Bloomberg News

Hedge Funds, Credit Cards, Trading Review: Compliance

September 21, 2012

The world’s largest hedge-fund advocacy group has named a former U.S. Securities and Exchange Commission official its chairman as the $2.1 trillion industry grapples with increased regulation.

Kathleen Casey, who stepped down as a Republican SEC commissioner last year, was appointed non-executive chairman of the Alternative Investment Management Association, the London- based lobbying group said in an e-mailed statement yesterday. She replaces Todd Groome, a former Deutsche Bank AG (DBK) executive and adviser to the International Monetary Fund, whose term expired.

Casey, 46, takes the post as global regulators implement rules ranging from restrictions on who can invest in hedge funds in Europe to U.S. requirements that funds undergo routine SEC inspections and disclose their leverage and investments to the government. European watchdogs are also considering whether to stiffen oversight of so-called shadow banking, a term that describes all financing activities not performed by banks.

From 2006 through 2011, Casey served as one of the five SEC officials who vote on whether to adopt new regulations for the finance industry and to punish individuals and companies for violations of securities laws. Her tenure coincided with the meltdown of the U.S. housing market that led to the collapses of Bear Stearns Cos. and Lehman Brothers Holdings Inc. in 2008.

The resulting global financial crisis prompted the U.S. Congress to approve the 2010 Dodd-Frank Act, which increased regulation of banks and hedge funds.

Casey last year voted against a rule mandated by Dodd-Frank that requires hedge funds to register with the SEC. The rule passed 3-2 with Democratic SEC commissioners supporting it and Republicans in opposition.

AIMA has 1,300 corporate members ranging from hedge funds to accounting firms and prime brokerage units at banks. Casey’s term as chairman lasts for two years.

Compliance Policy

Cordray Says CFPB to Propose Changes on Credit for Working Moms

The Consumer Financial Protection Bureau will propose changes to regulations that critics have charged could bar stay- at-home mothers from obtaining credit cards, its director, Richard Cordray, said yesterday.

Cordray said at a hearing of the House Financial Services Committee that the agency will engage in rulemaking on the topic and would propose the rule before Congress reconvenes after the election. It could affect major credit card issuers such as Capital One Financial Corp. (COF:US), JPMorgan Chase & Co. (JPM:US) and Bank of America Corp. (BAC:US)

The plans stem from an effect of the Credit Card Accountability, Responsibility and Disclosure Act of 2009, which governs how card issuers consider applications from non-working spouses.

The Federal Reserve, which wrote the first regulations under the law, stated that a card issuer may not determine a customer’s ability to repay by relying on income or assets of a person who is not liable for the debt unless the applicant has an ownership interest on the other person’s assets or income.

Members of Congress have argued the rule could limit the ability of stay-at-home mothers to get credit. Cordray said he largely agreed with their assessment.

Cities Weighing Mortgage Seizures Get Washington’s Attention

U.S. regulators and lawmakers are seeking ways to keep local governments from using the power of eminent domain to seize mortgages, citing concern about the potential cost to taxpayers, investors and homebuyers.

The issue, the subject of a Mortgage Bankers Association symposium yesterday, has gained attention in Washington after the city of Chicago and California’s San Bernardino County said they would consider confiscating home loans and cutting borrowers’ debt. No community has taken the step so far.

MBA president and chief executive officer David Stevens said at the symposium that the potential of eminent domain would have a “direct and profound impact” on the housing market, deterring investors because of concern over “arbitrary writedowns.”

The federal government is positioned to wield broad power in the debate because it owns or guarantees 90 percent of U.S. mortgages through government-sponsored enterprises and the Federal Housing Administration. Alfred Pollard, general counsel of the Federal Housing Finance Agency, regulator of Fannie Mae and Freddie Mac, said at the symposium, “there is a federal interest here.”

Pollard is leading an effort by the FHFA to determine whether Fannie Mae and Freddie Mac should intervene to discourage loan confiscations. In addition, a bill introduced last week in Congress would bar Fannie Mae, Freddie Mac, the Veterans Administration and the FHA from guaranteeing or buying loans in communities that seize mortgages.

Local governments, whose tax bases are being eroded by foreclosures in the wake of the mortgage crisis, say they are being forced to act because lenders and federal officials have failed to find solutions for troubled borrowers.

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EU Targets Money Funds in Bid to Strengthen Shadow Bank Rules

Money-market funds may face tougher rules as part of a European Union bid to prevent so-called shadow banks from causing another financial crisis, according to draft EU documents obtained by Bloomberg News.

