Financial Regulatory Forum

Who will run the European Supervisory Authorities day-to-day? (Complinet)

By Peter Elstob, Complinet

Sometimes the crudest calculations can be the most helpful. Despite official protestations, it is a fairly safe assumption that the permanent positions that have been announced so far at the three European Supervisory Authorities have effectively been shared out among member states, with some weighting for their importance as financial centres. If a slightly shakier assumption is entertained, namely that the three executive directors, whose job it will be to run the ESAs’ day-to-day operations, will be chosen on a similar basis (although perhaps with individual qualities and qualifications playing a more important part), it is possible to make some educated guesses about the nationalities, and maybe the identities, of those who will fill these important roles. (more…)

Links to CDS measures growing common in bank credit deals (Westlaw Business)

The American International Group (AIG) building is seen in New York, March 24, 2009. REUTERS/Shannon StapletonBy Erik Krusch

Jan. 10 (Westlaw Business) –  Credit terms are loosening, but lenders are still after their proverbial pound of flesh. Consider AIG and AT&T’s recent credit agreements, which link each loan’s interest rate to the corporations’ credit default swaps (CDS). Lenders are also insulating themselves from risk with London Interbank Offered Rate (LIBOR) floors, such as the one undergirding healthcare technology company MedAssets’ recent term loan. In a similar vein, bankers installed an original issue discount (OID) in construction materials maker Armstrong World Industries’ recent term loan. Lenders are doing their due diligence and weighing risks in order to concoct the right mix of interest rate terms in hopes of protecting their capital going forward. (more…)

FDIC SunFirst action a reminder of third-party processor risk to banks (Complinet)

By Brett Wolf, Complinet

An enforcement action brought by the Federal Deposit Insurance Corporation against SunFirst Bank, of Utah, has provided a stark reminder of the legal and regulatory obligations that firms face when dealing with third-party payment processors. Third-party payment processors, sometimes known as TPPPs, are bank customers who use their accounts to process payments for merchant clients. They are a growing concern for banks, in no small part because they have of late attracted the attention of regulators and the U.S. Department of Justice. (more…)

COLUMN – So, banker, how much do you get paid?

Bank Street, LondonBy Keith Mullin, Editor at Large, International Financing Review; the views expressed are his own

LONDON, Jan 7 (Reuters) – The New Year began as the old one ended, with a flurry of histrionics and hyperbole around the… OK, admittedly salacious… topic of bank bonuses.

The problem is there are now so many official, semi-official and generally interfering bodies and organisations spouting forth sanctimoniously and/or contradictorily about how banks should structure their compensation schemes and how much they should pay their staff that the only inevitable result – mystification – has duly been reached. (more…)

Why U.S. inside traders escape harsh sentences

US Courthouse, New YorkBy Andrew Longstreth

NEW YORK, Jan 6 (Reuters Legal) – The recent flurry of insider-trading arrests by the Manhattan U.S. Attorney has set Wall Street on edge. But if recent history is any guide, people found guilty of that crime tend to get off relatively easy, a Reuters Legal analysis suggests.

The analysis covers sentences imposed in 2009 and 2010 in 15 insider-trading cases brought by the U.S. Attorney in New York, representing virtually all those imposed in that court during this period. Of these, 13 sentences, or nearly 87 percent, were lighter than the terms prescribed by the U.S. Sentencing Guidelines — and seven of the sentences carried no prison time at all. The data from 2009, culled from a report issued last year by law firm Morrison & Foerster, reveal that only one prison term, for 63 months, was issued for insider trading in 2009.

The routine practice of departing downward from the guidelines in insider-trading cases is particularly striking given the much lower rate at which judges in the New York federal court typically do so. According to U.S. Sentencing Commission statistics from fiscal 2009, New York federal judges departed downward from the guidelines in 57 percent of all cases, a full 30 percentage points lower than for insider-trading cases alone. (more…)

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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