CompliancEX: May 2009

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May 2009

May 31, 2009

SEC Sunday May 31, 2009

The SEC Sunday is a weekly addressing all the latest rules and regulation changes of the last week. When you need to catch up on all the latest information regarding all the relevant Agencies and Organizations, look no further than this post.

SEC

05/26/09: Press Release

SEC Halts Foreign Exchange Offering Fraud by College Professor and Houston-Based Lawyer

http://www.sec.gov/news/press/2009/2009-122.htm

Related Litigation Release

http://www.sec.gov/litigation/litreleases/2009/lr21056.htm

Related SEC Complaint

http://www.sec.gov/litigation/complaints/2009/comp21056.pdf

Related News Articles

HedgeWeek News

05/27/09: CFTC Charges Texas Duo with Fraud in Multi-Million Dollar Forex Scheme

http://www.hedgeweek.com/articles/detail.jsp?content_id=332868

New York Times

05/26/09: S.E.C. Accuses 2 in Texas of Faking Bank Records

http://www.nytimes.com/2009/05/27/business/27fraud.html

05/25/09: SEC Accuses Texas Professor, Lawyer of Fraud

http://www.nytimes.com/reuters/2009/05/26/business/business-us-sec-forex.html

Reuters Business & Finance News

05/26/09: SEC Accuses Texas Professor, Lawyer of Fraud

http://www.reuters.com/article/ousiv/idUSTRE54P4Q920090526

05/22/09: Final Report

27th Annual Forum on Small Business Capital Formation

http://www.sec.gov/info/smallbus/gbfor27.pdf

05/22/09: Press Release

SEC Takes Steps to Strengthen Existing Rules Governing Securities Trading by Personnel

http://www.sec.gov/news/press/2009/2009-121.htm

05/22/09: Remarks by James A. Brigagliano, Co-Acting Director, Division of Trading and Markets

The Road Ahead: Short Sale Regulation for Today’s Markets

http://www.sec.gov/news/speech/2009/spch050509jab.htm

05/21/09: Press Release

SEC Obtains Asset Freeze of Wisconsin-Based Investment Adviser Charged in Kickback Scheme

http://www.sec.gov/news/press/2009/2009-119.htm

Related Litigation Release

http://www.sec.gov/litigation/litreleases/2009/lr21055.htm

Related SEC Complaint

http://media.journalinteractive.com/documents/wealth_052209.pdf

Related News Articles

Milwaukee Wisconsin Journal Sentinel

05/21/09: Appleton-Area Investor Misled Clients, SEC Says

http://www.jsonline.com/business/45728897.html

05/21/09: Press Release

SEC Charges Florida Trader for Issuing Fake Press Release to Manipulate Stock Price

http://www.sec.gov/news/press/2009/2009-118.htm

Related Litigation Release

http://www.sec.gov/litigation/litreleases/2009/lr21054.htm

Related SEC Complaint

http://www.sec.gov/litigation/complaints/2009/comp21054.pdf

05/21/09: Press Release

SEC Charges Eight Participants in Penny Stock Manipulation Ring

http://www.sec.gov/news/press/2009/2009-117.htm

Related Litigation Release

http://www.sec.gov/litigation/litreleases/2009/lr21053.htm

Related SEC Complaint

http://www.sec.gov/litigation/complaints/2009/comp21053.pdf

05/21/09: Administrative Proceeding

In the Matter of Matthew J. Browne – 10b-5 Violations

http://www.sec.gov/litigation/admin/2009/34-59960.pdf

05/21/09: Administrative Proceeding

In the Matter of Daryl L. Batts – Securities Fraud via Misrepresentations Made to Clients

http://www.sec.gov/litigation/admin/2009/34-59958.pdf

05/21/09: Administrative Proceeding

In the Matter of David G. Ghysels, Kenneth E. Mahaffy, Jr., And Linus N. Nwaigwe – Securities Fraud

http://www.sec.gov/litigation/admin/2009/34-59957.pdf

05/21/09: Statement at Open Meeting to Propose Amendments by Commissioner Kathleen L. Casey

Facilitating Shareholder Director Nominations

http://www.sec.gov/news/speech/2009/spch052009klc.htm

05/21/09: Keynote Address by James A. Brigagliano, Co-Acting Director, Division of Trading and Markets

2009 SIFMA Market Structure Conference

http://www.sec.gov/news/speech/2009/spch052009jab.htm

05/21/09: Testimony by Martha Mahan Haines, Assistant Director, Division of Trading and Markets before the U.S. House of Representatives Committee on Financial Services

Legislative Proposals to Improve the Efficiency and Oversight of Municipal Finance

http://www.sec.gov/news/testimony/2009/ts052109mmh.htm

05/20/09: Litigation Release

SEC v. FTC Capital Markets, Inc., FTC Emerging Markets, Inc. also d/b/a FTC Group, Guillermo David Clamens and Lina Lopez a/k/a Nazly Cucunuba Lopez – SEC Charges Registered Broker-Dealer, Its Unregistered Affiliate and Two Individuals in Fraudulent Scheme to Pay Off Ficticious Bonds With Tens Of Millions In Unauthorized Trading

http://www.sec.gov/litigation/litreleases/2009/lr21052.htm

FEDERAL REGISTER

05/27/09, SEC: Proposed Rule

Custody of Funds or Securities of Clients by Investment Advisors

The Securities and Exchange Commission is proposing amendments to the custody rule under the Investment Advisers Act of 1940 and related forms. The amendments, among other things, would require registered investment advisers that have custody of client funds or securities to undergo an annual surprise examination by an independent public accountant to verify client funds and securities. In addition, unless client accounts are maintained by an independent qualified custodian (i.e., a custodian other than the adviser or a related person), the adviser or related person must obtain a written report from an independent public accountant that includes an opinion regarding the qualified custodian's controls relating to custody of client assets. Finally, the amendments would provide the Commission with better information about the custodial practices of registered investment advisers. The amendments are designed to provide additional safeguards under the Advisers Act when an adviser has custody of client funds or securities. Comments must be received on or before July 28, 2009.

http://edocket.access.gpo.gov/2009/pdf/E9-12182.pdf

Related Legal Alerts

Drinker Biddle

05/22/09: SEC Proposes Changes to Investment Adviser Custody Rule

http://www.drinkerbiddle.com/files/Publication/8ab8f683-a4a4-41a3-8d3f-0020604591e7/Presentation/PublicationAttachment/bf9dc542-6ed8-4175-884e-091f736a545e/SEC%20Proposes%20Changes%205.22.pdf

KL|Gates

05/27/09: SEC Proposes Amendments to Custody Rule

http://www.klgates.com/newsstand/detail.aspx?publication=5667

Reed Smith

05/26/09: SEC Proposes Amendments to Adviser Custody Rule and Related Forms

http://www.reedsmith.com/publications.cfm?cit_id=24986&widCall1=customWidgets.content_view_1&usecache=false

Winston & Strawn, LLP

05/22/09: SEC Proposes Amendment to Advisers Act Custody Rule to Better Protect Investor Funds against Madoff-Type Investment Scams

http://www.winstonandstrawn.com/siteFiles/Publications/5_21_09_SEC_Proposes_Amendment.pdf

FEDERAL REGISTER (Continued)

05/22/09, CFTC: Proposed Rule

Concept Release on Whether to Eliminate the Bona Fide Hedge Exemption for Certain Swap Dealers, etc.; Extension of Comment Period

On March 24, 2009, the Commodity Futures Trading Commission (“Commission”) published a concept release on whether to eliminate the bona fide hedge exemption for certain swap dealers and create a new limited risk management exemption from speculative position limits. Comments on the proposal were originally due by May 26, 2009. Now, at the request of interested parties, the Commission is extending the comment period to June 16, 2009.

http://edocket.access.gpo.gov/2009/pdf/E9-12000.pdf

05/22/09, CFTC: Proposed Rule

Investment of Customer Funds and Funds Held in an Account for Foreign Futures and Foreign Options Transactions

The Commodity Futures Trading Commission (Commission) is seeking public comment on possible changes to its regulations regarding the investment of customer funds segregated pursuant to Section 4d of the Commodity Exchange Act (customer segregated funds) and funds held in an account subject to Commission Regulation 30.7 (30.7 funds). Commission Regulation 1.25 provides that a derivatives clearing organization (DCO) or a futures commission merchant (FCM) holding customer segregated funds may invest those funds in certain permitted investments subject to specified requirements that are designed to minimize exposure to credit, liquidity, and market risks. The Commission is considering significantly revising the scope and character of these permitted investments and is seeking public comment before issuing proposed rule amendments. Additionally, in conjunction with its consideration of possible amendments to Regulation 1.25, the Commission is considering applying the investment requirements of Regulation 1.25, including any prospective amendments, to investments of 30.7 funds. The Commission is seeking public comment on this action before issuing proposed rule amendments. Comments must be received on or before July 21, 2009.

http://edocket.access.gpo.gov/2009/pdf/E9-12020.pdf

05/22/09, EBSA: Final Rules

Investment Advice – Participants and Beneficiaries

This document delays the effective and applicability dates of final rules under the Employee Retirement Income Security Act, and parallel provisions of the Internal Revenue Code of 1986, relating to the provision of investment advice to participants and beneficiaries in individual account plans, such as 401(k) plans, and beneficiaries of individual retirement accounts (and certain similar plans). These rules were published in the Federal Register on January 21, 2009, and were to have become effective and applicable on March 23, 2009, but were delayed until May 22, 2009, by a final rule published on March 20, 2009 (74 FR 11847). This document further delays the effective and Applicability dates of these final rules from May 22, 2009, until November 18, 2009, to allow additional time for the Department to evaluate questions of law and policy concerning the rules. The effective and applicability date of the rule amending 29 CFR

part 2550, published January 21, 2009, at 74 FR 3822, delayed March 20, 2009, at 74 FR 11847 is further delayed until November 18, 2009.

http://edocket.access.gpo.gov/2009/pdf/E9-12065.pdf

Related Articles

PlanSponsor News Daily

05/21/09: EBSA Again Extends Effective Date of Advice Rule

http://www.plansponsor.com/pi_type10/?RECORD_ID=46308

05/22/09, SEC: Notice

Hearing on Target Date Funds and Similar Investment Options

Notice is hereby given that the Department of Labor and the Securities and Exchange Commission will hold a joint one-day hearing on issues relating to investments in target date funds and similar investment options by 401(k) plan participants and other investors. The one-day hearing will be held on June 18, 2009, beginning at 9 a.m., EST.

