Bloomberg News

Cyprus, Argentina, SEC Tick-Size, Bonuses: Compliance

March 25, 2013

Cyprus dodged a disorderly default and unprecedented exit from the euro by bowing to demands from creditors to shrink its banking system in exchange for 10 billion euros ($13 billion) of aid.

Cypriot President Nicos Anastasiades agreed to shut the country’s second-largest bank under pressure from a German-led bloc in a night-time negotiating melodrama that threatened to rekindle the debt crisis and rattle markets.

“It’s been yet another hard day’s night,” European Union Economic and Monetary Affairs Commissioner Olli Rehn told reporters in Brussels early today. “There were no optimal solutions available, only hard choices.”

It was the second time in nine days that Cyprus struck a deal with its euro partners and the International Monetary Fund, capping a tumultuous week that underscored the contradictions of the crisis management that has dominated European policy making for more than three years. Cyprus, the euro area’s third- smallest economy, is the fifth country to tap international aid since the crisis broke out in Greece in 2009.

The first Cypriot accord, reached March 16, fell apart three days later when the parliament in Nicosia rejected a key plank, a tax on all bank accounts that sparked the indignation of smaller depositors. Efforts to win an alternative bailout from Russia, which lent Cyprus 2.5 billion euros in 2011 when the nation was shut out of international markets, failed.

The revised accord spares bank accounts below the insured limit of 100,000 euros. It imposes losses that two EU officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc, the largest bank, which will take over the viable assets of Cyprus Popular Bank Pcl (CPB), the second biggest.

Cyprus Popular Bank, 84 percent owned by the government, will be wound down. Those who will be largely wiped out include uninsured depositors and bondholders, including senior creditors. Senior bondholders will also contribute to the recapitalization of Bank of Cyprus.

For more, click here.

Compliance Policy

Argentina Tightens Securities Regulation as Peso Slides

Argentina modified rules governing mutual fund investments in locally traded securities of foreign companies in a bid to increase investment in local companies and curb capital flight.

The regulator reduced the proportion of securities known as Cedears, which are peso-denominated shares and bonds of foreign companies, that mutual funds can hold to 25 percent from 75 percent, as the assets are now considered to be a foreign investment, according to resolutions published in the March 22 official gazette.

“It’s understood that it’s appropriate to limit the maximum rate of investment in that asset class to ensure proper channeling of domestic savings into productive development,” according to the resolution.

The measure is part of President Cristina Fernandez de Kirchner’s efforts to bring dollars back to the country and curb capital flight as the peso is forecast to weaken at the fastest rate in the world and reserves, which the country uses to pay debt, fell 13 percent in the past 12 months to $41 billion. She also made insurance companies repatriate foreign investments and forces them to invest part of their portfolio in government sponsored companies and projects.

The resolution also states that the securities that don’t trade in the local exchanges must be valued according to the closing price in the market where they trade using the official currency rate published by state-controlled Banco de la Nacion Argentina.

Each business day, investment funds will have to provide the regulator with details of the composition and valuation of their portfolios, the resolution says.

Telephone calls to the securities regulator’s press department seeking comment on the resolution went unanswered.

For more, click here.

SEC Favors Pilot Program to Vary Tick Size for Small U.S. Stocks

The U.S. Securities and Exchange Commission’s staff is poised to recommend a pilot program to test whether larger trading increments promote more active trading of small stocks.

A pilot program would increase the ‘‘tick size,” or minimum increment for quoting shares, for smaller public companies. A 2012 law, the Jumpstart Our Business Startups Act, required the SEC to examine the impact that penny increments had on the liquidity of shares issued by small- and medium-size companies.

In theory, wider tick sizes would increase the spread between bid and offer prices, boosting profits for market makers. Higher profits may revive interest in funding analyst research on small stocks, generating greater interest in the stocks, supporters of the idea say.

Proponents say widening minimum tick sizes would help boost the number of small companies going public, while skeptics complain it will cause people to pay more when they trade. U.S. exchanges began quoting stocks in pennies in 2001, after over 200 years pricing equities in fractions. The move to penny increments benefited professional traders willing to pay a penny more to jump in front of a competing bid, Angel said.

At a roundtable on decimalization last month at the SEC, many participants expressed support for a pilot even as some questioned whether varying tick sizes would yield more IPOs or research coverage.

Skeptics of varying tick sizes point out the benefits are unknown, while it’s clear the move to 1-cent increments lowered spreads and created savings for investors.

