Bloomberg News

U.K.-Banks Tax Dispute, Brazil Stock Tax, CBOE: Compliance

March 13, 2012

UBS AG (UBSN) and Deutsche Bank AG (DBK) said they don’t owe taxes over a 2003 compensation plan U.K. authorities argue was designed to avoid millions of pounds in taxes and national insurance contributions on employee bonuses.

The two banks appealed separate rulings that found them liable for income and payroll taxes for bonuses paid to bankers in shares through an offshore trust, in a four-year-old dispute with U.K. revenue officials. UBS owes 49.6 million pounds ($77.5 million) on total bonus payments of 92 million pounds into the plan, according to documents disclosed yesterday after Bloomberg petitioned the court for their release.

The case “concerns a disagreement over the interpretation of highly technical tax legislation and dates back to a one-off compensation plan for 2003,” UBS spokesman Richard Morton said in an e-mailed statement.

The U.K. government is taking “decisive and swift action” to tackle tax avoidance, Chancellor of the Exchequer George Osborne told Parliament this month after authorities closed two tax loopholes that had been used by Barclays Plc. (BARC) Legislators are seeking a tougher approach to companies that hire lawyers and accountants to cut tax bills.

UBS and Deutsche Bank said in the court documents that they didn’t have to pay income tax on the shares because they were “restricted securities” that weren’t eligible for contributions. Both plans involved setting up offshore vehicles that issued securities to employees. The vehicles, which are no longer used, invested in the shares of UBS and Deutsche Bank.

“This was a one-off arrangement from eight years ago and hasn’t been repeated,” said Adrian Cox, spokesman for Frankfurt-based Deutsche Bank. “We believe it met all the requirements at the times.”

HMRC lawyer Nikky Fadero said the department wouldn’t comment until the judges released a decision. “The predominant reason for the ESIP scheme was tax avoidance,” HMRC said in its court filing.

A week-long trial at the Upper Tribunal in London ended on Feb. 28. There is no schedule for a ruling.

Compliance Policy

Brazil Unlikely to Tax Stock Investment, BM&FBovespa CEO Says

Brazil is unlikely to reinstate the financial transactions tax on foreigners’ stock purchases as part of its effort to curb the real’s rally, said BM&FBovespa SA (BVMF3) Chief Executive Officer Edemir Pinto.

BM&FBovespa SA is the operator of Latin America’s biggest securities exchange.

The government extended a 6 percent tax, known as IOF, on foreign loans and bonds issued abroad by local companies to include lending with a duration as long as five years, according to a decree published yesterday in the official gazette. It was the third measure taken this month to weaken the real. The 6 percent tax, which was originally applied to foreign borrowing of as long as two years, had already been extended on March 1 to loans and bonds with a duration of three years. The central bank the same day extended the tax to some loans granted to exporters.

In December, the government cut to zero the IOF tax on foreigners’ stock purchases as part of steps to boost economic growth, two years after imposing the 2 percent levy on equity and debt purchases in October 2009 to keep inflows from pushing up the currency.

Brazil’s real is the worst performer among the 16 main currencies tracked by Bloomberg since March 1, when the government started escalating efforts to contain capital inflows which President Dilma Rousseff dubbed a “monetary tsunami.” The real has fallen 5.5 percent this month, trimming its gain this year to 2.6 percent.

The government is unlikely to change taxation on derivatives, Pinto said.

Schaeuble Says EU Should Strive for 27-Nation Transactions Tax

German Finance Minister Wolfgang Schaeuble said the European Union should continue to strive for agreement on a financial-transactions tax among all 27 EU countries.

European finance ministers will debate the issue at a meeting today without a need for immediate conclusions, Schaeuble told reporters in Brussels yesterday before an evening gathering of euro-area ministers.

The European Commission, the EU’s regulatory arm, has proposed a wide-ranging tax on trading of stocks, bonds, derivatives and other financial contracts. The commission says the tax could raise 57 billion euros ($75 billion) annually if implemented throughout the region, while also discouraging transactions like high-frequency trading that it considers more risky to the financial system.

The Brussels-based commission and Denmark, current holder of the EU’s rotating presidency, have urged more technical work in search of a widely accepted compromise.

Danish Economy Minister Margrethe Vestager said yesterday in a statement that she does not expect final conclusions to be drawn at this meeting. The group will return to the matter at a ministerial session toward the end of Denmark’s presidency, which concludes on June 30, she said.

France has been pressing for speedier work with a smaller group of nations if no broader coalition emerges.

Energy Loan-Guarantee Data Needs to Be Consolidated, Report Says

The U.S. Energy Department’s scattered data on loan- guarantee applications makes oversight of the program difficult, the Government Accountability Office said.

“Without consolidated data on applicants,” the program’s managers “do not have readily accessible information that would facilitate more efficient program management,” the government watchdog said yesterday in a report.

Mortgages, Exchange-Traded Products, Among FSA Retail Priorities

The U.K.’s Financial Services Authority said unfair mortgage contracts and funds traded on exchanges are among the products posing the biggest risk for retail financial consumers.

The FSA said it found “some evidence of poor practice in U.K.-authorized firms” that sell exchange-traded products, the regulator said in a report on the retail finance industry published today. The supervisor also said that some lenders sold mortgages that “resulted in detriment for consumers.”

The FSA will be disbanded next year as part of the government’s plans to hand responsibility for banking supervision to the Bank of England. Oversight of trading and consumer rules will be taken over by the Financial Conduct Authority.

Consumer confidence in retail financial products “remains low,” because of declining real income and low interest rates, the FSA said.