http://edocket.access.gpo.gov/2009/pdf/E9-12024.pdf

Related SEC Press Release

05/22/09: SEC, DOL Accepting Requests to Participate in Joint Hearing Examining Target Date Funds

http://www.sec.gov/news/press/2009/2009-120.htm

Related SEC Notice

05/22/09: Hearing on Target Date Funds and Similar Investment Options

http://www.sec.gov/rules/other/2009/ic-28725.pdf

FRB

05/23/09: Speech by Vice Chairman Donald L. Kohn at the Conference on Monetary-Fiscal Policy Interactions, Expectations, and Dynamics in the Current Economic Crisis

Interactions between Monetary and Fiscal Policy in the Current Situation

http://www.federalreserve.gov/newsevents/speech/kohn20090523a.htm

05/22/09: Finance and Economics Discussion Series 2009-20

Should Risky Firms Offer Risk-Free DB Pensions?

http://www.federalreserve.gov/pubs/feds/2009/200920/200920pap.pdf

05/22/09: Finance and Economics Discussion Series 2009-19

New Evidence on 401(k) Borrowing and Household Balance Sheets

http://www.federalreserve.gov/pubs/feds/2009/200919/200919pap.pdf

FDIC

05/27/09: Press Release

FDIC-Insured Institutions Earned $7.6 Billion in the First Quarter of 2009

http://www.fdic.gov/news/news/press/2009/pr09077.html

Quarterly Banking Profile – 1^st Quarter 2009

http://www2.fdic.gov/qbp/2009mar/qbp.pdf

Related News Articles

Bloomberg Finance News

05/27/09: U.S. ‘Problem’ Banks Rise to 15-Year High, FDIC Says

http://www.fdic.gov/news/news/press/2009/pr09077.html

Investment News Daily Alert

05/27/09: Banks Earned $7.6 Billion In 1Q After Record Loss In 4Q

http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20090527/REG/905279987

05/27/09: Press Release

Buyer Beware: Tips from the FDIC on How to Protect Against Foreclosure Frauds, Easy Money Schemes and Other Costly Deals

http://www.fdic.gov/news/news/press/2009/pr09078.html

05/22/09: FIL-22-2009

FDIC Insurance Coverage: Extension of Temporary Increase in Standard Maximum Deposit Insurance Amount

http://www.fdic.gov/news/news/financial/2009/fil09022.html

05/22/09: FIL-24-2009

Consideration of the Special Assessment When Analyzing and Rating Financial Institutions

http://www.fdic.gov/news/news/financial/2009/fil09024.html

05/21/09: Press Release

FDIC Adopts Final Rule Imposing a Special Assessment on Insured Depository Institutions

http://www.fdic.gov/news/news/press/2009/pr09074.html

Final Rule

http://www.fdic.gov/news/board/May22no1.pdf

FIL 23-2009

http://www.fdic.gov/news/news/financial/2009/fil09023.html

Related Statement from ABA

http://www.aba.com/Press+Room/052209SpecialPremiumAssessment.htm

Investment News

05/22/09: FDIC to Charge Big Banks More to Replenish Insurance Fund

http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20090522/REG/905229971

Washington Post

05/23/09: Big Banks to Pay Larger Share of FDIC Levy

http://www.washingtonpost.com/wp-dyn/content/article/2009/05/22/AR2009052203442.html

OCC

05/26/09: Publication

Electronic Interpretations and Actions - May 2009

http://www.occ.treas.gov/interp/may09/intmay09.htm

05/22/09: News Release

Comptroller Dugan's Statement on the FDIC's Special Assessment Rule

http://www.occ.treas.gov/ftp/release/2009-54.htm

05/22/09: Bulletin, 2009-15

Investment Securities: Risk Management and Lessons Learned

http://www.occ.treas.gov/ftp/bulletin/2009-15.html

OTS

05/27/09: CEO Letter 304

ALLL (Allowance for Loan and Lease Losses) Observed Thrift Practices Including Sound Practices

http://files.ots.treas.gov/25304.pdf

PCAOB

05/21/09: Inspection Reports

SEC Adds 21 Inspection Reports and One Expanded Inspection Report to Website

New Inspection Reports:

Berman & Company, P.A.

http://www.pcaobus.org/Inspections/Public_Reports/2009/Berman_and_Co.pdf

Brady, Martz & Associates, P.C.

http://www.pcaobus.org/Inspections/Public_Reports/2009/Brady_Martz_Associates_P.C.pdf

Coleman & Williams, Ltd.

http://www.pcaobus.org/Inspections/Public_Reports/2009/Coleman_Williams.pdf

Creason & Associates, P.L.L.C.

http://www.pcaobus.org/Inspections/Public_Reports/2009/Creason_and_Associates.pdf

Ernst & Young LLP

http://www.pcaobus.org/Inspections/Public_Reports/2009/Ernst_Young.pdf

Related News Articles

Investment News Daily Alert

05/27/09: Geithner Unveils Stimulus Tax Credits

http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20090527/REG/905279979

New York Times

05/27/09: Geithner Unveils Stimulus Tax Credits in Boston

http://www.nytimes.com/aponline/2009/05/27/business/AP-US-Investment-Tax-Credits.html

IRS

05/26/09: Notice 2009-48

Treatment of Certain Employer-Owned Life Insurance Contracts

http://www.irs.gov/pub/irs-drop/n-09-48.pdf

Related News Articles

PlanSponsor News Daily

04/26/09: IRS Sets Out Limits for Employer-Owned Life Insurance Expense

http://www.plansponsor.com/pi_type11/?RECORD_ID=46345

05/26/09: Notice 2009-47

Application of Sections 7702 and 7702A to Life Insurance Contracts that Mature After Age 100

http://www.irs.gov/pub/irs-drop/n-09-47.pdf

OFAC

05/27/09: Recent Actions

Anti-Terrorism Designations / Anti-Narcotics Designations

http://www.treas.gov/offices/enforcement/ofac/actions/20090527.shtml

SDN List updated as of May 27, 2009 (in Alphabetical Order)

http://www.treas.gov/offices/enforcement/ofac/sdn/t11sdn.pdf

SDN List Updated as of May 27, 2009 (Additions since January 1, 2009)

http://www.treas.gov/offices/enforcement/ofac/sdn/t11sdnew.pdf

Terrorism Brochure Updated as of May 27, 2009

http://www.treas.gov/offices/enforcement/ofac/programs/terror/terror.pdf

Narcotics Brochure Updated as of May 27, 2009

http://www.treas.gov/offices/enforcement/ofac/programs/narco/drugs.pdf

Related U. S. Treasury Press Release

05/27/09: Treasury Targets Medellin-Based Drug Trafficker, Key Link between Colombian and Mexican Drug Cartels

http://www.treasury.gov/press/releases/tg147.htm

FINRA (formerly NASD)

05/27/09: Regulatory Notice 09-28

FINRA Reminds Firms of Their Obligation to Provide Accurate Information in Disseminating, or Using Services to Disseminate, Indications of Interest

http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p118779.pdf

05/26/09: Podcast

FINRA Rulebook Consolidation

http://www.accelacomm.com/jump/podcast_138/www.accelacast.com/programs/FINRA_podcasts/FINRA_Podcast_Rules_June_Effective_Dates.mp3

FASB (Financial Accounting Standards Board)

05/22/09: FASB Statement No. 164

Not-for-Profit Entities: Mergers and Acquisitions

http://fasb.org/pdf/fas164.pdf

Summary of Statement

http://fasb.org/st/summary/stsum164.shtml

Related Press Release

http://fasb.org/news/nr052209.shtml

05/22/09: Report

2008 Annual Report of the Financial Accounting Foundation

http://fasb.org/annualreport/FAF_2008_AR.pdf

MSRB

05/27/09: MSRB NOTICE 2009-24

Reminder: MSRB Discontinues e-Os System at Noon Eastern Time Today

http://www.msrb.org/msrb1/whatsnew/2009-24.asp

05/22/09: MSRB NOTICE 2009-23

MSRB Receives Approval To Launch Continuing Disclosure Pilot Of The MSRB’S Electronic Municipal Market Access (EMMA) System

http://www.msrb.org/msrb1/whatsnew/2009-23.asp

05/22/09: MSRB NOTICE 2009-22

SEC Approves Primary Market Disclosure Service on EMMA for Electronic Dissemination of Official Statements

http://www.msrb.org/msrb1/whatsnew/2009-22.asp

FSA

05/26/09: Press Release

FSA Bans and Fines Trader £140,000 for Unauthorized 'Pre-Hedging'

http://www.fsa.gov.uk/pages/Library/Communication/PR/2009/066.shtml

Final Notice for Nilesh Shroff

http://www.fsa.gov.uk/pubs/final/Shroff.pdf

05/20/09: Press Release

FSA Bans Trader for Concealing his Trading Position

http://www.fsa.gov.uk/pages/Library/Communication/PR/2009/065.shtml

Final Notice for David Connor Redmond

http://www.fsa.gov.uk/pubs/final/david_redmond.pdf

For more agency information and other relevant materials please consider a subscription to the FSR Alert by emailing FSRAlert@verizon.net with “Request for FREE 30-Day Trial Subscription” included on the Subject line.

Posted at 06:00 AM in Regulatory Alerts, News and Developments | Permalink | Comments (0) | TrackBack (0)

May 30, 2009

The U.S. Congress Review May 30, 2009

The Compliance Exchange introduces a new weekly feature – The U.S. Congress Review. Every Saturday we will post news on future hearings on Financial Services, Regulations, Press Releases, Laws that have been passed and Bills that are being introduced, anything pertaining to Regulatory Compliance that passes over the desks at the U.S. Congress. Please make sure to check back every Saturday for the latest updates.