Judith Burns, an SEC spokeswoman, declined to say how soon a tick-size pilot program would be approved.

A pilot program would probably move forward under the SEC’s next chairman. Mary Jo White, President Barack Obama’s nominee to lead the agency, told senators on March 12 that she was inclined to believe that one tick size “doesn’t necessarily fit all.”

Europe’s Bonus Clampdown Hits Two-Thirds of Fund Managers

The European Parliament’s vote to cap bonuses in the asset- management industry could affect two-thirds of senior fund managers in the U.K., U.S. funds in Europe and hedge funds open to small investors.

Bonuses should not exceed base salaries for managers of mutual funds regulated by the European Union, known as UCITS, European lawmakers in the economic and monetary affairs committee voted March 21. The rules would cover 5 trillion euros ($6.5 trillion) of assets in UCITS, which include funds managed outside Europe and some linked to hedge-fund strategies such as John Paulson’s New York-based Paulson & Co. and Och-Ziff Capital Management Group LLC. (OZM:US)

Flushed with the success of overhauling bank-capital rules that banned bankers’ bonuses of more than twice fixed pay, European policy makers are pressing for tougher rules on fund managers. The managers will respond by increasing fixed salaries, moving overseas and pulling products from Europe if they can’t dilute the rules, industry lobby groups said.

The committee’s proposal sets the stage for a vote by the full European Parliament before negotiations with national diplomats can start.

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China, Brazil Reach Consensus on 190b Yuan Currency Swap

Consensus was reached recently on a 190b Yuan currency swap plan to be created between the People’s Bank of China and Banco Central Do Brasil, Foreign Ministry spokesman Hong Lei said at a briefing in Beijing.

An agreement on the currency-swap plan will be signed “soon,” Hong said. The currency-swap mechanism will “help promote economic and trade interaction between the two countries” and safeguard financial stability, he said.

Chinese and Brazilian leaders are to meet this week during annual BRICS summit in Durban, South Africa.

U.K. Finance Regulator to Shift Focus to Consumer Protection

The U.K. finance regulator will renew its focus on consumers and continue to investigate market abuse and other rule breaches, including manipulation of the London interbank offered rate, as it prepares to split into two new agencies.

The U.K. Financial Services Authority will be replaced on April 1 with a consumer-focused watchdog and a prudential regulator that will be a unit of the Bank of England. The consumer agency, the Financial Conduct Authority, will continue many of the current initiatives of the finance regulator, the FSA said in a statement today.

The main risks in the industry for the coming year are firms designing products that aren’t in the long-term interest of consumers and don’t respond to their needs, a lack of transparency on what’s being sold, a poor understanding by consumers of risk, and a shift toward more complex structured products that lack oversight, according to the statement.

“We are introducing new approaches to the way we do much of our work, becoming much more proactive and consumer- focused,” said Martin Wheatley, the chief executive officer- designate of the FCA. “A risk for all regulators is becoming bound to conventional thinking. That is why the new regulator will be much more transparent, so we can learn from our mistakes. There is no room for the poor behavior of the past.”

The FCA will regulate the conduct of around 26,000 firms and the prudential standards of as many as 23,000 financial companies, the regulator said.

Middle Ground on Cross-Border Swaps Rule Sought by SEC’s Walter

U.S. regulators should apply domestic derivatives rules to overseas firms when foreign laws don’t demand comparable requirements, Securities and Exchange Commission Chairman Elisse B. Walter said in a speech today.

That approach to oversight required by the Dodd-Frank Act would be an alternative to finding overseas rules are “broadly equivalent” in a way that might ignore regulatory gaps between countries, Walter said in a speech prepared for an Australian Securities and Investments Commission conference in Sydney.

The comments by Walter come as the SEC is preparing to issue a proposal for outlining cross-border application of its rules for security-based swaps. Overseas regulators have pressed the Commodity Futures Trading Commission to curb the reach of its requirement that trades be guaranteed at clearinghouses and traded on exchanges or other platforms.

Her call for substituted compliance was a “middle ground” between Europe’s call for equivalence and the most strict approach requiring U.S. and overseas regulations to align perfectly, Walter said.

Compliance Action

Franklin Square Raises Billions as Brokers Push Junk-Loan Funds

Brokers across the U.S. are tapping into demand for high- yield debt, and drawing regulatory scrutiny, by pushing investors into pools of risky loans that have extracted more in fees than they’ve paid out in profit.

