"OCC AND FDIC PROPOSE RULE TO STRENGTHEN LIQUIDITY RISK MANAGEMENT"

FROM:  FEDERAL DEPOSIT INSURANCE CORPORATION 
OCC and FDIC Propose Rule to Strengthen Liquidity Risk Management

The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) proposed a rule on Wednesday to strengthen the liquidity risk management of large banks and savings associations.

The OCC and FDIC’s proposed liquidity rule is substantively the same as the proposal approved by the Board of Governors of the Federal Reserve System on October 24, 2013. That proposal, which was developed collaboratively by the three agencies, is applicable to banking organizations with $250 billion or more in total consolidated assets; banking organizations with $10 billion or more in on-balance sheet foreign exposure; systemically important, non-bank financial institutions that do not have substantial insurance subsidiaries or substantial insurance operations; and bank and savings association subsidiaries thereof that have total consolidated assets of $10 billion or more (covered institutions). The proposed rule does not apply to community banks.

Liquidity generally is a measure of how much cash or cash-equivalents and highly marketable assets a company has on hand to meet its obligations. Under the proposed rule, covered institutions would be required to maintain a standard level of high-quality liquid assets such as central bank reserves, government and Government Sponsored Enterprise securities, and corporate debt securities that can be converted easily and quickly into cash. Under the proposal, a covered institution would be required to hold such high-quality liquid assets on each business day in an amount equal to or greater than its projected cash outflows less its projected cash inflows over a 30-day period. The ratio of the firm's high-quality liquid assets to its projected net cash outflow is specified as a "liquidity coverage ratio," or LCR, by the proposal.

"We learned during the financial crisis just how important liquidity is to the stability of the system as a whole, as well as for individual banks," said Comptroller of the Currency Thomas J. Curry. "A number of large institutions, including some with sufficient levels of capital, encountered difficulties because they did not have adequate liquidity, and the resulting stress on the international banking system resulted in extraordinary government actions both globally and at home. The proposed liquidity rule will help ensure that a bank’s cash, and not tax-payer money, is the first line of defense if it faces a short-term funding stress."

"The recent financial crisis demonstrated that liquidity risk can have significant consequences to large banking organizations with effects that spill over into the financial system as a whole and the broader economy. The proposed rule acted on today would establish first quantitative liquidity requirement applied by federal banking agencies and is an important step in helping to bolster the resilience of large internationally active banking organizations during periods of financial stress," said FDIC Chairman Martin J. Gruenberg.

The liquidity proposal is based on a standard agreed to by the Basel Committee on Banking Supervision. The proposed rule is generally consistent with the Basel Committee's LCR standard, but is more stringent in some respects such as the range of assets that will qualify as high-quality liquid assets and the assumed rate of outflows of certain types of funding. In addition, the proposed rule’s transition period is shorter than that included in the Basel framework. The accelerated transition period reflects a desire to maintain the improved liquidity positions that U.S. institutions have established since the financial crisis. Under the proposal, U.S. firms would begin the LCR transition period on January 1, 2015, and would be required to be fully compliant by January 1, 2017.

RABOBANK TO PAY $475 MILLION SETTLEMENT IN LIBOR MANIPULATION CASE

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Rabobank to Pay $475 Million Penalty to Settle Manipulation and False Reporting Charges Related to LIBOR and Euribor

CFTC Order Finds that for Nearly Six Years, Rabobank Engaged in Acts of Manipulation, Attempted Manipulation and False Reporting of U.S. Dollar, Yen and Sterling LIBOR and Euribor

Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order against Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank or the Bank), bringing and settling charges of false reporting and attempted manipulation of the London Interbank Offered Rate (LIBOR) for U.S. Dollar, Yen and Sterling, and of the Euro Interbank Offered Rate (Euribor) and charges of successful manipulation of Yen LIBOR. The CFTC also settled charges that Rabobank, at times, aided and abetted the attempts of derivatives traders at other banks to manipulate Yen LIBOR and Euribor. These violations, which spanned nearly six years, involved more than two dozen employees working out of six offices on three continents. Rabobank is obligated to pay a penalty of $475 million, and the company is ordered to take further steps to ensure the integrity of its LIBOR and other benchmark interest rate submissions in the future.

