February 03, 2014
Kind Of Like Clinical Work
Posted by David Zaring

The SEC just charged a finance professor from Florida State and an engineering professor from Florida A&M with naked short selling, which the professors might have been doing as a kind of protest against a practice that doesn't have a very good case for illegality behind it.

But I've heard it said that it's not the crime, it's the cover-up, and the two professors spent a lot of time covering up what they were doing.  Moreover, part of their point of their shorts was to not take on the expense of covering, too, which for good or ill, is something all shorts are required to do.  Anyway, here's the SEC:

Colak and Kostov set their scheme in motion in early 2010 and went on to sell more than $800 million worth of call options in more than 20 companies.  Their trading strategy involved purchasing and writing two pairs of options for the same underlying stock, and targeting options in hard-to-borrow securities in which the price of the put options was higher than the price of the call options.  Colak and Kostov profited by avoiding the cost of instituting and maintaining the short positions caused by their paired options trading.

Sound bad?  Well, the SEC didn't get an admission of guilt out of the two, and all told, they had to pay the agency $400,000 to settle the case.  So not exactly throwing away the key.  Not good for business school professors to be accused of violating the securities law, though.  HT: Securities Docket.

UPDATE: Here's Matt Levine with a nice explanation, more careful than anything you see above, or how the scheme was meant to work, and the regulatory arbitrage implications thereof, vel non.

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January 28, 2014
The SEC's Anti-Bribery Year In Review
Posted by David Zaring

Over at the FCPA Professor blog, Mike Koehler has a take on the year the SEC has had with bribery, an increasingly important remit for the agency's enforcement lawyers.  The topline - action is slightly up from last year, but down from its peak a couple of years ago.  Some intriguing details:

The range of SEC FCPA enforcement actions in 2013 was, on the high end, $153 million in the Total enforcement action, and on the low end, $735,000 in the Ralph Lauren enforcement action.  Of the $300 million the SEC collected in 2013 corporate FCPA enforcement actions, approximately $219 million (73%) were in two enforcement actions (Total – $153 million and Weatherford – $66 million).

Two corporate FCPA enforcement actions from 2013 were SEC only (Philips Electronics and Stryker).

Of the 8 corporate enforcement actions from 2013, 3 enforcement actions were administrative actions (Philips Electronics, Total, and Stryker) and 1 action (Ralph Lauren) was a non-prosecution agreement.  In other words, there was no judicial scrutiny of 50% of SEC FCPA enforcement actions from 2013.  The settlement amounts in these actions comprised approximately 57% of the SEC’s $300 million collected in 2013 corporate FCPA enforcement actions.

In 2013, the SEC collected approximately $208 million in disgorgement and prejudgment interest in enforcement actions that did not charge anti-bribery violations (either administrative actions that did not charge any FCPA violations or settled civil complaints that did not charge anti-bribery violations).  In other words, approximately 69% of the $300 million the SEC collected in 2013 FCPA enforcement actions was no-charged bribery disgorgement. 

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January 23, 2014
Brummer On How To Improve The Transatlantic Banking Relationship
Posted by David Zaring

Chris Brummer has a column over at Project Syndicate with some proposals for improving an increasingly frayed relationship.  You'll have to head over there for the prescriptions, but here's his encapsulation of the problem:

Radical disparities between the rule-making cultures of the US and the EU are exacerbating the problem. Unlike the US, where independent agencies lead the rule-making process according to Congressional dictates, legislative actors in Brussels and Strasbourg – the European Commission, the European Council, and the European Parliament – set regulatory agendas and write the rules. And, though EU agencies like the European Central Bank are assuming an increasing share of regulatory responsibility, divergences in decision-making procedures continue to affect the rate and nature of transatlantic coordination.

Making matters worse, market and monetary reforms have occasionally merged, with rule-making becoming partly dependent on the decisions of disparate agencies and institutions. Meeting enhanced Basel III capital standards, for example, is about more than just rules; it requires the recapitalization of banks – a process that is taking longer in Europe than in the US, partly because the eurozone has had to negotiate funding mechanisms for banks and cash-strapped governments. Now these delays are raising doubts in the US about the EU’s commitment to reform.

Well worth your time, if you think that this sort of regulatory diplomacy is an increasing feature of financial supervision....

