Bloomberg News

Vienna Bank Summit, Cyber Attacks, Romania: Compliance

January 12, 2012

(Updates with CFTC rules vote, SEC hedge-fund rules, India retail reversal in Compliance Policy; China Construction Bank ex-employee in Compliance Action; Anderson in Interviews; Fannie Mae’s Williams in Comings and Goings.)

Jan. 11 (Bloomberg) -- Banking regulators from 17 countries are due to meet today to discuss Austrian proposals to limit eastern European credit risk for the Alpine republic’s banks, according to three people with knowledge of the agenda.

The meeting in Vienna brings together senior officials of the Austrian central bank and the FMA regulator, the European Banking Authority and from countries including Hungary, Romania and the Czech Republic, said the people, who declined to be identified because the agenda isn’t public.

The Austrian Financial Market Authority, or FMA, supervises banks, pension companies, investment funds and other investment providers.

The officials will discuss capital and liquidity rules drawn up by Austria’s central bank and the FMA, which require Erste Group Bank AG, Raiffeisen Bank International AG and UniCredit SpA’s Bank Austria unit to underpin their lending in eastern Europe with local deposits rather than parent funding, according to the outline presented Nov. 21. Those tighter lending requirements, intended to help safeguard Austria’s AAA credit rating, have drawn criticism from policy makers in eastern Europe who are concerned they may stifle economic growth in the region.

New loans given in “key” countries mustn’t exceed 110 percent of local deposits and funding raised directly by the local subsidiaries, the Austrian central bank said in November.

The three banks also need to meet most of the Basel Committee on Banking Supervision’s new capital rules by the beginning of next year, and will be subject to a surcharge of as much as 3 percentage points.

Christian Gutlederer, a spokesman for the Austrian central bank, declined to comment on the meeting.

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Compliance Policy

CFTC May Vote on Derivative Rules to Protect Cities, Collateral

The U.S. Commodity Futures Trading Commission may complete rules designed to curb the abuses of banks that sell derivatives to municipalities as it moves to impose new Wall Street regulations under the Dodd-Frank Act.

CFTC commissioners are scheduled to vote today on final regulations, first proposed a year ago, that would set business conduct standards between swap dealers and clients, including pension funds, endowments and state and local governments.

The rules are part of the CFTC’s effort to reduce risk and boost transparency in the $708 trillion global swaps market after largely unregulated contracts helped fuel the 2008 credit crisis. Dodd-Frank, the financial-regulation overhaul enacted in 2010, seeks to have most swaps guaranteed by central clearinghouses and traded on exchanges or other platforms.

Municipalities faced unforeseen fees during the crisis to escape from derivative contracts pitched by banks as a way to save money. The CFTC regulation to be weighed today marks Washington’s broadest effort to rein in a segment of the derivatives industry that flourished during the past decade, only to cost taxpayers billions when the deals collapsed.

The CFTC may also complete rules to protect swap traders’ collateral that is used to reduce risk in trades. The agency may also vote to propose limits on proprietary trading and investments in private equity and hedge funds under the so- called Volcker rule. The CFTC is the last of five U.S. regulators to consider proposing the limits.

Hedge Funds Ask SEC to Let Them Go Public in Private Offerings

The Managed Funds Association is urging U.S. regulators to remove restrictions on solicitation and advertising in private offerings to make it easier for hedge funds to raise money and promote their products.

The Securities and Exchange Commission should amend its rules to allow private funds to “engage in communication and offering activity while remaining in compliance,” Richard H. Baker, the Washington-based lobby group’s president and chief executive officer, said in a letter requesting the rule change. An SEC advisory group on small and emerging companies voted for a similar recommendation on Jan. 6.

The change would let hedge funds avoid the SEC’s registration process while openly seeking money from so-called accredited investors, those deemed sophisticated enough to understand riskier offerings. Changes in securities markets and regulations have rendered the 30-year-old restrictions unnecessary, Baker wrote in the letter dated Jan. 9.

