measure’s most vocal supporter unexpectedly delayed a key vote.

Gary Gensler, head of the U.S. Commodity Futures Trading Commission, abruptly postponed a vote on Thursday to open proposed new position limits to public comment, evidence of mounting pressures internally as the agency implements dozens of rules meant to make markets safer and more transparent.

The agency must carefully balance the laws it is required to implement as part of the sweeping Dodd-Frank financial overhaul with the opinions of its five commissioners, who disagree on how they should get there.

WikiLeaks furor raises risk issue for financial firms -Complinet

WIKILEAKS/By Brett Wolf, Complinet

Some financial institutions are scrambling to put distance between themselves and the whistleblower web site WikiLeaks, but is this necessary? Financial services firms face no clear legal obligation to cut off WikiLeaks and its founder Julian Assange, but intense publicity and the pressure brought by the US government and lawmakers to cripple the organization are forcing companies to weigh other risks they might face if they continue to do business with WikiLeaks.

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Dodd says the threat to financial reform real but not complete – Complinet Interview

U.S. Senator Christopher DoddBy Ted Knutson, Complinet

As Democratic U.S. Senator Christopher Dodd prepares to leave office, Republicans are threatening to chip away at what may be his biggest legislative accomplishment: the Wall Street regulation overhaul he helped steer through Congress this year as chairman of the Senate Banking Committee. It was the biggest fix to the financial regulatory system in 70 years, and Republicans emboldened by November election gains are looking to deny regulators the extra money they want to enforce it, and to delay seating a head of the Consumer Financial Protection Bureau (CFPB).

Dodd said in an interview with ThomsonReuters unit Complinet that the damage to a “real darn good bill” could be real, but not complete. In his half-hour interview last Friday, Dodd looked ahead to the future of the Dodd-Frank Wall Street Reform and Consumer Protection Act and back at the two-year process that led to its creation.

Complinet: How much would it damage regulatory reform if Republicans block budget increases for the Securities and Exchange Commission and the Commodity Futures Trading Commission that say they need to implement it? (more…)

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