U.S. CONGRESS

U.S. HOUSE OF REPRESENTATIVES COMMITTEE ON FINANCIAL SERVICES

05/21/09: Hearing

Legislative Proposals to Improve the Efficiency and Oversight of Municipal Finance

Archive of Webcast

http://financialserv.edgeboss.net/wmedia/financialserv/hearing052109.wvx

Witness Testimony:

Ms. Martha Mahan Haines, Chief, Office of Municipal Securities, U.S. Securities and Exchange Commission

http://www.house.gov/apps/list/hearing/financialsvcs_dem/haines_-_sec.pdf

Mr. Bill Apgar, Senior Advisor to the Secretary, Department of Housing and Urban Development

http://www.house.gov/apps/list/hearing/financialsvcs_dem/apgar_-_hud.pdf

Mr. David W Wilcox, Deputy Director, Division of Research & Statistics, Board of Governors of the Federal Reserve System

http://www.house.gov/apps/list/hearing/financialsvcs_dem/wilcox_-_frb.pdf

The Honorable Thomas C. Leppert, Mayor of Dallas, Texas on behalf of the U.S. Conference of Mayors

http://www.house.gov/apps/list/hearing/financialsvcs_dem/leppert_-_us_mayors.pdf

Mr. Ben Watkins, Director of State of Florida Division of Bond Finance, State Board of Administration, Florida

http://www.house.gov/apps/list/hearing/financialsvcs_dem/watkins_-_fl.pdf

Mr. Michael J. Marz, Vice Chairman, First Southwest Company on behalf of the Regional Bond Dealers Association

http://www.house.gov/apps/list/hearing/financialsvcs_dem/marz_-_rbda.pdf

Ms. Laura Levenstein, Senior Managing Director, Moody’s Investors Service

http://www.house.gov/apps/list/hearing/financialsvcs_dem/levenstein_-_moody's.pdf

Mr. Keith Curry, PFM Group, Managing Director

http://www.house.gov/apps/list/hearing/financialsvcs_dem/curry_-_pfm.pdf

Mr. Alan B. Ispass, PE, BCEE, Vice President and Global Director of Utility Management Solutions, CH2M Hill

http://www.house.gov/apps/list/hearing/financialsvcs_dem/ispass_-_ch2m.pdf

Mr. Sean W. McCarthy, President and Chief Operating Officer, Financial Security Assurance, Inc.

http://www.house.gov/apps/list/hearing/financialsvcs_dem/mccarthy_-_fsa.pdf

Mr. Bernard Beal, Chief Executive Officer, MR Beal & Company on behalf of The Securities Industry and Financial Markets Association

http://www.house.gov/apps/list/hearing/financialsvcs_dem/beal_-_sifma.pdf

Ms. Mary Jo Ochson, CFA, Senior Vice President, Chief Investment Officer for the Tax-Exempt Money Market and Municipal Bond Investment Groups and Senior Portfolio Manager, The Federated Funds

http://www.house.gov/apps/list/hearing/financialsvcs_dem/ochson_-_federated.pdf

Mr. Mike Allen, Chief Financial Officer, Winona Health on behalf of Healthcare Financial Management Association

http://www.house.gov/apps/list/hearing/financialsvcs_dem/allen_-_hfma.pdf

Mr. Sean Egan, Managing Director, Egan-Jones Ratings Co.

http://www.house.gov/apps/list/hearing/financialsvcs_dem/egan_jones.pdf

U.S. HOUSE OF REPRESENTATIVES WAYS AND MEANS COMMITTEE

05/21/09: Hearing

Tax-Exempt and Taxable Governmental Bonds

Archive of Webcast

Not Available

Witness Testimony

The Honorable Alan Krueger, Assistant Secretary for Economic Policy, United States Department of the Treasury

http://waysandmeans.house.gov/media/pdf/111/alank.pdf

Robert L. Culver, President and Chief Executive Officer, Mass Development, Boston, Massachusetts

http://waysandmeans.house.gov/hearings.asp?formmode=view&id=7796

Patrick McCoy, Director of Finance, NYS Metropolitan Transportation Authority, New York, New York

http://waysandmeans.house.gov/media/pdf/111/mccoy.pdf

Michael Decker, Co-Chief Executive Officer, Regional Bond Dealers Association, Alexandria, Virginia

http://waysandmeans.house.gov/media/pdf/111/decker.pdf

James P. Esposito, Managing Director, Goldman Sachs & Co., New York, New York

http://waysandmeans.house.gov/media/pdf/111/goldman.pdf

Gary W. Bornholdt, Counsel, Nixon Peabody LLP

http://waysandmeans.house.gov/media/pdf/111/bornholdt.pdf

U.S. HOUSE OF REPRESENTATIVES COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

05/20/09: Hearing:

State and Local Pandemic Preparedness

Archived Webcast

Not Available

Member Statements

Opening Statement of Chairman Edolphus Towns

http://oversight.house.gov/documents/20090520113339.pdf

Witness Testimony

Dr. Daniel M. Sosin, Director, Coordinating Office for Terrorism Preparedness and Emergency Response, Centers for Disease Control and Prevention, Department of Health and Human Services

http://oversight.house.gov/documents/20090519145346.pdf

Dr. Guthrie Birkhead, Deputy Commissioner for Public Health, New York State Department of Health

http://oversight.house.gov/documents/20090520102134.pdf

Dr. Rex Archer, Director of Health, Kansas City, Missouri, KCMO Health Department

http://oversight.house.gov/documents/20090519145122.pdf

Mr. Terry Allan, MPH, Health Commissioner, County of Cuyahoga, Ohio

http://oversight.house.gov/documents/20090519145054.pdf

Dr. Paul Jarris, Executive Director, The Association of State and Territorial Health Officials (ASTHO)

http://oversight.house.gov/documents/20090519145257.pdf

U.S. SENATE COMMITTEE ON FINANCE

05/21/09: Press Release

Office of Thrift Supervision Should Stop Allowing Thrift Backdating, Hold Employees Accountable for Recent Instances

http://finance.senate.gov/press/Gpress/2009/prg052109a.pdf

CONGRESSIONAL BILLS

BILLS PASSED HOUSE/SENATE

05/22/09: Law Enacted

H.R. 627: Credit Card Accountability Responsibility and Disclosure Act of 2009, or the Credit CARD Act of 2009

A law to amend the Truth in Lending Act to establish fair and transparent practices relating to the extension of credit under an open end consumer credit plan, and for other purposes.

http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h627enr.txt.pdf

Congressional Research Service Summary

http://www.govtrack.us/congress/bill.xpd?bill=h111-627&tab=summary

BILL INTRODUCTIONS

05/21/09: Bill Introduction

H.R. 2622: Compliance, Examinations, and Inspections Restructuring Act of 2009

A bill introduced by Rep. Kevin McCarthy [R-CA] to amend the Securities Exchange Act of 1934 to establish rules and procedures for the delegation of compliance and inspections authority to the operating divisions of the Securities and Exchange Commission, and for other purposes.

http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h2622ih.txt.pdf

05/16/09: Bill Introduction

S. 1074: Shareholder Bill of Rights Act of 2009

A bill introduced by Sen. Charles Schumer [D-NY] to provide shareholders with enhanced authority over the nomination, election, and compensation of public company executives.

http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:s1074is.txt.pdf

(NOTE: Bills are generally available from the Government Printing Office on the internet a couple of days after they are introduced on the floor of the House or Senate. Delays can occur when there are a large number of bills to prepare or when a very large bill has to be printed.)

For more Congressional Reviews and other relevant materials please consider a subscription to the FSR Alert by emailing FSRAlert@verizon.net with “Request for FREE 30-Day Trial Subscription” included on the Subject line.

Posted at 06:00 AM in Regulatory Alerts, News and Developments | Permalink | Comments (0) | TrackBack (0)

May 29, 2009

Interesting articles you may have missed this week

Financial Overhaul Raises Questions
The Wall Street Journal -Obama administration officials are debating whether to pare some of their more ambitious ideas to revamp oversight of financial markets, in a nod to the political difficulties of pushing through sweeping changes, people familiar with the process say…Continue to full article

Bair Attacks Too-Big-to-Fail as Enforcer Geithner Must Trust
Bloomberg - Sheila Bair, chairman of the Federal Deposit Insurance Corp. and a lifelong Republican, boarded Air Force One for the first time in February. Neither President George H.W. Bush nor his son, President George W. Bush, had invited her on the world’s most famous jet in the five years she worked for them. It was a Democratic president, Barack Obama, who asked her to fly to Washington after the two had unveiled his administration’s foreclosure relief plan in Mesa, Arizona…Continue to full article

It’s Thankless, but He Decides Madoff Claims
The New York Times - The Ponzi scheme's victims denounce him as cold-hearted, dishonest and just plain wrong. No, they are not describing Bernard L. Madoff, the author of the fraud that has ruined their lives. They are criticizing Irving H. Picard, the New York lawyer and trustee who has been appointed to represent their interests in the tangled scandal…Continue to full article

Morgan Stanley Bullying Is Least of SEC’s Woes: Jonathan Weil
Bloomberg - If the Securities and Exchange Commission had its druthers, we still might have no idea that an internal probe into the securities trades by two of its attorneys had led to a criminal investigation. That makes the budding scandal only worse, just when the SEC can’t afford many more embarrassments…Continue to full article

SEC overhaul -- Dump Mary Schapiro
The Huffington Post - The Obama administration is missing the forest for the trees as it focuses on regulatory overhaul of the SEC. While giving the Federal Reserve the power to supervise large financial firms is a step in the right direction, the real problem is Mary Schapiro, the newly appointed Chairman of the SEC…Continue to full article

Risk Center Commentary - The SEC Declares War on Capital Market’s Criminals
The Risk Center - It didn’t take long for the “new SEC” to begin enforcing the law and declaring war on white collar criminals that have preyed on the capital markets. A couple of weeks ago the SEC filed an insider trading civil suit against two former traders in connection with trading in credit default swaps using insider information and made it clear that this is the first of many new suits designed to ensure the integrity of the capital markets…Continue to full article

Obama admin wants Fed and FDIC in key roles
Reuters - The Obama administration wants to designate the Federal Reserve as the new systemic risk regulator and give the Federal Deposit Insurance Corp authority to unwind bank holding companies, a source familiar with the administration's proposal said on Wednesday…Continue to full article