David Meister, the Director of Enforcement stated, "The CFTC has now charged five global financial institutions for LIBOR manipulative schemes, with nearly $1.8 billion in penalties imposed by the Commission alone. The sheer number of institutions and individuals involved in these cases reflects a truly shocking and brazen degree of unlawfulness, warranting the historic enforcement response we bring forth today and in our prior cases. I want to personally commend Gretchen Lowe and the Division staff who have all painstakingly worked to investigate and prosecute these cases in the finest traditions of law enforcement."

Ms. Lowe, Acting Director of Enforcement-designate, commented, “For years, Rabobank allowed profit-driven traders located in offices around the globe to corrupt the submission process for critical benchmark interest rates. When an institution threatens the integrity of the financial markets, we bring the full force of our authority to bear. Accordingly, today the Commission holds Rabobank accountable for its egregious, manipulative misconduct.”

Highlights of the CFTC Order

Rabobank was one of the global banks that submitted borrowing rate information on a daily basis for use in the calculation of LIBOR for various currencies and for Euribor. Rabobank also traded and held cash and derivatives positions whose value depended on these same benchmarks.

From at least mid-2005 through early 2011, Rabobank traders engaged in hundreds of manipulative acts undermining the integrity of U.S. Dollar and Yen LIBOR, Euribor and, to a lesser extent, Sterling LIBOR. The violations took various forms:

• Rabobank traders, some of whom doubled as LIBOR and Euribor submitters, regularly made and accommodated their fellow traders’ requests to make favorable rate submissions to benefit their trading positions through attempts to manipulate U.S. Dollar and Yen LIBOR and Euribor. On occasion, they did the same with respect to Sterling LIBOR. Making submissions that were, as some Rabobank employees said at the time, “ridiclous,” “obseenly high” and “silly low,” more than two dozen traders, including several desk managers and at least one senior manager located in Rabobank’s New York, London, Utrecht, Tokyo, Hong Kong, and Singapore offices engaged in this wrongful conduct or knew it was ongoing at the time but did nothing to stop it.

• At times, Rabobank was successful in its attempts to manipulate Yen LIBOR. In fact, the misconduct with respect to Yen LIBOR was so entrenched that as traders assumed the role of submitter, their predecessors would train them on the unlawful practices.

• Rabobank also, at times, aided and abetted other banks’ attempts to manipulate Yen LIBOR and Euribor, including coordinating with an interdealer broker on Yen LIBOR submissions to aid the manipulations of the Senior Yen Trader at UBS AG. As one senior Rabobank employee put it: “You know, scratch my back, yeah, and all,” to which the broker observed, “Yeah oh definitely, yeah, play the rules.”

The CFTC Order further finds that Rabobank ignored the obvious conflict of interest it created by assigning traders with trading positions tied to LIBOR and Euribor to serve as Rabobank’s LIBOR and Euribor submitters. Submitters were improperly left to choose between their responsibility to make an honest assessment of borrowing costs and their desire to maximize the profitability of their trading positions. Here, Rabobank’s submitters often resolved the conflict in favor of profit. This conflict was exacerbated by traders and submitters sitting together so that traders could simply shout requests for unlawful submissions across the trading desk. Rabobank thus provided these employees with unfettered opportunities to attempt to manipulate LIBOR and Euribor for profit, and the traders took advantage of those opportunities. The Order also finds that Rabobank otherwise lacked sufficient controls around the LIBOR and Euribor submission process and failed to adequately supervise its traders and submitters.

According to the Order, this manipulative conduct occurred even after the Commission had commenced its investigation of Rabobank’s U.S. Dollar LIBOR practices in April 2010, when Rabobank received the Commission’s request that the Bank internally investigate its U.S. Dollar LIBOR practices. In late 2010, after Rabobank submitters refused, as instructed by a manager, to consider a trader’s requests for particular Yen LIBOR submissions, the Rabobank trader promptly obtained the assistance of an interdealer broker to continue attempting to manipulate Yen LIBOR to benefit his trading positions through early 2011.

The Order requires Rabobank to pay a civil monetary penalty of $475 million, cease and desist from its violations of Commodity Exchange Act, and adhere to specific undertakings to ensure the integrity of its LIBOR and other benchmark interest rate submissions in the future. The Order also recognizes the significant cooperation of Rabobank with the Division of Enforcement in its investigation.