Sales of junk-rated debt funds known as non-traded business-development companies doubled to a record $2.8 billion last year, according to estimates by MTS Research Advisors, a Gilbert, Arizona-based consulting firm. Franklin Square Capital Partners, the Philadelphia firm that created the securities about four years ago, said it took in $134 million of revenue last year, much of that passed on to Blackstone Group LP (BX:US), which picks the loans and manages the portfolios.

The funds, sold by brokers, take investor money and lend it to companies. The investments are luring individuals with annual payouts of about 8 percent and access to managers including Blackstone and KKR & Co. (KKR:US) Brokerages generally take 10 percent upfront, several times the amount charged by similar junk-loan mutual funds, while management and performance fees rival those of hedge funds.

In addition to the upfront commissions, investors generally pay 2 percent management fees and about 20 percent of returns, Jonathan Bock, a Wells Fargo & Co. (WFC:US) analyst, wrote in a January report.

Investors in Franklin Square’s initial $2.5 billion fund have paid a total of $323.5 million in commissions and fees since 2008, Bock wrote in the report. That’s 25 percent more than the $258 million it has distributed to investors, according to data compiled by Bloomberg.

The rapid increase in sales has drawn scrutiny from the Financial Industry Regulatory Authority, which said in a January letter to brokers that monitoring the investments is among its priorities this year. The non-traded securities may be hard for investors to sell, according to Finra.

Franklin Square created the unlisted version in 2008, as brokers were raising billions of dollars selling another type of non-traded investment, real estate investment trusts.

“It’s really about bringing institutional-quality alternatives to the investing public,” Chief Executive Officer Michael Forman said in a phone interview. “Everybody wants to invest in alternatives.”

Franklin Square’s pitch is that the new structure allows investors who don’t have enough money to buy private-equity or hedge funds to diversify into loans to smaller companies, according to its website.

“We don’t think the fees on these products are all that much different than we see with variable annuities or with mutual funds,” Forman said.

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Deutsche Bank Board Cleared in Libor Probe, Handelsblatt Says

Deutsche Bank’s management board was cleared of wrongdoing in German banking regulator Bafin’s preliminary report on a probe into alleged attempts by traders at the company to rig interbank borrowing rates, Handelsblatt reported, citing unidentified people familiar with the matter.

The report’s findings show that Deutsche Bank had organizational shortcomings in submitting Libor rates. Deutsche Bank has corrected the shortcomings by giving oversight to a unit based in the risk management department, the newspaper said. Bafin verbally informed the German Finance Ministry of its findings and will present the ministry with a preliminary report this month, Handelsblatt reported.

The final report is to be presented to the ministry mid- year, the newspaper said.

Deutsche Bank said in July that internal probe cleared current or former board members of wrongdoing. The bank said in January that it probably won’t resolve all issues pertaining to alleged rigging this year.

Kinnucan Deserves Triple Penalties for Egregious Acts, SEC Says

An expert-networker sentenced to more than four years in prison for passing tips to hedge fund clients should pay a triple penalty in a civil case because of his “egregious” behavior, U.S. regulators said.

John Kinnucan, who pleaded guilty to insider trading and was sentenced for his criminal conduct, is still defending himself in the lawsuit over his “flagrant and involved” actions, the U.S. Securities and Exchange Commission said in a March 22 court filing.

The SEC seeks a summary judgment granting its request without a trial that Kinnucan be ordered to pay $4.75 million in penalties for the insider-trading scheme that lasted at least two years.

As the founder of Broadband Research LLC, an expert- networking firm he ran from his home in Portland, Oregon, Kinnucan pleaded guilty to one count of conspiracy and two counts of securities fraud for obtaining and passing illegal tips to hedge fund clients, including two in New York.

Kinnucan admitted getting inside information about SanDisk Corp. (SNDK:US), F5 Networks Inc. (FFIV:US) and OmniVision Technologies Inc. (OVTI:US), including quarterly revenue numbers, after befriending employees of technology companies from 2008 to 2010.

The civil case is SEC v. Kinnucan, 12-cv-01230, U.S. District Court, Southern District of New York (Manhattan); the criminal case is U.S. v. Kinnucan, 12-cv-00163, U.S District Court, Southern District of New York (Manhattan).