Frank Rules Out Creating Single U.S. Bank Regulator
Bloomberg - House Financial Services Committee Chairman Barney Frank ruled out creating a single U.S. bank watchdog similar to the U.K.’s Financial Services Authority as part of an overhaul of regulations. “It’s not just the structure of the regulatory authorities but the content of the regulation that is relevant,” Frank, a Massachusetts Democrat, said today on CNBC cable television. “My own preference is for a dual-track regulation” that would focus on the health of the banks and the need to monitor for systemic risk, Frank said…Continue to full article

Speech by SEC Staff: The Road Ahead: Short Sale Regulation for Today’s Markets
By James A. Brigagliano, Co-Acting Director, Division of Trading and Markets
U.S. Securities and Exchange Commission. At STA’s 13th Annual Washington Conference, Regulatory Reset in 2009, Washington, D.C…Continue to full article

Top Fund to Shut as Firm Faces Probe
The Wall Street Journal - Pequot Capital Management -- a pioneering and well-connected hedge fund that gained fame for racking up years of strong returns -- is shutting its doors amid a revived insider-trading probe…Continue to full article

Public Now Views SEC More Unfavorably than IRS
Compliance Week - A recently conducted survey confirms that the Securities and Exchange Commission is now viewed unfavorably by a remarkable 55% of respondents. To put this into some context, the percentage of unfavorable opinions of the SEC exceeded even that of the Internal Revenue Service…Continue to full article

SEC's Mary Schapiro discusses executive pay
The Los Angeles Times - Schapiro, who supports giving shareholders more say, expresses concern that compensation has become disconnected from long-term company performance. Mary L. Schapiro has been in the job just a few months, but the Obama administration's new top securities regulator already is pursuing an aggressive agenda that blends souped-up enforcement with new rules designed to give investors more power and advisors more responsibility…Continue to full article

SEC Slaps Trade Ban on Staff
The Wall Street Journal - The Securities and Exchange Commission imposed tough new rules on trading by employees, following an investigation into the dealings of two veteran enforcement lawyers…Continue to full article

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Why Brookstreet Investors Were In The Dark

By Suzanne Barlyn. Dow Jones. May 29, 2009.

New details in the Brookstreet Securities Corp. case support investor advocates' calls for lifting the curtain higher on details of brokers' transactions, particularly how brokers are compensated and their use of margin accounts.

The Securities and Exchange Commission on Thursday filed fraud charges against 10 former brokers for Brookstreet, an Irvine, Calif., brokerage that collapsed in scandal in 2007. It said the brokers falsely marketed investments in derivatives of mortgage-backed securities as safe and appropriate for investors with conservative goals, including retirees. In many cases, they allegedly told investors the securities were backed by the U.S. government. The Financial Industry Regulatory Authority, or Finra, also charged six Brookstreet brokers in a parallel enforcement action.

The brokers raked in more than $16 million in commissions between 2004 and 2007, the SEC says, while their clients collectively hemorrhaged almost $40 million in margin account deficits. Some of the brokers told clients that margin would be used sparingly, and with little or no risk to their principal, according to the SEC complaint.

Stuart D. Meissner represented three investors in arbitrations against two of the brokers. He says investors who purchase certain bonds or exotic instruments are often unaware of markups, which is the difference between what the broker pays for the security and what the investor pays.

Many investors only learn of the markup much too late - when filing an arbitration claim.

"It's certainly something that one is entitled to know, especially if it's not a traditional investment," says Meissner.

Furthermore, being told about the markup may not mean understanding it, notes Theodore G. Eppenstein, a New York-based attorney who represents investors in securities arbitrations. "You need a forensic accountant to take apart the statements. Even a sophisticated investor can't figure it out," he says.

Deborah Meshulam, a former SEC assistant chief litigation counsel who now chairs DLA Piper's SEC practice in Washington, says brokerages typically comply with securities laws that require disclosure of their compensation and conflicts of interest - but the catch is whether the disclosure is adequate.

The Brookstreet brokers misrepresented how margin accounts would be used, the SEC says, and some told clients that they would be taken off margin but weren't. Many investors aren't even candidates for margin accounts - particularly if their goals are conservative.

Jill I. Gross, director of the Investor Rights Clinic at Pace Law School in New York, says that, during the last two decades, margin accounts have been extended to customers who lack the financial sophistication to use them prudently. Regulators, she says, should consider imposing requirements for margin accounts, such as standards for net worth or knowledge level.

Some investor advocates say that compensating brokers based on the performance of client portfolios would prevent misconduct. But Philip M. Aidikoff, a Los Angeles-based securities attorney, is concerned the model would push brokers toward high-risk strategies. "A broker who isn't making anything on the portfolio may figure he has nothing to lose," he says.

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Financial Overhaul Raises Questions

By Damian Paletta and Kara Scanell. The Wall Street Journal. May 29, 2009.

Obama administration officials are debating whether to pare some of their more ambitious ideas to revamp oversight of financial markets, in a nod to the political difficulties of pushing through sweeping changes, people familiar with the process say.

At issue is whether officials want to reorganize the basic structure of oversight, or whether they will settle for new rules at existing agencies that would accomplish the same goal.

Many of the ideas under consideration could trigger a turf war on Capitol Hill and among government agencies. People involved in the process said that as a result, the plan could still break in several different directions.

Among the ideas being actively discussed are a new agency to oversee banks, as well as a merger of the Securities and Exchange Commission and Commodity Futures Trading Commission. House Financial Services Committee Chairman Barney Frank (D., Mass.) has already said he doesn't think such consolidation will happen, and his support would be integral to any major policy shift.

White House and Treasury officials are focused first on determining rules in areas such as banks' capital requirements before they choose which battles to fight over which agency does what.

A final decision on a plan to present to Congress is expected in several weeks, and Obama administration officials are still hopeful that lawmakers could approve a package by the end of the year.
The administration is under pressure to reorganize the fragmented structure of bank supervision. The Obama administration is expected to call for the Office of Thrift Supervision -- which regulates thrifts and has faced heavy scrutiny for its supervision of American International Group Inc., Washington Mutual Inc. and IndyMac Bancorp Inc. -- to be either abolished or folded into a larger regulator with broader powers.

OTS officials have said that all agencies made mistakes during the financial crisis. But John Reich, who stepped down as OTS director several months ago, said, "The reality is in today's time, with the decline in the number of federally chartered thrift institutions, it is going to create in the foreseeable future some resource challenges for the OTS that are going to place a significant strain on its budget in future years."
Other areas are more ticklish. Treasury officials want the Federal Reserve to become a financial-market supercop with powers to oversee broader risks to the economy. Some top lawmakers have suggested that this would be a tough sell politically, because it would centralize too much power in the Fed.

To address this, Treasury officials have discussed giving a group of top regulators the power to consult about systemic risks to the economy. The Fed would have power to enforce these policies. It is unclear how the council of regulators and the Fed would share powers.

The administration is also weighing the creation of a financial-products regulator, which could strip power from the SEC. That idea, which became public last week, prompted an immediate rebuke from SEC Chairman Mary Schapiro, who has been battling to preserve her agency's clout.

Cognizant of the political difficulties in merging the SEC and CFTC, the administration earlier this month said it wanted to bolster each agency's oversight of over-the-counter derivatives rather than shifting oversight to one agency.

On Capitol Hill, Rep. Frank has clashed with Rep. Collin Peterson (D., Minn.), chairman of the House Agriculture Committee, over which of the agencies should regulate credit-default swaps. The agriculture committees in Congress traditionally oversee the CFTC and fiercely guard that authority.

House Democrats are waiting to see what the administration puts forward before drafting legislation. The House Financial Services Committee is planning a series of hearings beginning in June to vet investor and consumer protection issues, as well as the structure of executive compensation plans at financial institutions.

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Finra Quietly Withdraws Discovery Proposal

By Suzanne Barlyn. Dow Jones. May 29, 2009.

It looks like the Financial Industry Regulatory Authority took to heart all the criticism about a proposal that would have obliged investors in arbitration to disclose more of their financial histories.

It quietly withdrew the plan.

Finra's decision may have been influenced by the times, in which many investors have lost a third or more of their portfolio values in the market drop and some have lost even more in frauds like Bernard L. Madoff's $50 billion Ponzi scheme.

Seth E. Lipner, an attorney and law professor at Baruch College in New York, says it's "a lousy time" to require that investors submit more information to justify arbitration claims against brokerages. "Wall Street was as inept at managing their own portfolios as they were in managing clients' money," he said.

Finra's proposal, filed with the SEC in March, would have changed the terms for lists of information that parties must exchange during arbitration. Document lists vary depending on the type of claim, but the proposal would have required, among other changes, that investors always submit five years of complete tax returns instead of three years of certain pages and schedules. It also would have required loan histories, among other papers.

The SEC received more than 50 comment letters about the proposal, including one from Lipner who likened the discovery process in securities arbitration to a "financial colonoscopy." That process, he says, also comes too late in a brokerage's relationship with an investor. "If they asked for this stuff when they made the recommendations, then it would already be in their files," he said in an interview Thursday.

Finra filed a two-page notice with the SEC, withdrawing the rule proposal, on May 21. The notice is buried among numerous 2008 filings posted on Finra's Web site.

Brendan Intindola, a Finra spokesman said that "a review of the comment letters submitted indicates that the consensus reached was not broad enough." Finra is working on a new proposal that is "informed by the comments submitted," he said.

Laurence S. Schultz, a securities arbitration attorney in Troy, Mich., says he applauds Finra's withdrawal, but is bothered the decision isn't more prominently featured on Finra's Web site given the substantial debate the proposal fueled. "They're not proud of it," he says.

Brokers didn't like some aspects of the proposal. The Securities Industry and Financial Markets Association, a trade group, described parts of it as "fundamentally unfair," criticizing a provision that required brokers to produce their entire trading history in cases about unauthorized and excessive trading, even with customers unrelated to the claim.

A Sifma spokesman said the industry broadly supports reforming the arbitration discovery process, but the proposal raised many issues, which it hopes can now be addressed outside of the rulemaking process.

Brian Smiley, president of the Public Investors Arbitration Bar Association, or Piaba, a Norman, Okla.-based group of attorneys who represent investors, says investor advocates perceived many provisions as being "overburdensome." But some are worth salvaging, such as a provision that would give certain investors more information about broker commissions. "I hope those will get into the new revision," he says.