In related actions, the U.S. Department of Justice entered into a deferred prosecution agreement with Rabobank, deferring criminal wire fraud charges in exchange for Rabobank continuing to cooperate and agreeing to a penalty of $325 million; the United Kingdom Financial Conduct Authority (FCA) issued a Final Notice regarding its enforcement action against Rabobank and imposed a penalty of £105 million (approximately $170 million); the Japanese Financial Services Agency (JFSA) issued an administrative action against Rabobank for failure of its internal controls within its Tokyo office; De Nederlandsche Bank (or the Dutch National Bank (DNB)) took action by imposing remedial measures on Rabobank; and the Dutch Public Prosecutor’s Office (DPP)) agreed to a payment of €70 million (approximately $96.5 million) by Rabobank in order for Rabobank to avoid a criminal prosecution.

The CFTC acknowledges the valuable assistance of the U.S. Department of Justice, the Washington Field Office of the Federal Bureau of Investigation, the FCA, the JFSA, the DNB, and the DPP.

*******

With this Order, the CFTC has now imposed penalties of $1.765 billion on entities for manipulative conduct with respect to LIBOR and other benchmark interest rates. See In re ICAP Europe Limited, CFTC Docket No. 13-38 (September 25, 2013) ($65 Million penalty) (CFTC Press Release 6708-13); In re The Royal Bank of Scotland plc and RBS Securities Japan Limited, CFTC Docket No. 13-14 (February 6, 2013) ($325 Million penalty) (CFTC Press Release 6510-13); In re UBS AG and UBS Securities Japan Co., Ltd., CFTC Docket No. 13-09 (December 19, 2012) ($700 Million penalty) (CFTC Press Release 6472-12); and In re Barclays PLC, Barclays Bank PLC, and Barclays Capital Inc., CFTC Docket No. 12-25 (June 27, 2012) ($200 million penalty) (CFTC Press Release 6289-12). In these actions, the CFTC orders each institution to undertake specific steps to ensure the integrity and reliability of its benchmark interest rate submissions.

CFTC Division of Enforcement staff members responsible for this case are Rishi K. Gupta, Anne M. Termine, Jonathan K. Huth, Philip P. Tumminio, Maura M. Viehmeyer, Elizabeth Padgett, Jordan Grimm, Terry Mayo, James A. Garcia, Kassra Goudarzi, Boaz Green, Timothy M. Kirby, Aimée Latimer-Zayets, Michael Solinsky, Jason T. Wright, Gretchen L. Lowe, and Vincent A. McGonagle.

SEC ANNOUNCES JUDGEMENT AGAINST CONSULTANTS TO CHINESE REVERSE MERGER COMPANIES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Obtains Final Judgment Against New Jersey-Based Consultants to Chinese Reverse Merger Companies

The United States Securities and Exchange Commission announced today that the Honorable Ronnie Abrams of the United States District Court for the Southern District of New York entered a final judgment against defendants Huakang Zhou (a/k/a David Zhou) and Warner Technology and Investment Corporation on October 18, 2013. The judgment permanently enjoins Zhou and Warner Investment from violating Sections 5 and 17(a) of the Securities Act of 1933, Sections 10(b), 13(d), 15(a), and 16(a) of the Securities Exchange Act of 1934, and Rules 10b-5, 13d-1, 13d-2, and 16a-3 thereunder.

Zhou and Warner Investment agreed to pay more than $1.4 million to settle the SEC's charges. Zhou and Warner Investment consented to the entry of judgment, without admitting or denying the allegations, and are liable to pay disgorgement in the amount of $983,375 plus prejudgment interest thereon in the amount of $82,449, and Zhou is liable to pay civil penalties in the amount of $400,000. The Commission's complaint alleged that Zhou and Warner Investment, consultants to numerous Chinese reverse merger companies, in connection with such work for various clients from 2007 through at least 2010, engaged in a scheme to list one client on a national securities exchange through manipulative trading and by facilitating in effect an artificial shareholder base sufficient for listing. Further, the complaint alleged that Zhou and Warner Investment made material misstatements and omissions in connection with an offering for another client through the misuse of proceeds. The complaint also alleged that Zhou and Warner Investment did not disclose certain holdings and transactions; sold unregistered securities; and acted as unregistered brokers and aided and abetted others' unregistered broker activity.

Based on the final judgment, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions that bars Zhou and Warner Investment by consent from association with any investment adviser, broker, dealer, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and from participating in any offering of a penny stock, with the right to apply for reentry after five years.