The EU may seek to regulate some types of shadow banks to make sure their solvency receives the same scrutiny as that of regular banks, according to documents prepared by EU staff who work on financial-services issues. Other measures could include limits on large exposures and tighter rules on transactions between a holding company and its subsidiaries, according to the papers.

This could mean forcing money-market funds with a fixed share value to switch to a floating-value system. EU financial officials “in particular discussed that regulatory approach,” according to the EU documents, written in preparation for a Sept. 14-15 meeting of finance ministers and central bankers in Nicosia, Cyprus.

The European Commission plans to publish draft rules for shadow banks in November. A policy document reflecting preparations for that initiative showed that policy makers seek to strengthen supervision while preserving “a useful channel of financial intermediation” that can help the economy while the financial crisis limits the amount of funding that banks can provide.

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U.K. Seeks Rejection of EU Bid to Scale Back Bank Liquidity Rule

The U.K. urged lawmakers to block European Commission proposals for applying a Basel bank liquidity rule, saying they may hamper efforts to bolster the banking system, according to a document obtained by Bloomberg News.

The commission’s compromise plan “significantly weakens” the standard, according to the U.K document, which was sent to members of the European Parliament. The U.K. recommends “rejecting” the proposal.

The measure, known as a liquidity coverage ratio, or LCR, would oblige banks to hold enough easy-to-sell assets to survive a 30-day credit squeeze. The requirement was included by the Basel Committee on Banking Supervision in an overhaul of bank rules that was agreed on following the collapse of Lehman Brothers Holdings Inc.

The commission this week submitted a revised text on how the EU should apply the LCR in a bid to advance negotiations with governments and legislators on a draft bank law to implement the Basel rules in the bloc. The compromise plan would scale back reporting on whether they meet the liquidity requirement, according to a copy of the proposals.

The Basel committee has said that banks should report to regulators on how well they measure up to the LCR even before the standard becomes binding in 2015.

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Special Section: Electronic Trading

NYSE Executive Urges Assessment of 2007 Stock Trading Overhaul

U.S. regulators and securities professionals should re- examine rules implemented in 2007 that transformed stock trading in the U.S., according to a NYSE Euronext (NYX:US) executive.

The proliferation of venues where investors can buy and sell shares, advances in trading speed spurred by computers, and the use of increasingly complex orders by high-frequency firms warrant a coordinated assessment, Joseph Mecane, head of U.S. equities at NYSE Euronext, said Sept 19 at a conference. The analysis should focus on Regulation NMS, the set of rules meant to foster competition and speed trading in shares listed on the New York Stock Exchange, he said.

The Senate Banking Committee was scheduled to hold hearings yesterday on electronic trading. Last week, the Big Board, owned by NYSE Euronext, agreed to pay $5 million to settle Securities and Exchange Commission charges that it sent price and other data to feeds used by brokers and high-frequency companies faster than it did to the public.

The SEC should arrange a “series of market structure roundtables to discuss a lot of these items as an industry and to have a holistic recommendation or series of legislative changes coming out of these issues,” Mecane said. “Each of these items is interrelated. I don’t think they get addressed, largely because you can’t address them in isolation.”

Buy and sell orders for U.S. equities are executed on 13 stock exchanges, several alternative venues, more than 40 dark pools and through other broker-dealer systems.

Scrutiny of equity infrastructure has increased this year after a series of computer malfunctions raised questions about the stability of modern market structure.

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Congress Must Be Ready to Act on High-Speed Trading, Reed Says

U.S. Senator Jack Reed, a Democrat from Rhode Island, said Congress must be ready to act on the issue of high-speed trading.

“We’ve had some wake-up calls,” Reed, who is chairman of the Senate Securities, Insurance and Investment Subcommittee, told Bloomberg Law’s Lee Pacchia.

While it’s encouraging that the SEC is looking into high- speed trading, Congress must also examine the issue, Reed said.

“If it’s clear by the evidence that we have to take steps then we should be prepared to take those steps,” Reed said. Congress must also be ready if regulators ask for more legislative authority, he said. Lawmakers must look closely to ensure fairness, transparency, confidence in markets and protect against systemic risk, he said.

Reed’s panel held a hearing on Capitol Hill on computerized trading.

Separately, European Central Bank Governing Council member Ewald Nowotny said on Sept. 13 that high-frequency trading should be banned.

