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Jun 25, 2014

SEC | Press Release - June 25, 2014: SEC Announces Fraud Charges Against Three Former Regions Bank Executives in Accounting Scheme


U.S. Securities and Exchange Commission

SEC Announces Fraud Charges Against Three Former Regions Bank Executives in Accounting Scheme

FOR IMMEDIATE RELEASE
2014-125
Washington D.C., June 25, 2014 — 
The Securities and Exchange Commission today announced fraud charges against three former senior managers of Regions Bank for intentionally misclassifying loans that should have been recorded as impaired for accounting purposes.  As a result, the bank’s publicly-traded holding company overstated its income and earnings per share in its financial reporting.
The SEC also entered into a deferred prosecution agreement with Regions Financial Corp., which substantially cooperated with the agency’s investigation and undertook extensive remedial actions.  Regions will pay a total of $51 million to resolve parallel actions by the SEC, Federal Reserve Board, and Alabama Department of Banking. 
According to the SEC’s orders instituting administrative proceedings against the three former managers, Thomas A. Neely Jr. was the principal architect of the scheme while serving as head of Regions Bank’s risk analytics group in 2009.  Along with the bank’s head of special assets Jeffrey C. Kuehr and chief credit officer Michael J. Willoughby, Neely took intentional steps to circumvent internal accounting controls and improperly classify $168 million in commercial loans as performing so Regions could avoid recording a higher allowance for loan and lease losses.
Kuehr and Willoughby agreed to settle the SEC’s charges by paying penalties of $70,000 apiece and consenting to bars from serving as officers or directors of public companies.  The SEC’s Division of Enforcement will continue to litigate its case against Neely. 
“Our enforcement actions against three senior executives coupled with the deferred prosecution agreement with Regions demonstrate that we will aggressively pursue individual responsibility while rewarding extraordinary cooperation and remediation by companies,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “The bank helped us bring a case against culpable individuals while remediating the misconduct by restructuring its processes and putting new management in place, among other things.”
According to the SEC’s orders and the deferred prosecution agreement, Regions Bank tracked and recorded its non-performing loans (NPLs) for internal performance metrics and regular financial reporting.  NPLs typically were placed on non-accrual status when it was determined that payment of all contractual principal and interest was 90 days past due or otherwise in doubt.  Once a loan was placed in non-accrual status, uncollected interest accrued during that current year was reversed and Regions Bank’s interest income would be reduced.  Non-accrual status also served as a trigger for Regions Bank to consider whether the specific loan was impaired and to determine an allowance for loan and lease losses in accordance with U.S. Generally Accepted Accounting Principles (GAAP).
The SEC’s Division of Enforcement alleges that when personnel within Regions Bank’s special asset department initiated procedures to place approximately $168 million in NPLs into non-accrual status during the first quarter of 2009, Neely arbitrarily and without supporting documentation required the loans to remain in accrual status.  By failing to classify the impaired loans in accordance with its policies, Regions’ financial statements for the quarter ended March 31, 2009, were materially misstated and not in conformity with GAAP.  In furtherance of the scheme, Neely and Willoughby knowingly provided understated NPL data for the quarter to the Regions’ CFO and other senior executives during a meeting in late March.
The SEC’s order against Neely charges him with violations of the antifraud, reporting, books and records, and internal controls provisions of the federal securities laws.  Kuehr and Willoughby consented to the entry of a cease-and-desist order finding that they violated or caused violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 as well as the reporting, books and records, and internal controls provisions of the federal securities laws.  Without admitting or denying the findings, Kuehr and Willoughby agreed to pay their respective $70,000 penalties plus be prohibited from serving as officers or directors of public companies for a period of five years.
The deferred prosecution agreement with Regions relates to the bank’s failure to maintain adequate accounting controls at the time.  The agreement credits the company’s extensive remedial efforts, including the creation of a new problem asset division with entirely new management and significantly enhanced procedures.  The agreement credits the substantial cooperation by Regions during the SEC’s investigation, and imposes a $26 million penalty that will be offset provided that the company pays a $46 million penalty assessed in the Federal Reserve’s action.  Regions also will pay a $5 million penalty to the Alabama Department of Banking. 
The SEC’s investigation was conducted in its Atlanta Regional Office.  The SEC appreciates the assistance of the Federal Reserve.

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Al Jazeera English

Femi speaks with MiyHosi Benton about raising her baby in prison. For more, watch the full episode:http://bit.ly/1pPuAtl

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VOAvideo

The U.S. National Transportation Safety Board (NTSB) says the Asiana Airlines plane that crashed last year was flying too low and too slowly for a landing in San Francisco. Three people were killed and nearly 200 injured in the crash of Asiana Flight 214. The U.S. agency released the cause of the crash during a meeting on Tuesday. VOA's Carolyn Presutti, who first reported that pilot inexperience and error contributed to the crash, was at the meeting and has the latest.


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Former UK Prime Minister Tony Blair is feeling the heat again; Not on dragging the UK into a costly war in Iraq on a false pretext -- but his current position as Middle East Peace Envoy's senior figure. A group of former diplomats have written to demand Blair be fired. Retired British ambassador, Oliver Miles joins RT for more. 

SEC | Rules and Guidance June 25, 2014: SEC Adopts Cross-Border Security-Based Swap Rules.