Lawrence S. Polk, a securities attorney with Sutherland in Atlanta who represents brokerages, says the debate over documents will likely continue, regardless of the economic climate.

"We're constantly being asked to give more documents, yet claimants don't want to make that type of disclosure," he says. "It seems the discovery system is becoming unbalanced."

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10 brokers hit with SEC fraud lawsuit

Federal regulators accuse the brokers of duping retirees into investing in complex, high-risk mortgage-backed securities. About 750 victims collectively lost more than $36 million.

By E. Scott Reckard. The Los Angeles Times. May 29, 2009

Alleging that 10 brokers made millions of dollars at the expense of retirees, federal regulators accused them Thursday of misrepresenting complex and illiquid mortgage investments as safe and suitable for conservative investors.

The Securities and Exchange Commission, in a civil fraud lawsuit filed in West Palm Beach, Fla., federal court, said the brokers worked for Brookstreet Securities Corp. of Irvine, which went out of business in 2007. More than 600 independent brokers nationwide had represented the firm.

The suit contends that the brokers did not clearly define the risks to customers before investing their money in high-risk, collateralized mortgage obligations, or CMOs.

"These brokers took customers primarily interested in protecting their money and pushed them into risky derivative investments through blatant misrepresentations," said a statement from Rosalind R. Tyson, director of the SEC's Los Angeles regional office.

In a parallel civil complaint, also filed Thursday in West Palm Beach federal court, the securities industry's self-regulatory arm accused six brokers formerly associated with Brookstreet of fraud and making unsuitable recommendations to retail customers.

The complaint by the Financial Industry Regulatory Authority alleged that the brokers sold CMOs that they did not understand themselves.

The defendants in the SEC case are accused of portraying particularly risky types of CMOs as secure investments, allegedly defrauding more than 750 customers who lost more than $36 million. The 10 brokers received $18 million in commissions and salaries from their customers' investments in CMOs, the SEC said.

Defense attorneys said the brokers named in the complaints would contest the accusations. H. Thomas Fehn of Los Angeles, a lawyer representing Russell M. Kautz of Medford, Ore., said that despite being described as high-risk, most of the CMOs had continued to pay interest.

The losses, Fehn said, were caused when the credit crunch struck in 2007, resulting in margin calls for additional cash to back up the securities purchased with borrowed money.

"It was the same problem that brought down Lehman Bros. and Bear Stearns," he said, adding that none of the defendants, nor any regulators, had been able to see the meltdown coming.

Attorney Gary Victor Dubin of Honolulu, representing broker Travis A. Branch of Kailua, Hawaii, said his client also denied wrongdoing. Branch believed so much in the CMOs that he and his family invested heavily in them and lost $1 million, Dubin said.

"The government is looking for scapegoats here," he said.

Robert N. Gest Jr. of Fort Lauderdale, Fla., denied any personal wrongdoing, saying he and the others had used Brookstreet's descriptions of the CMOs in marketing them to clients.

"All the documents said they were triple-A-rated," Gest said, "with the primary goal of preservation of capital and income. I trusted the company to do their due diligence."

The SEC complaint names as defendants Florida residents William Betta Jr., James J. Caprio, Troy L. Gagliardi, Barry M. Kornfeld, Clifford A. Popper, Alfred B. Rubin and Steven I. Shrago. Additional defendants are Branch, Kautz and Shane A. McCann of Florence, Mont.

The Financial Industry Regulatory Authority complaint names Gest; Thomas J. Brough and Jonathan J. Sheinkop of Chicago; Kevin M. Browne, who worked in Northern California; Eric R. Elliott of Fort Lauderdale; and Brian J. Falabella of Long Island, N.Y.

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Bair Attacks Too-Big-to-Fail as Enforcer Geithner Must Trust

By Alison Vekshin. Bloomberg. May 29, 2009.

Sheila Bair, chairman of the Federal Deposit Insurance Corp. and a lifelong Republican, boarded Air Force One for the first time in February. Neither President George H.W. Bush nor his son, President George W. Bush, had invited her on the world’s most famous jet in the five years she worked for them. It was a Democratic president, Barack Obama, who asked her to fly to Washington after the two had unveiled his administration’s foreclosure relief plan in Mesa, Arizona.

“Sheila, come on back. I want to talk to you,” Obama told Bair, who was seated in the plane’s conference room. He then escorted her into his airborne Oval Office for their first private meeting, where they discussed the government’s role in alleviating the worst financial crisis since the 1930s.

“It was great,” Bair says of her meeting with the president. “He’s got an agenda which we share. Banks are a means to an end. You stabilize the banks to support the economy. But you don’t stabilize the banks for the sake of stabilizing the banks.”

After being left out of big decisions by Bush administration officials, such as the push last year for the $700 billion bank bailout, Bair, 55, has become one of the most powerful policy makers in Washington. Driven by a combination of circumstances and her own candor, Bair has presided over the biggest expansion of the FDIC’s authority since its founding in 1933 to insure bank deposits.

‘Bites Like Jaws’

“She looks like Bambi and she bites like Jaws,” says Wade Henderson, president of the Washington-based Leadership Conference on Civil Rights, who has known her for 27 years. “There’s a quiet intensity about her. She’s idealistic in spite of her 30 years in Washington.”

Under Bair, the normally invisible agency was the prime mover behind Obama’s $75 billion program to curb foreclosures. Last year, the FDIC became the go-to agency to insure hundreds of billions in bank debt to boost liquidity, and it’s currently spearheading half of the initiative to encourage investors to buy up to $1 trillion in troubled assets.

The FDIC head isn’t done expanding her influence over Wall Street. An opponent of the “too-big-to-fail” policy for firms like Citigroup Inc., Bair is lobbying Congress to give the FDIC authority to wind down bank and thrift holding companies -- a move she says is necessary to protect taxpayers. And she wants lawmakers to include the agency in a systemic risk council to prevent future financial shocks.

Populist

As Bair builds her power, soaring bank failures are jeopardizing her agency’s deposit insurance fund, which had dwindled to $13 billion in the first quarter, the lowest amount since 1993 following the savings-and-loan crisis. She requested more funding from Congress, which on May 19 more than tripled the FDIC’s borrowing authority from the Treasury Department to $100 billion. Lawmakers also approved a temporary boost of the credit line to $500 billion.

A self-described “populist,” Bair has won allies in the Democratic Party, such as Representative Barney Frank of Massachusetts, in muscling the FDIC into prominence. She has also fought battles with the Independent Community Bankers of America, representing 5,000 banks, and the Bush administration.

In 2008, Bair says, her struggle with midlevel Treasury Department officials turned tense as they stonewalled her proposal to use federal funding to prevent foreclosures. And she tussled with Timothy Geithner, then the president of the Federal Reserve Bank of New York, over the request last year that the FDIC guarantee all debt issued by lenders -- a move she rejected because it would expose her agency to big losses.

Geithner’s Respect

“I’m from Kansas; I’m not from New York,” Bair says. “I’m a lot of things that are different. So maybe that does give me some more independence of thought and daring to not care who I offend.”

Following Obama’s election in November, Geithner tried to have her ousted for not being a team player, according to people familiar with the matter. Through a spokesman, Geithner declined to say whether he sought to remove Bair from office.

“I have great respect for her,” Geithner told Bloomberg TV on May 21. “She’s a strong advocate for her agency and a strong advocate for her points of view.”

In May, after the FDIC assisted the Federal Reserve in stress testing 19 lenders, Bair put their executives on notice. She said some of them could lose their jobs in the next few months after the companies submit capital-raising plans to the government, according to an interview with Bloomberg TV and a statement from the FDIC on May 15. Bair didn’t say that the government would oust the chief executive officers of the banks.

$4.8 Trillion in Deposits

Bair says she’s seeking more authority over banks because her agency has so much at stake -- $4.8 trillion in insured deposits.

“There is some perception we want these programs, we want all this power,” Bair says. “That is not the case. We want a cleanup. This agency was born of a crisis and made for a crisis.”

Congress created the FDIC in 1933 at the depths of the Great Depression during President Franklin D. Roosevelt’s first term. As thousands of customers rushed their lenders to withdraw funds, toppling about 4,000 banks that year, Congress gave the new agency the powers to insure deposits and liquidate failed lenders.

Set up as an independent authority like the Federal Reserve, with a chairman serving a five-year term, the FDIC has been quiescent during most of its history. Then, in the 1990s, the agency expanded its staff to liquidate banks during the S&L crisis, when 124 insured institutions went down in 1991 alone.

1,000 Bank Failures

Now facing the largest number of bank failures since the S&L debacle, Bair has been fighting with bankers to protect the solvency of her deposit insurance fund. As many as 1,000 banks will go down from 2009 to 2012, says Gerard Cassidy, managing director of bank equity research at RBC Capital Markets in Portland, Maine.

The FDIC’s insurance fund, which covers deposits up to $250,000 after Congress temporarily boosted the amount from $100,000, is financed by banks. Most of them pay an annual fee of 12 cents to 16 cents per $100 in deposits. In February, Bair proposed an additional, emergency one-time charge of 20 cents per $100 in deposits, which ignited a firestorm of criticism from small banks.

Camden Fine, president of the Independent Community Bankers of America in Washington, sent a letter to more than 35,000 bankers in early March.

Hiking Bank Fees

“Shake the walls of the FDIC and Congress until they reverse this and other misguided policies,” Fine wrote. Bankers barraged the agency with letters complaining that the levy would wipe out profits.

After Congress agreed to boost the FDIC’s credit line to backstop the insurance fund, Bair moved to reach a compromise with the banks. On May 22, the FDIC approved a one-time fee on banks of 5 cents per $100 in assets, minus Tier 1 capital. By basing the fee on assets rather than deposits, the FDIC is putting more of the onus on larger institutions.

As the FDIC gains more regulatory clout, Republican lawmakers say the agency is stretching itself too thin in veering from its main job of insuring deposits.

“I’m very concerned ultimately about the core function of the FDIC, which is the cornerstone of our financial system, which is the safety and soundness of the insurance fund,” says Representative Jeb Hensarling, a Texas Republican.