The rule change would reduce the cost of capital for private funds and lead to “greater efficiency, Baker wrote in the letter.

SEC Chairman Mary Schapiro asked her staff to rethink the measure after President Barack Obama directed federal agencies last year to ensure their rules promote economic growth while using the least burdensome tools to achieve regulatory ends.

The U.S. House of Representatives in November approved legislation proposed by California Republican Kevin McCarthy that would let closely held companies advertise for investors. A similar measure awaits action by the Senate.

India Lets Starbucks, Ikea Open Stores in Retail Reversal

India abandoned a rule against foreign single-brand retailers operating stores without a local partner, paving the way for global companies including Starbucks Corp. and Ikea.

The government ratified a Nov. 24 cabinet decision to raise the ownership limit to 100 percent from 51 percent for single- brand, Trade Minister Anand Sharma said in a statement yesterday. The new rules take effect immediately and require the companies to use smaller Indian companies for at least 30 percent of procurement, he said.

Wal-Mart Stores Inc., Carrefour SA and other foreign chains are still excluded from India’s $400 billion retail market after an attempt last year to change the law failed. Prime Minister Manmohan Singh’s administration has struggled to advance its initiatives amid opposition from its own allies and a corruption scandal that paralyzed parliament.

Starbucks would compete in India with operators including Lavazza SpA’s Barista Coffee Co. and closely held Cafe Coffee Day. The Seattle-based coffee chain said in November it intended to open its first store in India this year.

Calls and e-mails to the Starbucks public-relations team in Seattle weren’t immediately answered. Starbucks signed an agreement with India’s Tata Coffee Ltd. in January 2011 to source beans and consider opening stores.

Singh’s allies and other parties opposed a decision allowing retailers selling more than one brand, unveiled in late November, saying it would hurt local mom-and-pop type stores. The government suspended the policy Dec. 7.

Singh, 79, said he would renew the multibrand retail initiative after regional elections this year.

SEC Push May Yield New Disclosures of Company Cyber Attacks

As cyberspies from China, Russia and other countries ransack the computer networks of one major U.S. and European firm after the next, the SEC in October offered its new interpretation of disclosure requirements as applied to cybercrime. The amount of information that’s forthcoming will depend on whether company lawyers determine the incidents had, or will have, a material effect on the enterprise.

The networks of more than 2,000 companies, research universities, Internet service providers and government agencies were hit over the past decade by China-based cyber spies, according to Joel Brenner, U.S. counterintelligence chief until 2009. A November report by 14 U.S. intelligence agencies said Russia and other countries also are involved in such activities.

The companies, including firms such as Research In Motion Ltd. and Boston Scientific Corp., range from some of the largest corporations to niche innovators in sectors like aerospace, semiconductors, pharmaceuticals and biotechnology, according to intelligence data obtained by Bloomberg News.

In May, the Senate Commerce Committee asked SEC Chairman Mary Schapiro to clarify how cyber intrusions should be reported under the so-called material fact rule.

The guidance, which also says companies can’t use vague, general descriptions of the risks associated with possible future cyber break-ins when describing ‘‘risk factors,” raised fears that more detail could create a road map for hackers, said Alexander Tabb, a partner at TABB Group, which advises corporate clients on risk assessment.

For more, click here.

Compliance Action

Romanian Antitrust Council Fined Oil Companies 3% of Sales

Romania’s competition council fined five oil companies, including OMV Petrom SA and Rompetrol Group NV, about 880 million lei ($258 million), or 3 percent of their 2010 sales, for breaching antitrust rules.

The probe showed that Petrom, Rompetrol and the Romanian units of Lukoil OAO, MOL Hungarian Oil and Gas Plc and Eni SpA colluded on the withdrawal from the market of Eco-Premium, an unleaded gasoline pre-mixed with lead substitute, Bogdan Chiritoiu, the head of the Competition Council, said in a press conference in Bucharest yesterday.

The companies withdrew the gasoline from the market because of lack of demand and high production costs and “should not have talked about it,” with each other, according to Chiritoiu.