SEC OBTAINS VERDICT AGAINST ATTORNEY, REAL ESTATE FINANCE FUND AND FUND MANAGER

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Obtains Jury Verdict in Its Favor Against Minneapolis Attorney, Real Estate Finance Fund and Fund Manager On Fraud Claims

The Securities and Exchange Commission announced today that, on October 22, 2013, following a five-week trial, a jury in federal district court in St. Paul, Minnesota, returned a verdict against Todd A. Duckson, a Minneapolis, Minnesota attorney, Capital Solutions Monthly Income Fund, LP, a Minneapolis-based real estate lending fund (the "Fund"), and Transactional Finance Fund Management LLC, a company owned by Duckson that became the fund's investment advisor in November 2008. The Commission's complaint, which was filed in September 2010, alleged that the defendants engaged in securities fraud in connection with their offer and sale of interests in the Fund.

The complaint alleged that, from approximately March 2008 through December 2009, the Fund raised $21.6 million from investors in a series of unregistered offerings. During most of the period of the Fund's existence, it made "mezzanine loans" - or loans subordinate to more senior loans - to a single borrower. That borrower encountered financial problems in 2007 and, by May 2008, had defaulted on its obligations to the Fund. As a result, the Fund had no meaningful income-producing assets. The complaint alleged that in written documents provided to investors between March 2008 and late 2009, the Defendants made materially false and misleading statements that effectively hid the Fund's deteriorating financial condition. The complaint also alleged that the Fund would use proceeds raised in offerings primarily to make real estate loans and other investments, when in fact the Fund needed to use most of the proceeds to pay senior lenders on properties the Fund had acquired and to make interest payments to existing investors. Duckson played a key role in drafting the written documents provided to investors, first as the attorney for the Fund and, in and after November 2008, as the Fund's manager.

At the conclusion of a five-week trial, the jury returned a verdict for the Commission and against all three Defendants. In particular, the jury found in favor of the Commission on its claims that Duckson and the Fund violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, that Duckson aided and abetted the Fund's violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and that Transactional Finance Fund Management LLC violated Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. Finally, the jury found in favor of Transactional Finance Fund Management LLC on the Commission's claim that it violated Section 17(a) of the Securities Act. The jury specifically found that Duckson and the Fund acted with knowledge in committing the violations described above.

The trial team from the Commission's Chicago Regional Office consisted of trial attorneys Eric M. Phillips, Daniel J. Hayes, Benjamin J. Hanauer, attorney Marlene Key-Patterson and paralegal Terri Roberts.

REMARKS BY CFTC COMMISSIONER BART CHILTON TO INTERNATIONAL REGULATORS CONFERENCE

FROM:  COMMODITY FUTURES TRADING COMMISSION 
"Understood and Understanding"

Remarks of Commissioner Bart Chilton before the International Regulators Conference (Chicago, Illinois)

October 25, 2013

Good afternoon. It’s a pleasure to be with you, international regulators, here at the Federal Reserve Bank of Chicago. Thanks to Myra Silberstein for all of her work on this conference. Thanks also to the Federal Reserve staff who picked up the ball on the conference when the CFTC had to stop operations due to our government shutdown. And thanks to each of you for making the journey to the States.

The efforts that we are all part of, to ensure that we never again experience an economic calamity like we witnessed in 2008, is not only worthy but imperative.

I view what we all do in the next few years to really set the global regulatory rules for the financial sector for a generation. What we do now, will provide the rules of the road and the guidance for the next 20 to 30 years.

In order to get there we need to work together, to learn from each other and to build appropriate regulatory systems that make sense.

There is a movie that starred actor Kevin Costner. It’s called, “Field of Dreams.” In it, a voice from the Iowa corn field whispers, “If you build it, he will come.” The voice was talking about Shoeless Joe Jackson of the Chicago White Sox.

Well, if we build global regulatory regimes, others will come. We start here in the US and in the European Union and in your countries, and the entire world will come.

That’s why meetings like this are so very important, so that we can listen and learn from each other. We need not just to be understood, but even more importantly, to be understanding what others are saying. That’s our challenge. If we do it correctly, markets will be better and citizens will be protected.

Thanks for being here.

SEC SANCTIONS 3 INVESTMENT ADVISORY FIRMS FOR PROBLEMS WITH COMPLIANCE PROGRAMS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission today sanctioned three investment advisory firms for repeatedly ignoring problems with their compliance programs.