The regulator also said that “early signals suggest that greater repayment difficulties in the mortgage markets could materialize again in 2012.”

Compliance Action

Obama Monitors for Gasoline, Diesel Fraud in 360 U.S. Cities

The Obama administration is monitoring gasoline and diesel fuel prices in 360 U.S. cities to guard against fraud or price manipulation, according to a White House report released yesterday.

The report, which also says the administration has made progress weaning the U.S. from foreign oil imports, outlined the extent of price monitoring that President Barack Obama previously announced. At a March 6 news conference, Obama said he asked Attorney General Eric Holder to reconstitute a special task force to ensure the government is watching for “potential speculation in the oil markets.”

Obama was expected to speak about the report in interviews at the White House yesterday with television stations from Los Angeles, Denver, Austin, Des Moines, Orlando, Cincinnati, Las Vegas and Pittsburgh, according to a White House schedule.

The Commodity Futures Trading Commission, which regulates futures markets, has also cracked down on financial trades that evaded scrutiny in unregulated or overseas markets.

Rising gasoline prices have become a campaign issue as higher energy costs have overshadowed positive economic news indicating the recovery is gaining traction. Republican presidential candidates criticized Obama March 11 for environmental and permitting decisions affecting oil drilling that they say have exacerbated the spike in oil prices, and they vowed to reverse those decisions if elected.

For more, click here.

AIJ’s Asakawa Declines Request to Speak to Diet Over Losses

AIJ Investment Advisors Co. (0202964D) President Kazuhiko Asakawa declined a request to appear before a parliamentary committee seeking answers over how the suspended fund manager lost as much as $2 billion of pension money.

“Unfortunately I am unable to take up the offer,” Asakawa said, according to a faxed statement read by Banri Kaieda, chairman of the lower house financial committee, to reporters in Tokyo yesterday. Asakawa wrote that he is busy compiling information requested by the government’s financial watchdog, Kaieda said.

Asakawa’s reply is his first statement to be made public since the Financial Services Agency suspended AIJ on Feb. 24 for a month to find out what happened to the 185.3 billion yen ($2.3 billion) of pension assets managed by his firm.

The FSA’s investigative arm, the Securities and Exchange Surveillance Commission, “is still continuing its inspection,” Asakawa wrote, according to Kaieda. “I am busy as we are preparing documents to detail the assets under management by the March 23 deadline,” Kaieda quoted Asakawa as saying.

SEC Said to Plan Action Over Felix, SharesPost

The U.S. Securities and Exchange Commission is preparing sanctions against Felix Investments LLC over trading of private- company shares, the first action to emerge from a broad investigation of transactions involving non-public startups, two people with knowledge of the matter said.

Cris Valerio reported on Bloomberg Television’s “Street Smart.” Trish Regan also spoke.

For the video, click here.

Interviews/Speeches

Dixon Doll Expects U.S. Startup Bill to Help IPO Market

Dixon Doll, co-founder of venture-capital firm DCM Inc., talked about congressional legislation to help startups raise capital and the South by Southwest Interactive event in Austin, Texas.

The U.S. House last week voted to approve a package of measures to roll back U.S. Securities and Exchange Commission rules for newly public companies and closely held firms looking for investments. Doll spoke with Betty Liu on Bloomberg Television’s “In the Loop.”

For the video, click here.

Cole-Frieman Sees Non-Public Investments as ‘Wild West’

Karl Cole-Frieman, an attorney at Cole-Frieman & Mallon LLP, talked about the U.S. Securities and Exchange Commission’s investigations of pools through which investors can purchase shares of non-public companies.

He talked with Cory Johnson on Bloomberg Television’s “Bloomberg West.” Emily Chang also spoke.

For the video, click here.

Comings and Goings

CBOE Compliance Executive Patrick Fay Resigns Amid SEC Probe

CBOE Holdings Inc. (CBOE), the options exchange being investigated by the U.S. Securities and Exchange Commission, said senior compliance executive Patrick Fay has resigned, spokeswoman Gail Osten said in an e-mailed statement.

Fay had been placed on leave after the SEC began investigating the options-market operator’s oversight of traders, the Wall Street Journal reported last week, citing people familiar with the matter. He will “pursue other interests,” Osten said yesterday.

CBOE Holdings said in its annual report filed Feb. 28 that the SEC began investigating whether the company was complying with its obligations as a self-regulatory organization.

“The SEC is looking at all exchanges very carefully,” CBOE Chief Executive Officer William Brodsky said yesterday in an interview in Bonita Springs, Florida. He declined to comment on Fay’s resignation and the details of the investigation. “We have a very good relationship with the SEC and we work with them,” he said.

Fay, a senior vice president for member and regulatory services since 2006, was among 10 “executive officers” listed on CBOE’s website. He had rejoined the company in 2004 after 19 months at NQLX LLC. Before that, he spent 18 years with CBOE, according to the website.

CBOE was founded in 1973 as the first U.S. market for equity derivatives. As self-regulatory organizations, American exchanges are required to write rules for their markets, monitor trading and ensure that they and their customers aren’t breaking securities laws.

“The SEC is investigating CBOE’s compliance with its obligations as a self-regulatory organization under the federal securities laws,” CBOE said in the Feb. 28 filing. “The company is cooperating with the investigation, which is ongoing, and is conducting its own review of its compliance.”

The SEC’s Office of Compliance Inspections and Examinations conducts “routine and special inspections” of self-regulatory organizations, the Government Accountability Office said in a November 2007 report.

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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