Markets Should Be Less Speed Obsessed, Brooks Says

“We suggest any regulatory proposals be aligned with a goal of making the markets simpler, more transparent and less focused on speed,” Andrew Brooks, head of equity trading at T. Rowe Price Associates (TROW:US), told the Senate Banking Committee panel in a hearing on computerized trading.

The time is right to “step back to examine market structure and how it impacts all investors,” Brooks said in prepared testimony.

“There are currently over 1,000 order types to express your buy and sell interest and we suggest that a simplified model may be more efficient for all investors”.

High-frequency trading came under regulatory scrutiny after flash crash in May 2010, when about $862 billion was erased from stock values in 20 minutes before prices recovered.

Rebates for Stock-Market Orders Should Be Stopped, Themis Says

Eliminating a practice known as maker-taker pricing, in which an exchange charges some firms to trade and gives rebates to those providing orders, will make trading more fair for investors, according to Sal Arnuk, a partner at Themis Trading LLC.

High-frequency trading, in which computer algorithms are used to buy and sell stocks in fractions of a second, accounts for about half of equity trading volume, Arnuk said on Bloomberg Television’s “Market Makers” program with Erik Schatzker and Stephanie Ruhle.

“It’s a game of pick up the rebate,” he said. “Race to zero in speed, be first in line to pick up the exchange rebates, have the best cutting-edge algo. The combination of this is what’s caused the systemic risk in the marketplace especially over the last few years.”

Compliance Action

French Regulator Seeks to Fine OFI Over Madoff, Echos Says

Paris-based asset manager OFI AM was questioned yesterday by the French market authority, Les Echos reported.

OFI AM is accused of not having carried out the necessary due diligence linked to investments in funds managed by Bernard Madoff, and of having failed to respect statutory investment ratios, the newspaper reported.

The French markets watchdog is asking for a 500,000-euro ($650,000) fine for OFI AM and a 60,000-euro fine for each of its two managers at the time, according to Les Echos.

OFI AM’s lawyers said that the asset manager was a victim of Madoff and that it respected all regulatory procedures, the newspaper said.

Courts

Cosmo’s 25-Year Sentence Upheld in $413 Million Ponzi Scheme

Nicholas Cosmo’s 25-year prison sentence for running a $413 million Ponzi scheme was upheld by a federal appeals court in New York.

Cosmo, owner of Agape World Inc. and Agape Merchant Advance LLC, pleaded guilty in 2010 to fraud charges in connection with a scheme in which he promised to use investor money to make short-term loans.

Only about $30 million of the investors’ funds were actually used to make the loans, and victims’ losses totaled about $195 million, the government said.

Cosmo pleaded guilty to a single federal charge of mail fraud in 1999 and was sentenced to serve 21 months in prison and pay $177,000 in restitution. He was also ordered to undergo “extensive gambling therapy” while in prison, according to court records.

Bruce Bryan, a lawyer for Cosmo, didn’t return a call seeking comment on the appeals court’s ruling.

The case is U.S. v. Cosmo, 11-cv-4506, U.S. Court of Appeals for the Second Circuit (Manhattan).

Madoff Investors Get $2.5 Billion After Almost Four Years

Bernard L. Madoff’s investors were mailed checks totaling about $2.5 billion, almost four years after the Ponzi scheme operator was arrested.

Traders said anticipation of the payment, which many investors see as the last for a while, has spurred sales of Madoff claims in recent weeks.

Irving H. Picard, who is liquidating the con man’s firm, said checks for the second distribution from a customer fund were mailed Sept. 19 to people with approved claims. He has previously paid investors $336 million from the fund, now standing at $7.3 billion, according to his website.

The Securities Investor Protection Corp., which hired Picard and pays his fees, compensated investors for $803 million in losses after the Madoff brokerage collapsed.

The three payments satisfy half of the current Madoff accounts whose claims he has allowed, he said. The average check mailed yesterday was for about $2 million, Picard said in a statement.

Prices of larger claims have climbed steadily to 70 cents on the dollar from 67 cents in July, said Joseph Sarachek, managing director of claims trading at CRT Capital Group LLC, which buys and sells distressed debt. One $80 million claim, which he tried to buy, traded for 70 cents, he said.

Madoff is serving a 150-year prison sentence after pleading guilty to fraud.

The Madoff liquidation case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities Inc., 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The criminal case is U.S. v. Madoff, 09- cr-00213, U.S. District Court, Southern District of New York (Manhattan).

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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