The enforcement actions arise from the agency’s Compliance Program Initiative, which targets firms that have been previously warned by SEC examiners about compliance deficiencies but failed to effectively act upon those warnings.  Had the problems been addressed, the firms could have prevented their eventual securities law violations.  The SEC Enforcement Division’s Asset Management Unit has coordinated with examiners to bring several cases since the initiative began two years ago.

The firms charged today – Modern Portfolio Management Inc., Equitas Capital Advisers LLC, and Equitas Partners LLC – have agreed to settlements in which they will pay financial penalties and hire compliance consultants.

“The Compliance Program Initiative is designed to address repeated compliance failures that may lead to bigger problems,” said Andrew J. Ceresney, co-director of the SEC’s Division of Enforcement.  “That risk materialized with these firms, whose compliance programs were not adequate to prevent misleading statements in marketing materials or inadvertent overbilling of clients.  Firms must not only have policies and procedures in place, but also need to properly implement those policies and procedures.”

Andrew Bowden, director of the SEC’s National Exam Program, added, “After SEC examiners identified significant deficiencies, these firms did little or nothing to address them by the next examination.  Firms must fix deficiencies identified by our examiners.”

Under what is known as the “Compliance Rule” (Rule 206(4)-7 of the Investment Advisers Act), investment advisers are required to adopt and implement written policies and procedures that are reasonably designed to prevent securities law violations.  The rule requires advisers to review their policies and procedures at least once a year for adequacy and effectiveness of implementation.  Advisers also must designate a chief compliance officer responsible for administering the policies and procedures.

The SEC’s order against Modern Portfolio Management (MPM) and its owners G. Thomas Damasco II and Bryan Ohm finds that they failed to correct ongoing compliance violations at the firm despite prior warnings from SEC examiners.  In particular, they failed to complete annual compliance reviews in 2006 and 2009 and made misleading statements on MPM’s website and investor brochure.  For instance, one location on MPM’s website misleadingly represented that the firm had more than $600 million in assets.  However, on its Form ADV filing to the SEC during that same time period, it reported that the firm’s assets under management were $359 million or less.

MPM, Damasco, and Ohm agreed to be censured and pay a total of $175,000 in penalties.  Damasco and Ohm must complete 30 hours of compliance training, and MPM has agreed to designate someone other than Damasco or Ohm to be its chief compliance officer.  MPM, which is based in Holland, Ohio, must retain a compliance consultant for three years.

According to the SEC’s orders against New Orleans-based Equitas Capital Advisers and Equitas Partners as well as owner David S. Thomas, Jr., chief compliance officer Susan Christina, and former owner and chief compliance officer Stephen Derby Gisclair, they failed to adopt and implement written compliance policies and procedures and conduct annual compliance reviews to satisfy the Compliance Rule.  The Equitas firms made false and misleading disclosures about historical performance, compensation, and conflicts of interest, and they inadvertently yet repeatedly overbilled and underbilled their clients.  Many of these violations occurred despite warnings by SEC examiners during examinations of the Equitas firms in 2005, 2008, and 2011.  The firms, Thomas, and Gisclair failed to disclose these deficiencies to potential clients in response to questions in certain due diligence questionnaires or requests for proposals.  Gisclair also caused Compliance Rule violations and the incorrect billing of clients at Crescent Capital Consulting LLC, an investment advisory firm that he opened in late 2010.  Gisclair inflated the amounts of assets managed by Equitas and Crescent in their Form ADV filings to the SEC, and he improperly removed and retained nonpublic personal client information when he left Equitas.

Equitas Capital Advisers and Crescent have reimbursed all overcharged clients, and Equitas Capital Advisers, Thomas, and Gisclair agreed to pay a total of $225,000 in additional penalties. The Equitas firms have agreed to censures, the Equitas firms and Crescent have hired independent compliance consultants, and the Equitas firms and Gisclair must give clients notice of the SEC enforcement actions.

The SEC’s investigation into the Equitas firms was conducted by David Neuman of the Asset Management Unit and Virginia Rosado Desilets, and was supervised by Jeffrey Finnell of the Asset Management Unit.  Examinations of the firms were conducted by Conston Casey, David Marsh, Kenny Clowers, and Mavis Kelly.  The SEC’s investigation of Modern Portfolio Management was conducted by Amy Flaherty Hartman and Jamie Davidson following examinations of the firm by Michael Esposito, Sarah Kuhn, Arthur Stoll, Louis Gracia, Steven Levine, Kiley Hamilton, Belinda Hoskins, and Maureen Dempsey of the Chicago Regional Office.