The U.S. Commodity Futures Trading Commission (CFTC) issued a final rule for the retail foreign exchange market, which included slightly relaxing an earlier proposal that would slash leverage available to investors participating in these transactions.

The final rules implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Food, Conservation, and Energy Act of 2008, which, together, provide the CFTC with broad authority to register and regulate entities wishing to serve as counterparties to, or to intermediate, retail foreign exchange (forex) transactions.  

The final rule put in place requirements for retail foreign exchange products, including registration, disclosure statements, record keeping, financial reporting and minimum capital standards.  

The final regulations will be effective as of October 18, 2010.  The regulations were adopted essentially as written with the exception of two major issues:

• Leverage – while the proposed rules called for a maximum leverage of 10:1, the final rules allow the National Future Association (NFA) to determine the margin requirements for the currencies within a defined set of CFTC parameters.  Currently the parameters include 50:1 leverage for major currencies and 20:1 leverage for all other currencies.
• Forex Introducing Brokers – the proposed rules called for all forex introducing brokers to be guaranteed by a single future commissions merchant (FCM) or retain foreign exchange dealer (RFED).  The final rules allow a forex introducing broker to be either guaranteed or independent, consistent with other regulated futures introducing broker (IB).    FCMs and RFEDs are required to maintain net capital of $20 million plus 5 percent of the amount, if any, by which liabilities to retail forex customers exceed $10 million.

Major currency dealers oppose these changes.    Dealers argue that it will actually have a negative net affect on retail currency traders.   Instead of protecting the consumer, the CFTC’s actions will drive small volume retail traders to overseas dealers where leverage can be as high as 700:1!    There are also unregulated dealers overseas who will take advantage of retail traders seeking 100:1 leverage.   

More importantly, final regulation will kill retail trading in the United State.   Dealers argue that forex is a $1 billion industry that provides millions of solid jobs in the United States.     The final regulation will drive small retail customers offshore.   The result will be less fraud protection for the retail trader, a loss of millions of jobs in the United States, and no significant gain in consumer protection as a result.

The Securities and Exchange Commission (SEC) approved changes that make it easier for shareholders to nominate directors of public companies.

Under the new rules, shareholder groups owning at least 3% of a company’s stock for at least 3 years will be able to have nominees placed on annual proxy ballots sent to all shareholders.   And they will have to certify in writing that they don’t intend to use the new rules to change control of the company or gain more seats on the board than the one or 25 percent of the board – whichever is greater – permitted in the new rule. 

Under the current rules, investors must appeal to shareholders at their own expense if they seek new directors on a company’s board or a bylaw change.

The new policy is a victory for investor advocates.  Supporters argue that the change was necessary, especially considering the aftermath of financial crisis, risks corporations are taking for short-term profit gains and excessive compensation packages for executives. Getting candidates on the board gives supporters a better influence over company policy. SEC Chairman Mary Schapiro has said that the change is “a matter of fairness and accountability.”

However, the business lobbies oppose the new rule arguing that it would shift power to activist investors, result in annual battles for board seats that drain management’s time and make it harder for companies to focus on the long term.     The new rules were criticized for not considering the differences between operating companies and complexes of investment companies, for example the unique features of investment companies and the size of the investment company universe.

The U.S. Chamber of Commerce promised to fight the rule aggressively and there may be grounds for legally challenging the rule under the Administrative Procedures Act, which requires such rules to be subjected to cost-benefit analyses.

Wall Street firms that gave high-frequency traders direct access to the equity markets and contributed to last May 6 “Flash Crash” could face sanctions from market regulator.

On May 6th the trading in stock market became highly volatile and within few minutes the Dow Jones Industrial Average fell nearly 1,000.   At the time, many on Wall Street were at a loss for the violent swing in stock prices.   However, later many blamed high-frequency trading firms.

The exchanges most affected by the flash crash were the New York Stock Exchange, which is operated by NYSE Euronext and the Nasdaq Stock Market, which is operated by Nasdaq OMX Group.

