Compliance Avenue

As reported this morning by Reuters private equity news correspondent Andy Sullivan, Democrats are aiming for a final bill on financial reform by this evening; however, given that lawmakers have waited until the final, frantic hours to sort out the most controversial provisions in the bill, negotiations aiming to resolve differences between versions of passed by the House and the Senate in a final session could last deep into the night.

Among the most controversial provisions still to be resolved:

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The SEC today announced charges against ICP Asset Management and its founder, alleging that they defrauded clients in pooled mortgage products of tens of millions of dollars, including deals that were insured by American International Group Inc.

As reported by the WSJ.com, the SEC’s complaint, which was filed in federal court in Manhattan, is the SEC’s first allegation since the credit crisis that an asset manager overseeing CDOs mismanaged the accounts.

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House Majority Leader Steny Hoyer has voiced confidence that Congress will be able to reach agreement and approve final passage of the financial reform bill before July 4.

Congressional leaders, with pressure from the White House, had set a goal of completing the financial regulatory overhaul by July 4.

“He seems pretty confident that he can do that, and we’re hopeful that he can do that,” Hoyer said of Rep. Barney Frank (D-Mass.), who shepherded the initial legislation through the House, and who is leading the conference committee to reconcile separate House and Senate versions.

CNBC is reporting that in the week ahead banking reform will likely overshadow the Fed, as Congress edges closer to a new financial regulatory reform bill whose effect on the financial sector is still murky.

According to Friday’s “Week Ahead” article of Market Insider with Patti Domm, the joint banking committee is aiming to reach a compromise that would combine the House and Senate legislation by Thursday, with floor votes the following week.

On Tuesday, the conferees will take on consumer financial protection and whether to limit fees on debit card transactions.

Also still to be resolved is what will happen to the banks’ swaps businesses. The Senate bill would require swaps to be separated from the rest of the business. Under a compromise version, those assets could be retained by parent companies but isolated.

The fate of the swaps units has consistently been one of the bill’s most contentious issues.  It is also the most important issue to resolve in terms of the bill’s immediate potential impact on the financial markets, according to Jason Trennert, chief investment strategist with Strategas Research.

“Obviously, the desire is to get it done before July Fourth because they all go on vacation,” said Mr. Trennert.

According to an article in today’s New York Times, it appears that the “Volcker Rule” may make it through House/Senate conference committee.  This update comes as House and Senate negotiators are preparing financial regulation legislation for approval by President Obama. Read the rest of this entry »

On Thursday, June 10, the Securities and Exchange Commission approved rules that will require the exchanges and FINRA to pause trading in certain individual stocks if the price moves 10 percent or more in a five-minute period.

As we discussed in a previous Compliance Avenue post (see SEC Proposes Stock-by-Stock Circuit Breaker), the rules were proposed by the national securities exchanges and FINRA in response to the market disruption of May 6.

Under the rules, trading in a stock would pause across U.S. equity markets for a five-minute period in the event that the stock experiences a 10 percent change in price over the preceding five minutes. The pause, which would apply to stocks in the S&P 500® Index, would give the markets the opportunity to attract new trading interest in an affected stock, establish a reasonable market price, and resume trading in a fair and orderly fashion.

Initially, these new rules will be in effect on a pilot basis through Dec. 10, 2010.  The markets will use the pilot period to make appropriate adjustments to the parameters or operation of the circuit breakers as warranted based on their experience, and to expand the scope to securities beyond the S&P 500 (including ETFs) as soon as practicable.

SEC Chairman Mary Schapiro, who convened a meeting of the exchange leaders and FINRA at the SEC following the market disruption, said:

“The May 6 market disruption illustrated a sudden, but temporary, breakdown in the market’s price setting function when a number of stocks and ETFs were executed at clearly irrational prices.  By establishing a set of circuit breakers that uniformly pauses trading in a given security across all venues, these new rules will ensure that all markets pause simultaneously and provide time for buyers and sellers to trade at rational prices.”

At Chairman Schapiro’s request, the SEC staff also will:

• Consider ways to address the risks of market orders and their potential to contribute to sudden price moves.
• Consider steps to deter or prohibit the use by market makers of “stub” quotes, which are not intended to indicate actual trading interest.
• Study the impact of other trading protocols at the exchanges, including the use of trading pauses and self-help rules.
• Continue to work with the exchanges and FINRA to improve the process for breaking erroneous trades, by assuring speed and consistency across markets.

In addition, the SEC staff is working with the markets to consider recalibrating market-wide circuit breakers currently on the books — none of which were triggered on May 6. These circuit breakers apply across all equity trading venues and the futures markets.

Said Chairman Schapiro:

“It is my hope to rapidly expand the program to thousands of additional publicly traded companies.”

Yesterday, May 27, 2010, the SEC charged Connecticut-based hedge fund manager Pequot Capital Management, Inc., and its Chairman and CEO Arthur Samberg, with insider trading in Microsoft Corporation securities.  In response, Pequot and Samberg agreed to pay $28 million to settle the SEC’s charges that the firm traded shares of Microsoft based on insider information.

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Sen. Jeff Merkley (D., Ore.) has taken advantage of the delay in cloture to force a vote on the proprietary trading amendment he co-sponsored with Sen. Carl Levin before the final Senate bill proceeds to final vote. The proposed limits on proprietary trading are known as the “Volcker Rule” because of concerns raised by former Federal Reserve Chairman Paul Volcker, and are among the more hotly contested items left to be decided by the Senate as it considers broad changes to U.S. financial-market regulation.

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At a European Parliament meeting held yesterday in Brussels, the European Union moved a step closer to new rules on hedge funds and private-equity firms, with most member states backing the controversial Alternative Investment Fund Manager Directive that would regulate managers of hedge funds, private equity funds and venture capital funds in Europe.

Germany and France led the push for new rules, but the debate put much of the EU at odds with the U.K., home to almost 80% of the EU’s hedge-fund managers.

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The Securities and Exchange Commission announced yesterday that in response to the market disruption of May 6, the national securities exchanges and the Financial Industry Regulatory Authority (FINRA) are filing proposed rules under which they would pause trading in certain individual stocks if the price moves 10 percent or more in a five-minute period.

The markets are proposing these rules in consultation with FINRA and staff of the SEC to provide for uniform market-wide standards for individual securities in the S&P 500® Index that experience a rapid price movement.

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