ABA Opposition

The American Bankers Association, which represents banks of all sizes, is lobbying to stop the FDIC from gaining more turf. Bair’s proposal to give her agency the power to dismantle huge financial companies would have included government-controlled American International Group Inc. before the government took control of it, according to the Washington-based ABA. It says Congress shouldn’t give the wind-down authority to the FDIC because the financial burden of liquidating the large companies would likely fall on fee-paying banks.

“We think it would be a calamity for the country because the FDIC insurance of bank deposits has been so important,” says Edward Yingling, president of the trade group. “Why should a community bank in the middle of Iowa be paying for AIG? We pay insurance premiums to cover insurance on banks, not on everybody.”

As Bair’s stature rises, so does the number of hostile e- mails she receives from depositors who have suffered losses because their amount of money at failed banks exceeded the insurance limit. For the first time, starting in early 2009, the FDIC assigned a security detail to its chief. After speeches, Bair is often swarmed by crowds of reporters and citizens who sometimes jostle her 5-foot-4-inch (1.6-meter) frame.

Independence, Kansas

“She’s a very recognizable face now,” says Fine of the banking trade group. “All it takes is one disgruntled banker or depositor and bad things can happen.”

Bair’s populist politics were shaped in Independence, Kansas, a rural town of about 10,000 people where she grew up. Her mother, Clara, a nurse, and her father, Albert, a doctor, were children during the Great Depression and swayed her views about the importance of being thrifty.

“The culture out there is one of being in touch with the people and grassroots,” says Fine, who’s from Jefferson City, Missouri.

A classic overachiever, Bair graduated from Independence High School a year early and earned a degree in philosophy in three and a half years from the University of Kansas in Lawrence in 1975.

“I like to get things done quickly,” she says.

Robert Dole

Hoping to work in public service, she entered a law program at the same school and graduated three years later. Bair interviewed at several law firms that in the 1970s were mostly hiring men.

“They couldn’t compete with men for jobs in the law firms,” says Fred Lovitch, a professor at the law school who taught Bair in a securities regulation course. “She did what our best women students did then, which was to get as good a job as they could in the federal government and work their way up from there.”

The Department of Health, Education and Welfare in Kansas City hired Bair as a civil-rights lawyer. In 1981, she began her ascent in Washington, landing a job in the office of Robert Dole, a Republican senator from her home state. Dole, 85, says one of the reasons he hired Bair was because he knew her father, a political supporter. In seven years with the senator as a research director and counsel, she worked on civil rights, including legislation making Martin Luther King Jr.’s birthday a federal holiday and extending the Voting Rights Act; judicial nominations; and Dole’s presidential bid in 1988.

Runs for Congress

“She’s a hard worker, one of these people who if you say, ‘Sheila, would you do A, B, C or all three?’ then you didn’t have to worry about it every day,” Dole says.

Eager to make some money, Bair left Dole’s office in 1988 after his failed campaign for the White House and joined the New York Stock Exchange as its legislative counsel in Washington.

In 1990, at Dole’s urging, Bair returned to Kansas to run in the Republican primary in the 5th District for a House seat. The only pro-choice candidate among six contenders, she called for a balanced budget and the revitalization of economically depressed southeast Kansas. She rode around in rural communities on a bicycle with a yellow flag saying “Bair for Congress” before losing by 760 votes.

“She should have gotten married before the race,” Dole says. “At that time in Kansas, I think there were a lot of people, seniors and others, who would like to see young people married before they go to some public office.”

CFTC Commissioner

A year later, in 1991, the first President Bush nominated Bair to be commissioner of the Commodity Futures Trading Commission, an agency that fell under the jurisdiction of the Senate Agriculture Committee that Dole had served on. During her tenure at the CFTC, Enron Corp., the energy-trading company that would blow up in 2001, lobbied the commission to exempt over- the-counter energy derivatives from the agency’s rules banning fraud, says Susan Milligan, a senior vice president at the Chicago-based Options Clearing Corp. who worked for Bair at the CFTC.

Bair was the only commissioner of the three-member panel who dissented on the proposed exemption; she lost the battle.

“There was a lot of pressure to vote for the exemption from the OTC derivatives community,” Milligan says. “Sheila said, ‘Absolutely not. No responsible regulator exempts anyone from their anti-fraud authority.’”

NYSE

Bair returned to the NYSE in 1995, where she ran its Washington lobbying office for six years during the Internet- fueled stock market boom and bust. At the stock exchange, Bair maintained her consumer protection bent, leading the successful effort to include limits in the 1999 Gramm-Leach-Bliley Act to prevent OTC derivatives dealers from offering equity swaps to retail investors. The law repealed part of the Glass-Steagall Act of 1933, which banned companies from acting as both a commercial and an investment bank.

“We didn’t want retail investors to be in a situation where they didn’t understand the product and had losses,” says Milligan, who followed Bair to the NYSE.

In June 2001, as the Standard & Poor’s 500 Index was on course for a 13 percent drop for the year, the second President Bush nominated Bair to the post of assistant secretary for financial institutions at Treasury. After her confirmation in July, she helped create an office to improve the financial knowledge of Americans. The office encouraged banks to open student-run branches in high schools.

University of Massachusetts

Bair departed Washington about 12 months later for a quieter life at the Isenberg School of Management at the University of Massachusetts in Amherst. She raised two children -- Preston, 16, and Colleen, 9 -- with her husband, Scott Cooper, vice president of government relations at the Washington-based American National Standards Institute, a nonprofit group that helps coordinate standards for U.S. products.

“Students were always impressed with how well prepared she was,” says Thomas O’Brien, a finance professor who taught a course with Bair in 2005. “Sheila wasn’t a showoff at all. She does her own homework, and she calls things the way she sees them.”

At the university, some of her research focused on improving financial services for low-income people. In one paper on Latin American immigrants, she recommended that banks provide bilingual documents and staff, open more branches in Latino neighborhoods and offer money transfers along with check cashing.

President Bush

In 2006, Bair published the first of two children’s books, Rock, Brock, and the Savings Shock. It’s a tale about twin brothers -- a spender and a saver -- and how saving makes one brother rich. The second, Isabel’s Car Wash, about investing, tells of a girl with a plan to take $5 from her friends to start a car wash and pay them back with interest.

Bair says she wasn’t seeking a government post when Bush’s personnel director called her in 2006 about replacing Donald Powell, the FDIC head who had left to oversee the Hurricane Katrina reconstruction program. While she enjoyed the freedom at the university to express her own views, Bair couldn’t resist a return to public service. The Senate confirmed her in June 2006 as banks were reporting record earnings and no lender had failed in two years.

Early the following year, Bair became one of the first policy makers to speak out about the coming housing crisis that would plunge the economy into recession. The FDIC chief saw that a rash of subprime mortgages issued at low teaser interest rates a few years earlier were about to adjust to higher rates, boosting monthly payments by more than 30 percent and threatening to spur a wave of defaults.

Early Warnings

Bair wanted lenders to change mortgage terms to reduce monthly payments and help borrowers stay in their homes. But she had no regulatory control over major mortgage servicing companies. So Bair resorted to a series of private meetings and congressional appearances to try to persuade the mortgage industry to voluntarily prevent foreclosures.

In April 2007, Bair organized a summit of lenders and regulators at the seven-story FDIC headquarters in Washington. Representatives from Countrywide Financial Corp., Morgan Stanley Bank and Wells Fargo Home Mortgage were among the about 40 people who attended the eight-hour meeting. During the gathering, the representatives vowed that they would begin modifying loans, Bair says.

“Everybody said they knew these loans were going to be resetting and unaffordable and the loans would be restructured because it was in everyone’s interest to keep people in the house,” she says.

Pressuring Investors

The Bush appointee also collaborated closely with Democratic leaders in Congress. On April 17, the day after her summit, Bair urged servicers to adjust the terms of loans when she testified before the House Financial Services Committee, chaired by Frank. She also said investors in mortgage-backed securities whose returns were guaranteed in contracts would have to take losses too.

“I thing we should hold the servicers’ and the investors’ feet to the fire on this,” she said. “It was clear to investors that these were high risk. So I think everybody needs to share the pain now.”

The following day, she attended another closed-door meeting with lenders convened by Christopher Dodd of Connecticut, the Senate Banking Committee chairman.

Her testimony -- coming three months before two Bear Stearns Cos. hedge funds collapsed under the weight of investments in subprime debt -- made Bair the darling of Democrats and immunized her from criticism by lawmakers who chastised other regulators for their lax oversight of banks.

Admired by Frank

“I admire the fact that she wouldn’t let people shut her up,” Frank says. “The people who’d appointed her were unhappy she was speaking out, and she was right.”

In the months following her summit, Bair was reminded of the limits of her own power: Loan servicers hadn’t begun reducing payments for homeowners because of resistance by investors.

“I was frustrated because everybody was privately singing this song to us, but there was no execution,” Bair says. “A lot of the pushback was coming from the investor community. And you still see it with the investor community.”

As the bankruptcy of Lehman Brothers Holdings Inc. in September 2008 froze credit markets and threatened to take down even bigger securities firms, Treasury Secretary Henry Paulson and Fed Chairman Ben S. Bernanke rushed to Congress to win approval of an emergency rescue plan.

TARP

Just before they went to lawmakers to set up the $700 billion Troubled Asset Relief Program, or TARP, Bair says, she got a perfunctory call from Paulson telling her of their plans and asking her if she wanted anything added to the bill.

“They made the decision to go to the Hill to start this program,” Bair says. “We were never part of any of that.” Paulson, who left office in January, didn’t respond to requests for an interview.

Paulson told Congress that TARP funds would be used to buy troubled bank assets. Bair says the administration included a mortgage modification provision in the bill to try to win votes from the Black and Hispanic caucuses and other Democrats. The provision said that Treasury would set up a program to help struggling homeowners if the department used TARP money to buy mortgages or related securities.

Bair says that although Paulson changed course, opting to use the money to buy preferred bank shares, he still seemed to support the use of some TARP funding to modify mortgages. So the FDIC developed a $24.4 billion plan that soon died because mid- level Treasury staffers didn’t want to use taxpayer money to bail out homeowners, Bair says.

‘Robust Discussions’

“Then it got nasty,” she says. “People started leaking our plan with derogatory comments, so we went public with ours. It was just a kind of classic Washington unpleasant process.”