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January 22, 2014
The State Of Insurance Supervision
Posted by David Zaring

Over in DealBook, I look at the state of insurance supervision, as the Treasury Department has done in its blue ribbon report.  A taste:

Part of what has moved Treasury officials is an effort to keep up with the globalization of insurance supervision. Europe responded to the crisis by overhauling the way it looks after its industry, with renewed attention to its ability to survive financial shocks, and the empowerment of a continent-wide insurance supervisor. The European Union’s so-called Solvency II framework, moreover, raises the specter that Europe may use it solvency rules to keep foreign insurers out of European markets, on the grounds that they are too risky to trust with the money of European consumers. That threat, among other things, means that copies of the European approach are taking root across the world.

But keeping pace with Europe doesn’t work well with the American system of insurance regulation, where the federal role is minimal and each state has a different regulatory regime.

And you can find the whole thing over here.

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January 13, 2014
How Should Multinational Resolution Authority Work?
Posted by David Zaring

One of the many disasters of the financial crisis involved the bankruptcy of Lehman Brothers, which was marked by a race to the courthouse doors by creditors in most places Lehman had a substantial number of assets.  It also, given the number of subsidiaries Lehman had created, was very complicated to discern even which assets were domiciled where.  

Anyway, the consensus has been that a cross border resolution regime for big banks is needed, in light of the Lehman problems.  But very little progress on this high priority of the G20's has been made.  All of which brings us to the latest speech by a German banker urging that a cross-border deal be arranged.  Does that mean a treaty?  Evidently not.  The German central bank thinks that agencies like the FDIC should come up with a cross-border resolution authority protocol, and that that should do it.

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January 09, 2014
The Conflict Minerals Rule: Going Down?
Posted by David Zaring

Two conservative judges on the DC Circuit have expressed concerns that the rule is too broad (I guess this would be a Chevron problem) and impinges on free speech (laughable, but a constitutional problem with the statute, I guess).  And the federal regulators had been doing so well! HT: Corporate Counsel

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January 07, 2014
The Door Will Revolve More Slowly For The SEC's Senior Litigators
Posted by David Zaring

I'm unworried about the revolving door (these guys are, if you want a different view), but one of the traditional ways to slow it has been to require cooling off periods before former government employees can represent clients before their former colleagues.  These periods get longer the higher up the food chain one goes; the SEC, however, has long received an exemption from them for its litigators, because it used the revolving door as an enticement for recruitment.

Times are tough for lawyers, however, and the SEC no longer has these recruting problems, and so requested that the exemption be removed.  Hey presto - it happened, in a rule that is being passed without going through notice and comment (which isn't really very kosher, especially if the intital exemption did go through notice and comment).

If anything, the most interesting aspect of this development was the basis for the exemption itself, which was so that the SEC could tell senior lawyers that they could supercharge their private sector earning potential if they took high-level enforcement jobs.  At this point, maybe everyone knows this, and cooling off periods haven't hurt the private sector earning potential of senior prosecutors at Justice any either.

But it also shows that a benefit, once given, can always be taken away.

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December 13, 2013
Turf Building Or Common Sense
Posted by David Zaring

I'm at a banking conference in Hong Kong, but noticed that the Treasury Department has urged a greater federal role in the regulation of insurance in a long-awaited report issued by its Federal Isurance Office.  It's a role that the large insurance firms, always unethusiastic about 50 state regulation, would no doubt welcome.  Some observations:

  • The report does not seek to end state insurance supervision, but would like some direct federal regulation of the sector (for example, for mortgage insurers), and the capacity to threaten states with supplanting regulation if the states do not shape up in various ways.
  • The report justifies the need for a federal role in part on the internationalization of isurance, and, to some degree, through IAIS, the internationalization of insurance regulation.
  • The rationale for state supervision is that insurance doesn't really need to be regulated for capital adequacy (but see AIG), but rather for consumer protection (your policy doesn't pay out, you get sold insurance you don't need).
  • This, like the Volcker Rule, is a product of Dodd-Frank, which created the FIO.
  • A report is, as a matter of law, meaningless.  Indeed, Congress would have to act to give the FIO some of what it wants.

A wrap on the report is here.  It will be interesting to see whether this lands with anything more than a thud.

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December 10, 2013
The Advantages Of Having Five Regulators Write One (Volcker) Rule
Posted by David Zaring

I've got a piece over in DealBook on the advantages of a multi-regulator regime, which can be seen if you squint in just the right way.  A taste:

No other country has created such a patchwork of agencies to deal with financial oversight. Henry Paulson, a former Treasury secretary, called for a rationalization of financial regulation before the financial crisis in 2008. You wouldn’t dream up a world where a rule on proprietary trading by banks has to be administered by five agencies, if it is going to work at all.

