Bloomberg News

REITs Scrutiny, China IPOs, India Housing, Swaps: Compliance (1)

June 10, 2013

Iron Mountain Inc. (IRM:US) and Equinix Inc. (EQIX:US), two technology companies planning to convert to real estate investment trusts, plunged after saying that the U.S. Internal Revenue Service is scrutinizing their eligibility.

The IRS is weighing whether to narrow the legal definition of real estate for the purposes of converting to a trust, the companies said in separate regulatory filings.

As businesses from data centers to billboard owners make the switch to REITs -- which are subject to lower taxes and pay higher dividends than other companies -- the IRS is considering whether to restrict the types of enterprises that should qualify. The review means companies with nontraditional real estate operations -- like Equinix, which runs data centers, and Iron Mountain, which rents storage space and maintains paper and electronic records -- may struggle to win approval.

In the case of Iron Mountain, the IRS is questioning whether its warehouses filled with stacks of servers constitute real estate, according the company’s filing with the U.S. Securities and Exchange Commission.

“Under current legal standards the company’s racking structures are ‘real estate’ for REIT purposes,” Iron Mountain said in the filing. “However, the company can provide no assurances that the IRS will agree.”

Equinix, for its part, defended its data centers as eligible for REIT status “based on both existing legal precedent and the fact that other data center companies currently operate as REITs,” according to the company’s filing.

Representatives for the IRS didn’t immediately respond to a request for comment.

To qualify as a REIT, a company has to invest at least 75 percent of its assets in real estate and obtain 75 percent of its gross income from rents or interest on mortgages from financing property, according to the National Association of Real Estate Investment Trusts, a Washington-based trade group.

Compliance Policy

Hedge Funds Win Collateral Reprieve in SEC Dodd-Frank Shift

Hedge funds and asset managers won relief from Dodd-Frank Act collateral requirements for credit-default swaps under a policy shift disclosed June 7 in letters posted on the U.S. Securities and Exchange Commission’s website.

The letters to banks including JPMorgan Chase & Co. and Goldman Sachs Group Inc. (GS:US) revised a measure released in March that called for some clients to put up double the collateral dealers post for portfolio margin accounts at Atlanta-based IntercontinentalExchange Inc. (ICE:US) The banks instead will be able collect collateral from clients according to clearinghouse rules for six months.

During the six-month period, banks must design their own models for trading with clients that will then need SEC approval, the agency said in the letters dated today. The SEC suggested guidelines, including requiring enough margin to handle a 10-day liquidation with 99 percent confidence. The policy affects portfolio accounts with credit swaps tied to single securities offsetting those tied to indexes.

The change from the March policy may help encourage clearing of trades under Dodd-Frank, the 2010 regulatory law that called for most swaps to be guaranteed at clearinghouses as a way to reduce risk in the financial system. Mandatory clearing of trades began in March.

EU Fights July Deadline for U.S. Swaps Rule Opposed by Banks

The European Union is urging the U.S. to change course on planned swaps rules that it says would leave banks saddled with extra costs and incompatible legal obligations.

EU regulators are concerned that time is running out for the U.S. Commodity Futures Trading Commission to amend or delay requirements that stretch beyond U.S. borders, ahead of a July 12 deadline, an EU official said.

The international reach of CFTC swap-trading requirements has been one of the most controversial elements of the U.S. Dodd-Frank Act rules, prompting opposition from financial companies including Goldman Sachs Group Inc. (G:US) and Barclays Plc, as well as EU, Asian and South American regulators.

The EU is concerned that banks might face overlapping reporting requirements and incompatible restrictions on where to clear derivatives trades in the $633 trillion global market, according to the official, who can’t be named in line with official policy.

Jonathan Faull, the commission official responsible for financial-services rules, wrote last month to CTFC Chairman Gary Gensler urging him to allow more time for international talks.

China’s CSRC Releases Stringent IPO Rules as Xiao Tackles Fraud

China’s securities regulator plans to restrict share issuers and major holders from selling their stock below initial public offering price as part of new rules aimed at cracking down on fraud and protecting investors.

The restrictions will be in place for two years after lock-ups end, according to draft rules the China Securities Regulatory Commission posted on its website June 7. Issuers must also prepare and disclose plans to stabilize share prices that fall below net asset values within five years of their debuts.

