Recent SEC ‘Bad Actor’ Provisions For Hedge Funds, Private Equity Funds, Could Unearth Unethical Backgrounds Of Executives: Securities Lawyers

Recent SEC ‘Bad Actor’ Provisions For Hedge Funds, Private Equity Funds, Could Unearth Unethical Backgrounds Of Executives: Securities Lawyers

Recent regulations unearthing the legal backgrounds of those who sell private securities could lead to nervousness and layoffs among hedge fund and private equity executives, according to securities lawyers.

The major 2010 Dodd-Frank financial reforms required the Securities and Exchange Commission to adopt so-called “bad actor” provisions, which bar those convicted of financial crimes from selling private securities. The commission adopted these rules earlier in July.

Although only crimes committed after September 2013 will automatically disqualify private fundraisers, the provision still requires investment executives to at least disclose past convictions to investors.

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DERIVATIVES: CFTC makes “significant progress” on cross-border rules

DERIVATIVES: CFTC makes “significant progress” on cross-border rules

The CFTC is close to unveiling its approach to cross-border regulation of the over-the-counter derivatives market. Commissioner Mark Wetjen has signalled the agency may be ready to allow US firms operating in foreign jurisdictions to comply with local regulations instead of the US Dodd-Frank Act.

“We have made significant progress in recent weeks towards a workable cross-border framework,” Wetjen told the audience at the International Derivatives Expo in a keynote speech on Tuesday.

“I believe the CFTC should adopt interim guidance in the coming weeks and seek additional comment under an interim approach that provides legal certainty in the medium- and short-term.”

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Volcker Rule Stirs Up Opposition Overseas

As reported by Andrew Ross Sorkin from DealBook, usually, it is the banks that are fighting efforts to impose new regulations on the industry. Now, it is foreign governments fighting against bank regulations in the United States.

In the halls of last week’s annual meeting of the World Economic Forum here, Wall Street’s top bankers found a curious ally in their battle to end — or perhaps water down — the Volcker Rule, that part of last year’s Dodd-Frank financial regulation law that says that banks are not allowed to participate in “proprietary trading.” Translation: Banks can’t make risky bets with their own money. The idea, rooted in ending the too-big-to-fail phenomenon, is to separate the risky casino element of Wall Street from the utility role of helping finance the economy.

Yet finance ministers from around the world lined up to whisper in the ear of Timothy Geithner, the Treasury secretary, who made the rounds in Davos on Thursday and Friday, about a specific element of the Volcker Rule that has them apoplectic: The rule says that United States banks — and possibly certain foreign banks that do business in America — would be restricted in trading foreign government bonds. Yet the rule, conveniently, provides an exemption for United States government securities. Every other country is out of luck.

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Banks Find Loophole on Capital Rule

The Wall Street Journal’s David Enrich reports from London that some foreign banks are moving to restructure their U.S. operations to avoid one of the most-burdensome requirements of the new Dodd-Frank law.

In November, Barclays PLC quietly changed the legal classification of the U.K. bank’s main subsidiary in the U.S. so that the unit would no longer be subject to federal bank-capital requirements. Several other banks based outside the U.S. are considering similar moves, according to people familiar with the matter.

The maneuver allows them to escape a provision of the financial-overhaul law that forces the pumping of billions of dollars of new capital into the U.S. entities, known as bank-holding companies.

“It’s just not worth it to have all that capital trapped” in the holding company, said a New York lawyer who is advising banks on how to restructure.

The moves are the latest example of how banks are scrambling to cushion the impact of new laws and rules around the world.

Policy makers are demanding banks hold more capital and cash to help prevent a repeat of the financial crisis. But bank executives are worried that all the changes will crimp profits without making the financial system safer.

Last summer’s Dodd-Frank law beefed up rules governing the quantity and types of capital banks must keep to protect themselves from potential losses. The provision also closed a loophole that allowed foreign banks to run their U.S. subsidiaries with thinner capital buffers than those of their local rivals.

For example, Barclays Group US Inc., the U.K. bank’s Delaware-based holding company, had a Tier 1 leverage ratio of just 1.37% as of Sept. 30. That put the holding company below almost all its peers of similar size, which had an average ratio of 9.13%, according to Federal Reserve data.

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