The companies can challenge the decision in court and they can also ask for a postponement of the fine payment until a final legal decision is taken, Chiritoiu said.

The Competition Council has been investigating the energy market over the past two years and still has to complete a probe regarding a possible “cartel scheme” in setting fuel prices, Chiritoiu said. Fuel prices in Romania increased 8 percent in the first 11 months of 2011 from a year earlier, according to data from the National Statistics Institute.

For more, click here.

SEC Said to Prepare Vote on Cases Against Ex-Stanford Executives

U.S. Securities and Exchange Commission investigators have proposed sanctions against at least five former Stanford Group Co. executives and brokers for their role in selling investments that fueled R. Allen Stanford’s alleged $7 billion Ponzi scheme, according to two people with knowledge of the matter.

The SEC’s five commissioners are scheduled to vote tomorrow on whether to authorize the enforcement actions, which target brokers and senior executives at Stanford’s Houston-based brokerage, the people said, speaking on condition of anonymity because the matter isn’t public.

The vote by the commissioners could still be delayed or tabled, the people said.

The actions, which seek to bar the executives and brokers from working in the industry and claw back sales commissions, come almost three years after the SEC sued Stanford and a federal grand jury indicted him on 21 criminal counts alleging he used his U.S. brokerage to sell bogus certificates of deposits for his Antigua-based bank.

Stanford, 61, has denied the fraud allegations and is being held without bail pending trial.

The investigators are treating the cases as a legal test of whether they can sanction brokers for failing to conduct due diligence on in-house products, the people said. If successful, the cases could be replicated against more ex-Stanford brokers over time, said the person.

Oracle Investigated Over HP ‘Eviction Strategy’ Complaint

Oracle Corp. is under investigation by France’s competition regulator after Hewlett-Packard Co. complained that Oracle used discriminatory practices on its licensing and support for products based on Intel Corp. systems.

The competition authority said it opened a probe to examine Hewlett-Packard’s July complaint that Oracle’s refusal to support Intel’s Itanium systems would be an abuse of dominant position, and that its license pricing was “decided unilaterally.”

Hewlett-Packard described “a generalized eviction strategy by Oracle, reinforced, according to it, by a deceitful ad campaign against HP Integrity servers,” the regulator said in a decision published on its website yesterday.

Hewlett-Packard has also disputed in the U.S. Oracle’s plan to stop developing products that use Intel’s Itanium chip, which HP uses in some servers. Oracle, the largest database-software maker, has responded with claims including false advertising.

“Oracle has acted in the best interest of consumers by telling the truth as HP has attempted to hide Itanium’s real fate from customers in order to protect its own profits,” Thomas Vinje, a lawyer for Redwood City, California-based Oracle, said yesterday in a statement.

The regulator “recognized the strong evidence” that Oracle “violated EU and French competition law,” Palo Alto, California-based Hewlett-Packard said yesterday in an e-mailed statement.

Gaye Hudson, a spokeswoman for Oracle, declined to comment on Hewlett-Packard’s statement.

China Construction Bank Says Police Investigate Former Employee

China Construction Bank Corp. said a former employee has come under police investigation for “personal reasons.”

The employee, Zhang Chuanbin, worked at the Beijing-based bank’s CCB International unit, according to a statement on China Construction Bank’s website dated Jan. 5. Caixin magazine reported on its website that day, citing a person it didn’t identify, that Zhang was being investigated for front-running trades.

Yu Baoyue, a Beijing-based public relations official for the lender, declined to comment beyond what was in the statement and said he didn’t have contact information for Zhang.

Courts

SEC Sues Ex-WellCare Executives Over Trading Tied to Fraud Case

Three former WellCare Health Plans Inc. executives were sued by U.S. regulators over claims that they sold $91 million of shares while withholding money the firm was required to spend on programs for low-income people.