The watchdog is seeking public feedback on the proposals by June 21.

New CSRC Chairman Xiao Gang is extending predecessor Guo Shuqing’s campaign to combat fraud, dishing out penalties including a three-month suspension of Ping An Securities Co.

Under the draft rules, when a company reports a net loss or a drop of more than 50 percent in profit in the same year as an IPO, the CSRC will stop reviewing any applications submitted by the investment bank that advised it.

The CSRC also plans to change the IPO pricing system by letting individual investors who meet criteria set by underwriters participate in the placement process, previously limited to institutional investors, according to the draft rules.

To make the IPO process more market driven, the CSRC plans to allow issuers 12 months to decide when to start trading after they receive regulatory approval for their initial sales.

Companies will also be able to apply to issue bonds while their IPO applications are pending regulatory approval, the securities watchdog said, as it encourages companies to explore fundraising options.

SEC Doing Better at Assessing Cost of Regulations, Watchdog Says

The U.S. Securities and Exchange Commission has improved how it justifies new regulations after at least five recent court defeats faulted its use of economic analysis, according to an audit by the agency’s inspector general.

The agency specified the reason for regulations, considered alternatives to rules and integrated economic analysis into the rule-writing process, SEC Inspector General Carl W. Hoecker wrote in an analysis of 12 rules proposed or finished during 2012. The analysis was requested by Representatives Darrell E. Issa and Patrick T. McHenry, Republican lawmakers who have been critical of the SEC’s rulemaking procedures.

The audit shows how the SEC has made progress using cost-benefit analysis since having a rule on board of directors nominations overturned by the U.S. Court of Appeals for the District of Columbia in July 2011. That decision said the SEC failed to study the cost to companies of fighting shareholders over a nominee and how it would affect capital markets.

Issa and McHenry requested the analysis after the decision by the appeals court and a critical report on SEC cost-benefit analysis by former Inspector General David Kotz. A spokesman for McHenry declined to comment and a spokesmen for Issa didn’t immediately respond to requests for comment.

The report by outside consultant HDR Engineering Inc. says the SEC could improve how it describes alternatives to regulation and why it can’t always calculate the benefits of new rules.

Compliance Action

U.K. Fights EU Short-Selling Powers After Defeat on Bank Bonuses

The U.K., defeated in a campaign to derail European Union curbs on banker bonuses, goes to the bloc’s top court tomorrow in a bid to overturn the powers of an EU agency to ban short selling.

Britain will argue at the Luxembourg-based EU Court of Justice that the European Securities and Markets Authority’s decision-making ability comes at the expense of national supervisors, in the latest skirmish against the EU’s growing powers over financial services.

Prime Minister David Cameron has promised to seek a new settlement with the EU, amid a rising tide of opposition that saw the U.K. Independence Party, which advocates a divorce from the bloc, gains seats in local elections last month. While Cameron has said he plans a referendum on EU membership by the end of 2017, this has failed to quell calls from members of his Conservative Party for Britain’s European destiny to be put to the people sooner.

The U.K. has often found itself on the defensive in EU discussions on financial regulation. The nation, which lacks a veto on financial laws, was the sole dissenting voice in March opposing a deal to ban bonuses more than twice fixed pay.

For more, click here.

HDFC Expects Central Bank Approval for $500 Million Loan Soon

Housing Development Finance Corp. (HDFC), India’s biggest mortgage company, expects central bank approval soon for a plan to borrow $500 million overseas to finance home loans for the poor.

The proceeds from the dollar-denominated borrowing will be used to fund low-cost “affordable housing” projects, V. Srinivasa Rangan, executive director at the Mumbai-based company, said in an interview at his office on June 5.

The Reserve Bank of India unveiled rules in December to allow property developers, mortgage companies and the National Housing Bank, a regulator for home finance lenders, to raise funds abroad to finance mortgages for the needy. The total that can be raised under the program for all companies is $1 billion.

Mortgage lenders will cap individual home loan amounts at 2.5 million rupees ($43,800), and the cost of the property cannot exceed 3 million rupees under the rules. About half the population in India’s financial hub, Mumbai, lives in slums.

India’s housing industry is largely unregulated and opaque and consumers are often unable to access sufficient information or hold builders accountable, according to the government. A bill was approved this month that would regulate the residential housing industry to protect home buyers.