As the result, according to Financial Times, the Financial Industry Regulatory Association (FINRA) is undertaking a “sweep” of broker-dealers that offer market access to high-frequency traders to find out if they allowed these firms to run computerized trading programs – algorithms – without undertaking proper risk-management controls.

FINRA will try and determine whether the broker/dealers have the proper risk management controls in order to police clients that buy and sell securities quickly through computer driven algorithmic trades. Read more

A federal judge refused to dismiss an investor lawsuit against Fairfield Greenwich Group, a hedge fund firm accused of channeling money to the Madoff’s Ponzi scheme.

U.S. District Judge Victor Marrero in Manhattan allowed most of the claims to stand against Fairfield and other firms that provided administrative, custodial and accounting services.

Fairfield and co-founder Walter Noel are among 46 defendants in a separate lawsuit by Irving Picard, a court-appointed trustee who is seeking to recover money for victims of the estimated $65 billion Ponzi scheme.

Investors and Picard have accused Fairfield of guiding billions of dollars to Bernard L. Madoff Investment Securities LLC, which Picard is now liquidating.   Picard has estimated Fairfield received more than $1 billion of fees from Madoff, including for operating its “feeder funds.”

In his ruling, Marrero wrote that “according to plaintiffs, Fairfield fulfilled a critical role for Madoff, who knew that secrecy and obfuscation were key to prolonging how long he could keep his big lie afloat and his sand castles grounded.”    

Marrero further stated that the plaintiffs sufficiently alleged that several Fairfield defendants “intentionally or recklessly funneled plaintiffs’ money to Madoff over time while allegedly ignoring clear signs that they were dealing with a master thief.”

Madoff, 72, was arrested on December 11, 2008. He pleaded guilty in March 2009 to running the Ponzi scheme, and is serving a 150-year sentence in a North Carolina federal prison.

According to his website for Madoff victims, Picard has reviewed 13,286 claims arising from the Ponzi scheme, and found 2,188 claims worth $5.58 billion to be valid. Picard is a partner at the law firm Baker & Hostetler LLP

The case is Anwar v. Fairfield Greenwich Ltd et al, U.S. District Court, Southern District of New York, No. 09-00118.

Following the onset of the financial crisis, the hedge fund industry has experienced challenging conditions over the past two years suffering from outflows and poor performance.   However, despite the challenges, the institutional investors are quite optimistic about their fundraising horizon.

Recently conducted research survey by Preqin undertook a survey of 50 leading institutional investors from around the world in order to ascertain their hedge fund investment plans for the coming 12 months.

According to survey, almost a third of institutional investors plan to boost their hedge fund investments over the next 12 months, while less than half that number plan to cut their hedge fund exposure.  

In addition, more than two-thirds of institutional investors say they are happy with the returns produced by their hedge fund portfolios.   A fair number of institutions still have money waiting on the sidelines, with a quarter telling Preqin that they have not reached their current hedge fund targets.

According to Preqin, the results of the survey indicate that institutional support for hedge funds is set to increase modestly in the coming year, with longer term plans pointing to a more significant increase in commitment levels.

According to a new report published by NERA, economic consulting global firm, the total damages awarded against Japanese companies for errors in their financial statements increased four-fold to a record 45.9bn yen last year.

The economic analysts said the 2009 damages dwarfed the level recorded for 2008 – 9.9bn yen – and represented more than the total amount of securities litigation for the whole previous decade.

The reason for such increase was because a few particularly big cases were settled, which involved unusually large payouts.  According to Nera, there was little change in the number of cases settled in 2009 compared to 2008.

However, the report emphasizes an underlying trend: the number of securities law cases has been increasing since 2004, when the rules requiring a plaintiff to prove the extent of damages were eased and the powers of the market regulator, such as the Securities and Exchange Surveillance Commission, were increased.

Finally, 125 days late, New York Legislature approved budge bill without increasing taxes on hedge fund managers who work in the state but live elsewhere.    