Todd Farha, who was chief executive officer, Paul Behrens, his chief financial officer, and Thaddeus Bereday, who served as general counsel, sold 1.6 million WellCare shares from 2003 to 2007 while funneling premiums through an internal subsidiary to evade Florida’s regulatory framework, the Securities and Exchange Commission said in a lawsuit in Florida Nov. 9.

The excess premiums, which were counted as revenue, materially inflated net income and diluted earnings per share reported in the Tampa, Florida-based company’s public financial filings, the SEC said. The three executives stepped down in 2008 amid an FBI investigation of the fraud claims.

“The case against Mr. Farha has no merit and will be vigorously defended in court,” Tom Newkirk, an attorney for Farha at Jenner & Block LLP in Washington, said in an interview.

Jack Fernandez, an attorney for Bereday, declined to comment. A phone call to John Lauro, Behrens’s attorney, wasn’t returned.

WellCare, which restated earnings from 2004 through the first half of 2007, agreed in 2009 to pay $80 million and hire an outside monitor to avoid federal charges in the matter.

Interviews/Speeches

Carney on Domestic on Global Capital Rules, Hildebrand Exit

Mark Carney, the chairman of the Financial Stability Board, said that smaller domestic banks may face similar capital rules to measures planned for globally systemic lenders whose collapse would create economic turmoil.

The “framework should be in place for domestically systemically important banks by the end of the year,” Carney said in Basel yesterday. The board will also extend requirements for the largest banks to other kinds of financial institutions.

“Despite the important steps that have been taken over the last couple of years, we are all aware that, in the short term, vulnerabilities remain,” Carney said.

Banks including HSBC Holdings Plc, Citigroup Inc. and BNP Paribas SA have warned that plans by global regulators to impose extra capital requirements on systemically important lenders operating internationally could force them to cut loans to businesses and support to trade.

The FSB will also set up a group to examine cross-border disputes over rules governing banker pay, Carney said, acknowledging an “enduring mistrust” between banks and regulators over how lenders set their pay.

Carney also said that the board may not replace former Swiss National Bank Governor and FSB Deputy Chairman Philipp Hildebrand, following his resignation this week over a currency trades made by his wife.

The decision will be taken “in the fullness of time and in consultation with G20.”

For more, click here.

Anderson Says Liquidity ‘Real Challenge’ for Euro Banks

Jeremy Anderson, global chairman of KPMG LLP’s Financial Services Practice, talked about the impact of Europe’s debt crisis on the region’s banking industry.

Anderson spoke from Singapore with Rishaad Salamat on Bloomberg Television’s “On the Move Asia.”

For the video, click here.

Comings and Goings

Fannie Mae Chief Executive Michael J. Williams Stepping Down

Michael J. Williams will step down as chief executive officer of Fannie Mae, the mortgage finance guarantor controlled by U.S. regulators, the company announced.

Williams, who spent 21 years at Fannie Mae and helped guide its transition to government control, will continue as chief executive officer and president until a successor is named. The Washington-based company reported the departure yesterday in a filing with the Securities and Exchange Commission.

Williams, 54, became head of Fannie Mae in 2009, soon after mounting loan losses forced the company and its smaller rival, Freddie Mac, into U.S. government conservatorship. President Barack Obama and members of Congress are exploring ways to wind down the two companies.

Since 2008, the companies have been controlled largely by their government regulator, the Federal Housing Finance Agency, which is charged with conserving their assets and minimizing taxpayer losses.

For more, click here.

--With assistance from Silla Brush, William Selway, Lorraine Woellert, Michael Riley, Jesse Hamilton and Joshua Gallu in Washington; Jim Brunsden and Aoife White in Brussels; Ben Moshinsky in London; Heather Smith in Paris; Irina Savu and Andra Timu in Bucharest; Joshua Fellman in New York; John Liu in Beijing; Malavika Sharma in New Delhi; and Boris Groendahl in Vienna. Editors: Mary Romano, Glenn Holdcraft.

To contact the reporter on this story: Carla Main in New Jersey at cmain2@bloomberg.net.

To contact the editor responsible for this report: Michael Hytha at mhytha@bloomberg.net.


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