Nonetheless, even historical accidents have their merits. Cass Sunstein, the former White House regulatory czar, has long argued that group dynamics — whether they involve multiple judges looking at the same issue, or multiple agencies thinking about the same regulation — can moderate the extremes, and, perhaps, reflect the more careful deliberation that a give-and-take among decision makers should produce.

Moreover, if those regulators, in the end, decide to do things differently, we might expect the benefits of experiment, followed by market discipline, as investors flock to those financial institutions subject to the regulations most likely to keep them profitable and solvent.

Go give it a look, and let me know what you think.

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December 02, 2013
The Chamber Of Commerce Wants To Overhaul The FSOC
Posted by David Zaring

One of the things the FSOC is supposed to be is a task force keeping an eye on financial stability.  But it is also, to that end, supposed to be a noodge.  It keeps threatening to do something about money market funds in an effort to force the SEC to do more, for example.  And it has designated two insurance companies and GE Capital as systemically significant because their primary regulators had not done so.

That is why it is kind of interesting that the Chamber of Commerce has urged that the noodge factor be tamped down.  Currently the FSOC can just vote to designate a financial institution as systemtically signficant over the objection of their primary regulator.  As Reuters reports on the Chamber's proposal:

"If the primary regulator or independent council member does not vote in favor of designating a non-bank financial company for which the council member has industry expertise... then a second vote shall be scheduled within 45 days," the Chamber wrote. "The primary regulator shall issue a report to the FSOC within 30 days of the initial vote explaining its rationale as to why a firm should not be designated."

It's not a dramatic change - it would slow, rather than end, the council's designation role - but it does suggest that regualted industry is worried about what the FSOC is doing.  And that is worth noting, because it wasn't clear that the committee would be able to accomplish much at all, considering that it is a jammed together new federal entity, without totally obvious powers to forces its members to do anything (not always - Jake Gersen has a nice article on the entity that characterizes some of its powers to require as a "Mother-May-I" approach - the cite to that is here, and after the jump).

Jacob E. Gersen, Administrative Law Goes to Wall Street: The New Administrative Process, 65 Admin. L. Rev. 689, 711 (2013)

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November 25, 2013
More on Bank Consultants
Posted by David Zaring

Here's a wrap on the OCC's consulting guidance from Law360, about which we opined earlier.  Parts quote yours truly, so you can identify mistakes in the comments, if so inclined.

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November 20, 2013
Did The Revolving Door Debate Just End With Tim Geithner?
Posted by David Zaring

Longtime readers will know that I have little problem with the revolving door between government and the private sector.  Given that regulators of every stripe have, almost in all cases, gone through that door at some point, it seems a little naive to just indict the thing because it is a thing.  And there are plenty of reasons to believe it has an upside - but you'll have to read this if you want to find them out.

And now that Tim Geithner, the former Treasury Secretary, has joined a pretty obscure, if legendarily named, private equity firm, I'm declaring victory for the pro-door view.  At least in the popular press.  Here's a lintany of influencers: Sorkin, Yglesias, Bloomberg.  All find Geithner's move unproblematic.  And so should you - though you might wonder why you'd take this job instead of becoming chair of the Fed.  If being the second most powerful person in Washington is less appetizing than working for not much money in an obscure corner of private equity, perhaps we are going to have to incentivize public service more than the revolving door already does.

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November 13, 2013
The OCC's Consultants Guidance
Posted by David Zaring

Banking regulation is increasingly being done through private contractors - these days, the OCC will require a bank in trouble to hire a consultant, usually composed of former OCC employees, to set things straight, or expect a bank to come to it with that sort of proposal.  There are plenty of worries about conflicts of interest in this practice, while at the same time, bank consulting is a business really growing in value, making, for example, former OCC head Eugene Ludwig, who has founded the consultancy Promontory, dynastically wealthy.

Yesterday, the OCC issued guidance - not a rule, nothing binding, so no lawsuit over this is in the offing - to banks on how they should handle requests from the agency to hire consultants.  Here's a nice take on the context, from DealBook.  The document is short; and it doesn't really constrain the agency.  But it does suggest the values that the agency thinks is important when taking on a consultant.  