China Sovereign Fund President Says It’s Met State Expectations

China Investment Corp., the nation’s $482 billion sovereign wealth fund, has met the government’s expectations by delivering 5 percent annualized returns in the five years since its creation, the official Xinhua News Agency reported, citing the fund’s president.

CIC achieved an 11 percent investment return on its overseas portfolio last year, compared with a loss of 4.3 percent in 2011, Gao Xiqing, a vice chairman of the fund, said according to Xinhua.

The sovereign fund was set up in 2007 to boost returns on China’s foreign exchange reserves, which grew to $3.44 trillion at the end of the first quarter. Since then, the State Administration of Foreign Exchange, or SAFE, which oversees day-to-day management of the reserves, has created an office with the mandate to seek “innovative use” of the funds.

Li Jie, head of the foreign-exchange reserve research office at the Central University of Finance and Economics in Beijing, said by telephone that CIC is “an experiment for China to manage excessive foreign exchange reserves for higher returns.”

Li, who has advised the foreign exchange regulator in the past, said SAFE is acting increasingly like CIC, including investing in equities and hiring people from Wall Street.

Xinhua cited CIC’s Gao as saying there’s “no problem” with China having more than one sovereign fund if they have a proper relationship. There should also be an “overall plan,” he was quoted as saying.

Courts

SEC Pays $580,000 to Resolve Former Investigator’s Firing Claims

The U.S. Securities and Exchange Commission has paid $580,000 to settle claims by a former internal watchdog that he was fired in an effort to quash his investigations.

David Weber, who was terminated late last year from his job as chief investigator in the SEC inspector general’s office, will also have his personnel records revised to show he was an employee in good standing and resigned voluntarily. The settlement was announced by Cary Hansel, Weber’s attorney at Joseph, Greenwald & Laake in Greenbelt, Maryland.

The resolution puts a capstone on a troubled period at the SEC’s internal investigation unit. Weber sued the SEC in November, arguing that he was terminated as part of a campaign to cover up the potential wrongdoing he had been investigating.

“We have obtained justice for Mr. Weber, but that is only the beginning,” Hansel said. “This entire affair started when the SEC sought to silence Mr. Weber and bury the concerns he raised.”

The case is Weber v. U.S. Securities and Exchange Commission, 12-cv-01850, U.S. District Court, District of Columbia (Washington).

Sam Wyly Wins Ruling in SEC Lawsuit Limiting Civil Penalties

Sam Wyly, the former Michaels Stores Inc. (MIK:US) chairman sued by the U.S. Securities and Exchange Commission for alleged insider trading and securities fraud, won a ruling limiting the civil penalties the agency can seek.

U.S. District Judge Shira Scheindlin in Manhattan in an order yesterday agreed with Wyly that a U.S. Supreme Court ruling in February bars the SEC from seeking civil penalties more than five years after the alleged violations.

An agreement between the SEC and Wyly in 2006 stopped the clock on the statute of limitations, limiting civil penalties to violations that occurred after Feb. 1, 2001, according to the judge’s order. The SEC alleges that Wyly and his late brother Charles made fraudulent filings as early as 1992, the ruling said.

Wyly’s lawyer, William A. Brewer III, described the ruling in an e-mailed statement as “a resounding victory” that disposes of “potentially hundreds of millions of dollars in penalties.”

The SEC also seeks about $550 million in disgorgement of ill-gotten gains, which wasn’t addressed in the ruling.

John Nester, an SEC spokesman, said in an e-mail that the agency is reviewing the decision.

The 2010 suit alleged a 13-year scheme by the brothers to hide their ownership of stock in four public companies on whose boards they sat.

The case is Securities and Exchange Commission v. Wyly, 10-cv-05760, U.S. District Court, Southern District of New York (Manhattan).

Interviews/Speeches

Plosser Says More Capital Is Needed for Largest Banks

Federal Reserve Bank of Philadelphia President Charles Plosser spoke about financial regulation and bank capital requirements.

He spoke at the Boston College Carroll School of Management in Chestnut Hill, Massachusetts.

For the audio, click here.

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

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


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Companies Mentioned

  • IRM
    (Iron Mountain Inc)
    • $34.63 USD
    • 0.26
    • 0.75%
  • EQIX
    (Equinix Inc)
    • $213.19 USD
    • 2.81
    • 1.32%
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