William Isaac, who served as FDIC chairman under President Ronald Reagan from 1981 to 1985, says Bush officials objected to Bair’s push to modify loans.

“They thought she was way out in left field,” Isaac, 65, says. “I think she was right. Too many foreclosures were driving down real estate values, and if we didn’t address that issue, then the banking and economic problems would only get worse.”

As banks struggled to raise money, Paulson and Bernanke turned to Bair to start the Temporary Liquidity Guarantee Program to insure debt issued by banks -- a sweeping escalation of the FDIC’s role. Bair says she and Geithner had “robust discussions” about how much debt the FDIC would insure under the program.

“There were early discussions about us guaranteeing all bank liabilities, and we weren’t going to do that,” Bair says.

Insuring Debt

If the FDIC suffered losses, they would have to be recouped by charging fees to already battered banks. Bair did agree to temporarily insure new senior unsecured debt, such as commercial paper. And she insisted the agency charge banks that use the program a fee for the guarantee.

The program, which started in November, allows banks to issue debt with a top, AAA credit rating. Bair has said she doesn’t want to extend the program, which had insured $342.7 billion in debt and raised $8 billion in fees without incurring any losses as of mid-May, beyond its scheduled end on Oct. 31.

Lou Crandall, chief economist at research firm Wrightson ICAP LLC in Jersey City, New Jersey, says the program has been one of the government’s most successful responses to the financial crisis.

“It’s contributed to the funding stability of a large number of issuers and eased immediate concerns about their access to cash,” Crandall says.

President Obama

After the November election, Geithner, then Obama’s nominee for Treasury secretary, sought to push Bair out of office, according to people familiar with his thinking. Geithner said Bair was too focused on protecting the solvency of her deposit insurance fund rather than the financial system as a whole, the people said.

“He’s never indicated to me in any way that he had any problem with working with me or anything else,” Bair says. “President Obama has made clear he wants people to work together.”

As the head of an independent agency whose term overlapped two administrations, Bair could have kept her job without being reappointed by Obama. Bair says she would have stepped down if the president had requested it. Instead, Obama sent signals that he wanted her to stay.

Troubled Assets

Bair says the transition team, co-chaired by John Podesta, whom she’s known for years, reached out to her to discuss mortgage modifications. Dodd and Frank also wrote a letter to Obama in December asking him to keep Bair, stressing her willingness to buck the Bush administration.

“I wasn’t sure whether there would be a carryover of the friction with the Bush people, so that’s why I wrote that letter,” Frank says. Bair’s flight on Air Force One in February suggested to her that the new president wanted her to continue leading the agency. “With the new administration, the president has been very inclusive, and that’s helped us,” Bair says.

Early this year, as public hostility over Wall Street bailouts and bonuses reached a fever pitch, Bair says she played a significant role with Geithner and Bernanke in devising the Public-Private Investment Program to buy illiquid mortgage- backed assets from banks. Paulson’s decision in 2008 not to use TARP funds to buy these assets hurt the prices the FDIC was getting when it liquidated failed banks. Congress wasn’t about to hand the Treasury more money to acquire bad debt while unemployment soared, reaching 8.9 percent in April.

Buffett’s Idea

So Bair says the trio decided to create incentives for private investors -- an idea that billionaire investor Warren Buffett had proposed to Paulson in 2008 -- since they were better suited to establish market prices for the debt. The Treasury and Fed told her that the FDIC would have to provide financing to get the loan program for banks off the ground.

“They basically said, ‘If you want it, you’ll have to ante up too,’” says Bair, who agreed. Bair told the Treasury that her agency should operate the auction of assets since it had experience selling off failed banks. “Treasury was fine with that,” Bair says. “They are not really equipped to run a program like this.”

Under the PPIP, which was announced in March and will use up to $100 billion of TARP funds, the FDIC will oversee the sale of distressed loans. The Treasury will provide half of the equity to buy a pool of loans from banks, with private investors putting up the other half. The FDIC will offer debt guarantees to investors of up to six times the capital provided.

Reluctant Banks

“The debt guarantee by the FDIC is a huge sweetener,” says Mark Tenhundfeld, senior vice president at the ABA.

While investors have expressed a lot of interest in buying the assets, banks are reluctant to sell them.

“The troubled assets are still there, and the need is still there to clean that up,” Bair told Bloomberg TV on May 15. “Some need to be told that they need to deal with their troubled assets.”

Most banks may decide to keep the assets and take writedowns rather than sell them at a steep discount, says Christopher Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York.

“I’d be surprised if you’re going to get many banks who feel their assets are worth 90 cents on the dollar right now selling at 60 cents to a hedge fund,” Rupkey says.

Dwindling Insurance Fund

At a May 27 news conference, Bair pointed to additional obstacles to getting banks and investors to participate. She said they may be hesitant because of concerns that Congress could change the rules governing the program. She cited an amendment lawmakers approved this month that requires the Treasury to write rules guarding against conflicts of interest in the PPIP, a process that could delay a test run of the program that had been scheduled for June. Banks also have been able to raise capital and may have less incentive to sell assets, Bair said.

With bank failures rising -- 36 have folded this year -- Bair is struggling to keep the deposit insurance fund solvent. In the first quarter, bank collapses had reduced the fund to $13 billion from $17.3 billion in the previous period.

The FDIC classified 305 banks as “problem” institutions in the first quarter, the highest total in 15 years and an increase from the 252 on the agency’s list in the fourth quarter. Banks are rated on measures including asset quality, earnings and liquidity.

“The banking industry still faces tremendous challenges,” Bair said on May 27. “Going forward, asset quality remains a major concern.”

Emergency Fee

Last September, Bair was still bullish about the fund. “Despite the recent drawdown to cover losses, the insurance fund is in a strong financial position to weather a significant increase in bank failures,” Bair told the Florida Bankers Association in Sarasota, Florida.

In moving to replenish the pool, Bair made a major misstep, says Fine of the community banking group. Her emergency fee proposal on Feb. 27 of 20 cents per $100 in deposits was immediately met with outrage from bankers. They deluged her office with protests, saying it would take a large chunk out of their 2009 profits at a time when they could least afford it.

The assessment would cost Citizens Bank of Ada more than 10 percent of its net earnings, Kassie Cothran, the Oklahoma-based bank’s senior vice president, wrote the agency.

Battle With Bankers

“Without these assessments, the deposit insurance fund could become insolvent this year,” Bair wrote in a letter to bank CEOs on March 2. That didn’t quell the brouhaha. The next day in his letter to bankers, Fine likened the proposal to “Japan’s sneak attack on Pearl Harbor.”

A day later, Bair called Fine on his cell phone to make peace while he was dining with two bankers. “You’re going to have to call the dogs off,” Fine says Bair told him. “You’ve got to tone down the rhetoric. We’re just getting bombarded.”

When Bair asked if sharply reducing the fee would help, Fine said it was a step in the right direction. On March 5, she turned to Congress for funding, sending a letter to Dodd urging lawmakers to expand the agency’s credit as a contingency and so the FDIC could reduce the bank fee. Two months later, Congress overwhelmingly approved the massive increase, including a $500 billion credit boost through 2010, and the president signed the measure on May 20.

Dismantling Giants

The FDIC has tapped this credit only once in its history, when the S&L crisis left the fund insolvent by $7 billion in 1991. The agency repaid the loan with interest two years later using industry fees.

Fine says the protests from bankers caught Bair flat-footed and taught her a lesson. “I believe if she had it to do over again, she would have explored alternatives and laid some groundwork before,” he says. “She, to her credit, adjusted very rapidly.”

The FDIC boss doesn’t think she misplayed her hand by proposing the fee.

“I don’t know if it was a mistake,” she says. “The 20 basis points -- we thought about that very carefully. I don’t think I had any choice.”

As financial behemoths such as Citigroup live off bailouts -- it’s received $45 billion in taxpayer funding -- Bair is asking Congress to give her agency the power to dismantle large bank holding companies. Currently, the FDIC can only unwind thrifts and banks such as Citibank, a division of Citigroup that operates retail outlets. The agency can’t disassemble the entire Citigroup, which also has trading and investment banking units.

Risk Council

“Done correctly, the effect of the resolution authority will be to increase market discipline and protect taxpayers,” Bair told the Senate Banking Committee on May 6.

While lawmakers begin the biggest regulatory overhaul since FDR, they’re split on who should get the power to contain systemic financial risk. Last year, Frank and Paulson pushed for the Fed to gain the authority to prevent shocks such as the one caused by the collapse of Lehman Brothers. In March, after the public outcry over government-funded AIG’s payout of $165 million in bonuses, lawmakers blamed the Fed because the New York Fed is the insurer’s main overseer while under government control. Following that flap, Bair told lawmakers on May 6 that they should divide the super-cop job among the FDIC, the Fed, the Treasury and the Securities and Exchange Commission.

While SEC Chairman Mary Schapiro backs Bair’s proposal to prevent concentration of power with a single regulator, Geithner opposes it.

Congress’s Priority

“Geithner believes that we need a single independent regulator with responsibility for systemically important firms,” Treasury spokesman Andrew Williams said in a May 8 e- mail. “He does see a role, however, for a council to coordinate among the various regulators.”

Ronald Glancz, chairman of the financial services group at Venable LLP, a Washington law firm, says Congress won’t let the debate over who gets authority prevent the creation of a super regulator.

“It is going to happen,” Glancz says. “This is the No. 1 priority in Congress for dealing with future financial crises.”

After trying to rescue struggling homeowners for almost two years, Bair says she felt vindicated standing with Obama in February as he announced his foreclosure plan in Arizona. It uses $75 billion to coax banks to make payments affordable for up to 4 million borrowers. The government will share in the cost of reducing the borrowers’ monthly payments to 31 percent of their monthly income.

JFK Award

The program hasn’t permanently altered any loans yet. Fourteen participating loan-servicing companies had extended trial modification offers to more than 55,000 homeowners, according to a May 14 Treasury release. At least 10,000 borrowers are making lower payments as part of a three-month trial, a requirement before borrowers can have their loans permanently modified, the Treasury said.

On May 18, Bair accepted the John F. Kennedy Profile in Courage Award at his presidential library in Boston for “sounding early warnings” about the subprime lending crisis. She shared the honor with Brooksley Born, former chairman of the CFTC, who in the late 1990s fought to regulate OTC derivatives in a losing battle against Robert Rubin, a former Treasury secretary and Citigroup executive committee chairman.