Ex-Deutsche Bank Accountant Gets 3 1/2 Years for Tax Fraud

David Parse, a former Deutsche Bank AG (DBK) accountant, was sentenced to three and a half years in prison for his role in what prosecutors claim is the biggest criminal tax-fraud prosecution in history.

Parse, 51, was convicted in 2011 of mail fraud and obstructing the Internal Revenue Service as part of a scheme to market fraudulent tax shelters that the U.S. said cost the Treasury more than $230 million in lost taxes. He was sentenced March 22 by U.S. District Judge William Pauley in Manhattan.

“Parse played a central and longstanding role in the criminal scheme,” Pauley said before announcing the sentence.

Parse was accused of being a key actor in a fraud that created more than $7 billion in illegal tax deductions and benefits. He made $3 million in commissions from the fraud, according to the government.

In addition to the prison time, Pauley sentenced Parse to three years of supervised release, $115.7 million in restitution and $1 million forfeiture.

The case is U.S. v. Daugerdas, 09-cr-00581, U.S. District Court, Southern District of New York (Manhattan).

John Thomas’s Belesis Aided Hedge-Fund Fraud for Fees, SEC Says

Anastasios “Tommy” Belesis, founder of John Thomas Financial Inc., and Houston radio host George Jarkesy defrauded investors in two hedge funds, the U.S. Securities and Exchange Commission said.

The two men, both 38, told investors the funds were independent from the brokerage then steered excessive fees to Belesis’s New York-based firm, the SEC said in a March 22 statement. The regulator said it started administrative proceedings against Belesis, Jarkesy, who managed the funds, and their firms. They could face punishments including disgorgement and financial penalties, the SEC said.

Belesis worked with Jarkesy to raise two funds in 2007 and 2009, which peaked at $30 million under management, telling investors they would invest in microcap stocks, bridge loans and life-insurance policies, the SEC said. Jarkesy inflated the value of investments in disclosures and hired stock promoters to boost the price of shares, while Belesis and John Thomas Financial “willfully aided, abetted and caused” the hedge funds’ violations, according to the regulator.

“Jarkesy disregarded the basic standards to which all fund managers are held,” Andrew M. Calamari, director of the SEC’s New York regional office, said in the statement. “Not only did he falsify valuations and deceive investors about the value of their holdings, but he bent over backwards to enrich Belesis at the funds’ expense.”

The SEC said in a March 22 complaint that Belesis repeatedly pushed Jarkesy for more fees, in a “profane and belligerent manner,” and tried to make the funds invest in companies his firm had interests in. On one occasion cited by the SEC, after Belesis yelled at the fund manager, Jarkesy tried to reassure him by saying in an e-mail: “We will always try to get you as much as possible, Everytime without exception!”

Belesis “intends to defend himself vigorously against these allegations,” said David Pitts of Argot Partners LLC, a spokesman for the brokerage chief. Jason Lewis, Jarkesy’s lawyer at Locke Lord LLP in Dallas, said his client denies the allegations.

Cyprus Videos/Interviews

Dijsselbloem, Rehn, Lagarde on Cyprus Bailout Deal

Dutch Finance Minister Jeroen Dijsselbloem, who chairs meetings of euro finance ministers, European Union Economic and Monetary Affairs Commissioner Olli Rehn and Christine Lagarde, managing director of the International Monetary Fund, speak at a news conference in Brussels about reaching an agreement on a bailout for Cyprus.

Cyprus agreed to the outlines of an international bailout, paving the way for 10 billion euros ($13 billion) of emergency loans and eliminating the threat of default.

To watch the video, click here.

Barnier Says Cypriot Deal Is ‘Better Than Bankruptcy’

European Union Financial Services Commissioner Michel Barnier speaks in Brussels about the long-term financing needs of the European economy, Cyprus’s 10 billion-euro ($13 billion) rescue deal and the outlook for the nation’s banks.

To watch the video, click here.

Lawmaker Says Cyprus Must Assess Benefit of a Euro Exit

Nicholas Papadopoulos, Cypriot lawmaker and chairman of the parliamentary finance committee, discusses the consequences of the nation’s 10 billion-euro ($13 billion) bailout.

He speaks in Nicosia with Ryan Chilcote on Bloomberg Television’s “The Pulse.” To watch the video, click here.

To contact the reporter on this story: Carla Main in New Jersey at cmain2@bloomberg.net; Michael Bathon in Wilmington, Delaware, at mbathon@bloomberg.net.

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


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