One is competence - that is, the competence of both the bank and the consultant.  From the guidance:

When determining whether to require an independent consultant, the OCC considers, among other factors,

  • the severity of the violations or issues, including the impact of the violations on consumers, the bank, or others.
  • the criticality of the function requiring remediation.
  • confidence in management’s ability to perform or ensure that the necessary actions are taken to identify violations and take corrective action in a timely manner.
  • the expertise, staffing, and resources of the bank to perform the necessary actions.
  • actions already taken by the bank to address the violations or issues.
  • services to be provided by an independent consultant (for example, a full look-back or a validation of the bank’s look-back).
  • alternatives to the engagement of an independent consultant.

Another is independence:

When evaluating the independence of a consultant, including whether an actual or potential conflict of interest exists, the bank’s assessments should address, and the OCC considers, among other things, the following factors:

  • Scope and volume of other contracts or services provided by the independent consultant to the bank. As part of its submission to the OCC, a bank should disclose all prior work performed by the consultant for the bank for at least the previous three years. This information allows the bank and the OCC to assess the nature of the contracts and whether the consultant has been involved in any work closely related to the engagement under consideration. The information also allows the bank and the OCC to assess whether the number of contracts or services the consultant has had or has with the bank may pose an inherent conflict of interest.
  • Specialized expertise of the consultant and availability of other consultants, i.e., whether the bank evaluated other consultants with the requisite expertise and independence.
  • Proposed mitigants to address any potential conflict or appearance of conflict. For example, when the proposed consultant already has a contractual relationship with the bank, a mitigant could include the creation or maintenance of effective barriers to the exchange of information by different teams of the proposed consultant with differing responsibilities to the bank. Any proposed mitigant must be well established and documented in the engagement contract as well as in ongoing documentation and practice.
  • Any financial relationship, including the amount of fees to be paid, or previously paid to the person or company as a percentage of total revenue of that person or company, and any other financial interest between the bank and the proposed consultant.
  • Any business or personal relationship of the consultant, or employees of the consultant, with a member of the board or executive officer of the bank.
  • Prior employment of consultant staff by the bank.
  • Other relevant facts and circumstances.

It isn't clear whether this marks the onset of new oversight of a new set of gatekeepers in financial regulation, or is meant to head off alterantive forms of regulation coming from elsewhere, notably the state of New York.  But it's an important development in compliance, I think.

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November 02, 2013
The Sunny Side Of Dodd-Frank
Posted by David Zaring
I suspect my view of how Dodd-Frank is doing is different than yours.  But you'll have to head over to DealBook to see if I'm right.

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October 30, 2013
GM Cost Us Money
Posted by David Zaring

I don't mind the occasional bailout.  For financial institutions, unless you're headed into a depression, they often don't lose the government money; instead you hang onto volatile assets until they mature, and when they mature, volatile instruments become more predictable.  And often there isn't an alternative to bailing out an important financial intermediary, either.  That doesn't mean you celebrate bank bailouts; the loss of discipline on the banks - that is a terrible thing.  But it often ends up being the bitter you have to take with the not so sweet, but not so sour either.  They do not have to be massive money losers - just time-to-repayment shifters.

Still, we knew that industrial company bailouts might present their own problems.  And Treasury hasn't held onto GM long enough for it to bounce back (nor is it obvious that that would eventually happen):

Treasury would need to get $147.95 on its remaining shares to break even. That’s not going to happen: GM’s stock closed Wednesday at $35.80, up $0.21, or 1 percent. At current trading prices, the government’s remaining stake is worth about $3.6 billion. At current stock prices, taxpayers would lose about $10 billion on the bailout when all the stock is unloaded.

Earlier this month, Treasury reported it sold $570.1 million in General Motors Co. stock in September, as it looks to complete its exit from the Detroit automaker in the coming six months. The Treasury says it has recouped $36 billion of its $49.5 billion bailout in the Detroit automaker. The government began selling off its remaining 101.3 million shares in GM on Sept. 26, as part of its third written trading plan.

It will lose $9 billionish on the deal.  It isn't obvious to me that Treasury has interfered overly with the corporate governance of the auto companies once it took them over.  But it did insist on the divestment of a ton of auto franchises, may have pressed GM to sell Volts, and, in the end, lost money.  That's not exactly a record to celebrate, even if you do conclude that some sort of intervention was necessary.

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