Bair says she’s not seeking the Treasury secretary post or any other higher position in Washington.

“I have no aspirations other than to return to academia after this job is over and have more time with my family again,” she says from her office, located a block away from the White House.

Bair’s legacy will mostly ride on the effectiveness of her new initiatives, from foreclosure relief to asset sales. As results are tallied, Bair’s friends and critics can then judge whether the idealistic populist from Kansas who ventured to Washington three decades ago has helped put America’s banks back on stable ground.

Posted at 12:30 PM in News and Current Events | Permalink | Comments (0) | TrackBack (0)

2 Auditors Held in India Fault System

By Heather Tommons. The New York Times. May 28, 2009

Mahesh Kumar A./Associated Press

Srinivas Talluri, left, and Subramani Gopalakrishnan, auditors of Satyam Computer Services, are in prison, charged with multiple offenses, including falsification of accounts.

CHANCHALGUDA, India — Hyderabad’s Central Prison is no country club jail.

The prison, opened in the 1800s, is surrounded by high watchtowers and a concrete wall. Behind its hulking, metal-studded front door live more than 900 men, held for crimes like pick-pocketing and murder. Then there are the two accountants.

Four months after the revelation of a major fraud at Satyam Computer Services shocked corporate India, markets here have practically declared the scandal over. Satyam’s top managers confessed and were jailed, the board was fired, and the giant outsourcing company was sold.

But Satyam’s independent auditors, two partners from the Indian office of PricewaterhouseCoopers, say they are innocent and remain in prison, charged with multiple offenses, including dishonesty, cheating, falsification of accounts and using forged documents.

The auditors, who are technically in “judicial custody,” are luckier than most prisoners here. Their wives can bring them food from outside during their twice-weekly visits. But they receive few other privileges. They sleep on the floor in a cell with other inmates, in temperatures that often exceed 100 degrees.

In an interview in the prison’s dim, noisy, concrete visitor’s hall this week, the accountants said they were scapegoats for a system that failed to catch years of wrongdoing.

“I’ve been 31 years in this profession, and I have never seen auditors being booked,” said Subramani Gopalakrishnan, one of the jailed auditors and the founder of the PricewaterhouseCoopers office in Hyderabad.

He yelled through three fences in the room. Prisoners pushed against one fence. Visitors — lawyers and wives with babies — pressed against another, and a third occupied a garbage-strewn no man’s land between the first two.

PricewaterhouseCoopers audited Satyam’s books worldwide from 2001 until the company’s founder, B. Ramalinga Raju, confessed in January that he had been manipulating the accounts for years and that more than $1 billion cash on the company’s balance sheet did not exist.

Subsequent investigations revealed falsified bank balances, depository receipts, invoices and even bank letterhead used to bolster the fake accounts. Mr. Raju and some of the other top managers, who have confessed to crimes and are awaiting trial, are also in Hyderabad’s prison, but in separate quarters from other prisoners.

PricewaterhouseCoopers, facing numerous shareholder class-action suits and investigations, is under intense pressure to prove that its partners were not complicit. But a preliminary report from India’s Central Bureau of Investigation accuses the auditors of “consciously” overlooking accounting irregularities and “knowingly” certifying inflated and falsified data.

In a petition for bail for the partners, PricewaterhouseCoopers said that the government had “no material or iota of evidence to even remotely suggest” that the partners “had any knowledge” that Satyam documents were falsified.

Mr. Raju’s “carefully crafted image” and political connections fooled the company’s board, India’s regulators and everyone else, Mr. Gopalakrishnan said from prison. In retrospect, the only thing he might have done differently, he said, would be to be more aware of the pressure on Indian outsourcing companies like Satyam to grow, and rely less on their employees to provide copies of the company’s bank balances. The other PricewaterhouseCoopers partner, Srinivas Talluri, a youthful 48-year-old with wire-rim glasses, is trying to maintain his professional mien behind bars. In the interview, his hair was neatly brushed, he carried a notepad and a plastic water bottle and his T-shirt was so smooth it seemed ironed.

He said his two children had not visited him during his four-month prison stint because he did not want them to see him behind bars. He recently offered to check the accounts at the prison’s canteen, just to keep his mind sharp.

“The whole world believes that preventing and detecting fraud is my responsibility,” he yelled through the wire fence. “No concerns were ever brought to us by anyone.” He said he “could not imagine” the company would forge depository receipts, or balances on fake bank letterhead. Banks in India are not required to give balances directly to auditors, he added.

Accounting experts say that while authorities may be treating the PricewaterhouseCoopers partners particularly harshly, making an example of them may prevent more serious repercussions for the country’s economy and even the audit firm itself.

“You can say it is a little unfair they are awaiting trial in prison, but at the same time it is part of a system of action that seeks to preserve investor confidence and limit collateral damage,” said Sudhakar Balachandran, an associate professor of accounting at Columbia Business School in New York.

Mr. Talluri and Mr. Gopalakrishnan provided more than 50,000 pages of documents from their office to investigators and sat for numerous interrogations, according to their bail petitions. PricewaterhouseCoopers maintains that the two partners are not a flight risk and keeping them in prison “constitutes a pretrial punishment,” the bail plea said.

The auditors’ wives say they have been doing their best to keep a brave face for their husbands, and spend a lot of time praying.

Right now, “even God is not with us,” said Mr. Gopalakrishnan’s wife, Jaya Lakshmi.

Posted at 11:30 AM in News and Current Events | Permalink | Comments (0) | TrackBack (0)

Banks Seek Role in Bid to Overhaul Derivatives

By Serena Ng. The Wall Street Journal. May 29, 2009.

The battle lines are being drawn in the derivatives market, as Wall Street tries to pre-empt new laws that could drain a big source of banks' profits.

A group of banks and money managers will next week present a plan designed to help fend off some rules proposed by the Obama administration, which wants to reform trading practices in the market for over-the-counter derivatives.

The banks are treading a fine line. They are being careful not to publicly oppose any rules and know that more regulation is inevitable. But at the same time they are seeking to stymie legislation that could seriously hurt their ability to generate fees. The banks plan to release a letter to the Federal Reserve Bank of New York and other U.S. and overseas regulators in coming days, according to people familiar with the matter.

Earlier this month, the U.S. proposed giving the Securities and Exchange Commission and the Commodity Futures Trading Commission authority to mandate centralized clearing of certain derivatives, impose new trade-reporting requirements, and force trading of "standardized" contracts onto exchanges or electronic platforms that will make prices more transparent.

Wall Street banks with large derivative-trading businesses have been outwardly supportive of greater regulatory oversight of the $684 trillion market. But behind the scenes, there has been hand-wringing over the details of certain proposals and discussions about how the industry can help shape the rules. Many bankers are against mandatory exchange-trading and real-time price reporting of trades.

Potentially billions of dollars in revenue is at stake. An effort earlier this decade to improve transparency in the corporate-bond market ended up cutting bank fees by more than $1 billion in a year, according to some studies.

In the letter, expected to be released next week, the banks will reiterate a commitment to meet the government's goal of transparency.

The industry will detail plans to expand central clearing of credit-default swaps to investment funds and other market participants. It also will propose that customized credit derivatives like those that nearly brought down American International Group Inc. be reported to a trade-information warehouse run by Depository Trust & Clearing Corp. On Thursday, DTCC moved to have its warehouse overseen by the Federal Reserve as it seeks to align itself with regulators' goals.

So far, some regulators and politicians are holding a hard line, insisting that radical changes are needed to avoid a repeat of last year's market panic when large financial firms neared collapse and no one knew how linked they were to others through derivatives. The reforms also mean that "the days of conducting standardized derivative trades over the phone will soon be over," said one senior administration official.
The industry's letter is unlikely to address whether some trades should go on a central platform and be reported publicly in a similar manner to trades in securities like corporate bonds.

For credit-default swaps, information about intraday trades and prices has long been controlled by a handful of large banks that handle most trades and earn bigger profits from every transaction they facilitate if prices aren't easily accessible.

For example, credit-default swaps tied to bonds of companies such as General Electric Capital and Goldman Sachs typically have a pricing gap of 0.1 percentage point between the bid and offer price. That translates into a $40,000 margin for every $10 million in debt insured for five years. Greater price transparency could narrow that gap, lowering costs for buyers and sellers but reducing fees for banks.

One price-reporting model being considered for the market is a system akin to Trace, a system for corporate bonds. After Trace was implemented in 2002, the gap between bid and offer prices halved, cutting trading profits for banks. Many bankers still lament that the transparency made traders less willing to take big positions in corporate bonds and encouraged more trading in the opaque credit-default swap market.

Still, the lack of more detailed information in the credit-default swap market has created "a lot of hyperbole and a perception that the market is a lot bigger and liquid than it really is," says Mark Alexandridis, managing director of First Principles Capital Management LLC, a money manager in New York.

The limits of the current system were at play last September, when panic encircled Morgan Stanley as investors saw the cost of its credit-default swaps surging. But aside from indicative bid and offer price "quotes" sent by Wall Street dealers to their clients, few investors knew what trades had actually taken place in Morgan Stanley swaps, and some cautious clients chose to pull away.
A Morgan Stanley spokeswoman declined to comment.

Wall Street currently reports most credit-default swap trades to the DTCC, which releases data to the public weekly. Earlier this year, financial information provider Markit began publishing end-of-day prices on credit-default swaps tied to about 400 bonds on its Web site. Regulators, however, want to see more.

Posted at 10:30 AM in News and Current Events | Permalink | Comments (0) | TrackBack (0)

CompliancEX

May 2009

May 31, 2009

SEC Sunday May 31, 2009

May 30, 2009

The U.S. Congress Review May 30, 2009

May 29, 2009

Interesting articles you may have missed this week

Why Brookstreet Investors Were In The Dark

Financial Overhaul Raises Questions

Finra Quietly Withdraws Discovery Proposal

10 brokers hit with SEC fraud lawsuit

Bair Attacks Too-Big-to-Fail as Enforcer Geithner Must Trust

2 Auditors Held in India Fault System

Banks Seek Role in Bid to Overhaul Derivatives

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