The State Assembly unanimously agreed to drop the proposed tax, which would have raised $50 million to help close the state’s $9.2 billion budget deficit by subjecting the performance fees earned by out-of-state hedge fund managers to the state’s income tax.  The plan led Governor Jodi Rell of neighboring Connecticut to offer relocation assistance to New York-based fund executives who leave for her state.

Instead of taxing hedge funds, the New York budget bill will raise $1 billion in new revenue in part by doing away with a sales tax exemption on clothing.

Although, New York Governor David Paterson promised to reject any attempt to impose new tax on hedge-fund managers, the proposal is still alive in Albany and it hasn’t been stricken from Albany’s budget plan yet.   It is certainly enough for Connecticut Governor Jodi Rell to continue her efforts to lure the New York’s hedge fund industry to Connecticut.

In June, Governor Paterson and key legislative leaders in Albany endorsed a plan to tax hedge fund managers who work in New York and live out-of-state as ordinary income, rather than capital gains.   The tax hike would have raised $50 million to help close New York’s $9.2 billion budget deficit.

Last week, New York State Assembly Speaker Sheldon Silver told The Post “there’s a good chance” that the tax won’t be included in the final budget deal when it’s wrapped up in the next few weeks.    Also, Mayor Bloomberg, who opposes the tax, privately called some key hedge-funders asking them to stay in New York.

However, hedge fund managers are not convinced.    Their continuing reason for leaving New York is that there is still a threat from the New York legislature to enforce a tax until the budget has been approved and its removal from Albany’s budget plan is contingent on reaching other compromises.   In addition, there is no basis to conclude that the New York State legislature will not reintroduce the proposal next year.   

As part of Governor Rell’s efforts, representatives of 30 city-based financial firms were lured to a private dinner meeting with Rell to hear her pitch to move their businesses to Connecticut and avoid a tax increase on their industry that’s being considered in New York.  A private dinner meeting was held yesterday evening in The Water’s Edge at Giovanni’s II, a steakhouse in Darien, Connecticut.

The House of Representatives yesterday gave its final approval to a bill increasing regulation of the U.S. financial industry.   The bill was widely described as the most comprehensive reorganization of financial regulation since the Great Depression, passed by a vote of 237 to 192, with all but three Republicans in opposition.    The legislation now moves to the Senate, where a vote is expected later this month.  The bill is not expected to be signed by the President at least until the middle of July.

The 2,300-page bill includes strict new rules for banks, such as ban on proprietary trading and a consumer financial protection agency.   However, it is not as harsh on hedge funds, allowing banks to invest up to 3% of their capital in alternative investment funds.   The bill also includes a simplified version of the Volcker rule, which was designed to keep banks from putting too much of their money in hedge funds and private equity funds.

The Supreme Court on Monday struck down part of a Sarbanes-Oxley Act of 2002 that created a national board that polices auditors of public companies.

More specifically, the high court ruled that the Public Company Accounting Oversight Board (PCAOB) violated the constitutional requirement on the separation of powers among the branches of government.    The court stated the president, or other officials appointed by him, must be able to remove members of a board that was created to tighten oversight of internal corporate controls and outside auditors.

In 2002, in response to the Enron and WorldCom accounting scandals, Congress enacted the Sarbanes-Oxley corporate reform law that established certain accounting and auditing requirements for corporate America.   Further, Congress created the board to replace the accounting industry’s own regulators.   The board has power to compel documents and testimony from accounting firms, and the authority to discipline accountants.

Board members are appointed by the U.S. Securities and Exchange Commission and can only be removed by the SEC for cause.  The board, set up as a quasi-private agency, has the power to impose rules and to inspect and fine accounting firms.    The board is funded through fees it collects from public companies. It inspects thousands of auditors, including the Big Four accounting firms: Ernst & Young LLP, KPMG, PricewaterhouseCoopers and Deloitte & Touche LLP. Read more

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