SEC Seal

06/25/2014 01:00 PM EDT

The Securities and Exchange Commission today adopted the first of a series of rules and guidance on cross-border security-based swap activities for market participants.  The new rules will be key to finalizing the remaining proposals.

The rules and guidance explain when a cross-border transaction must be counted toward the requirement to register as a security-based swap dealer or major security-based swap participant.  The rules also address the scope of the SEC’s cross-border anti-fraud authority.

The SEC also adopted a procedural rule regarding the submission of “substituted compliance” requests.  This rule represents a first step in the SEC’s efforts to establish a framework to address the possibility that market participants may be subject to more than one set of comparable regulations across different jurisdictions as a result of their cross-border swaps activity.  If the SEC were to grant a request for substituted compliance, it would permit market participants to satisfy certain Title VII security-based swap regulatory requirements by complying with comparable non-U.S. rules.

“The rules we adopted today have been strengthened to the extent feasible under existing law while increasing their clarity and workability for market participants,” said SEC Chair Mary Jo White.  “The rules lay the foundation for an expansive, robust approach to the potential risk to U.S. market participants and the U.S. financial system from security-based swap activities.”

Steve Luparello, director of the SEC’s Division of Trading and Markets, said, “In developing the final rules and guidance adopted today, we worked carefully to balance the regulatory goals of Title VII, the practical needs of market participants and workability with the existing CFTC regime.  The rules and guidance are appropriately tailored to our markets and regulatory structure.”

The Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in 2010.  Title VII established a comprehensive framework for regulating the over-the-counter derivatives market.

In future rulemakings on specific security-based swap requirements such as reporting of transactions to security-based swap data repositories, the SEC intends to address the cross-border application of these requirements, and when “substituted compliance” may be available for them.  Under the SEC’s contemplated approach to implementation of these security-based swap regulatory requirements, market participants would be made aware of both the domestic and cross-border aspects of these regulatory requirements before being required to comply with them.

The SEC also anticipates soliciting additional public comment on approaches by which the cross-border application of the security-based swap dealer definition appropriately can reflect policy concerns related to transactions involving two non-U.S. person counterparties where activity related to those transactions occurs at least in part within the United States.  The SEC believes that the final resolution of this issue can benefit from further consideration and public comment, in light of the significant issues raised by commenters related to the proposed requirement.

The rules adopted today will be effective 60 days after their publication in the Federal Register.  However, the rules addressing the application of the dealer and major participant definitions, and the procedures for submitting substituted compliance requests, will not impose requirements on market participants until after relevant substantive rulemakings have been completed.

*   *   *
FACT SHEET
Cross-Border Security-Based Swap Rules and Guidance
SEC Open Meeting
June 25, 2014

The SEC’s rules and guidance, among other things, provide:

  • An explanation of when a cross-border transaction needs to be counted toward the requirement to register as a security-based swap dealer or major security-based swap participant, including transactions guaranteed by a U.S. person and transactions by a “conduit affiliate” (a foreign affiliate of a U.S. person that could be used to evade the requirements of Title VII of the Dodd-Frank Act).
  • Procedures for foreign regulators or market participants to apply for substituted compliance, which would permit market participants to comply with U.S. requirements by complying with foreign requirements.
  • An anti-fraud rule that addresses the scope of the Commission’s cross border anti-fraud enforcement authority, clarifying that the authority applies where the fraud occurs or is felt within the U.S.

Background

May 2013 Rule Proposals – The SEC proposed a series of rules to address the application of security-based swap regulatory requirements under Title VII to cross-border activities.  The final rules address one aspect of the proposal: determining when market participants are deemed to be security-based swap dealers or major security-based swap participants as a result of their cross-border activities and thus subject to dealer or major participant regulation.  In future rulemakings, the SEC expects to address other aspects of its May 2013 proposal, including trade reporting and dissemination of trade details to the public, mandatory clearing and trade execution, and rules applicable to registered security-based swap dealers and major security-based swap participants, and security-based swap market infrastructure.

Dodd-Frank Act – The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act established a comprehensive framework for regulating the over-the-counter derivatives market.  Title VII of the Dodd-Frank Act gave the SEC regulatory authority over security-based swaps and certain key players in that market, including security-based swap dealers and major security-based swap participants.

Security-Based Swaps Definition – In general, a derivative is a financial instrument or contract, such as a swap, whose value is “derived” from an underlying asset such as a commodity, bond, or equity security.  Derivatives provide a way for counterparties to transfer risk related to the underlying assets.  A security-based swap is a swap tied to a single security, loan, or issuer of securities, a narrow-based security index, or the occurrence of certain events relating to an issuer or issuers of securities in a narrow-based security index.

Cross-Border Security-Based Swap Market – The security-based swap market often involves counterparties located in different countries.  According to data analyzed by SEC staff, a majority of transactions involving single-name credit default swaps on U.S. reference entities involve one or more counterparties located abroad.  Based on staff estimates, only 13 percent of global notional volume between 2008 and 2012 was between two U.S.-domiciled counterparties.  This compares to 48 percent entered into between one U.S-domiciled counterparty and one foreign-domiciled counterparty, and 39 percent entered into between two foreign-domiciled counterparties.  In addition, some security-based swaps may be negotiated and executed in two different countries and then booked in other countries.  Finally, the security-based swap market is largely an inter-dealer market.  Commission staff estimates that more than 80 percent of notional volume has ISDA-recognized dealers as counterparties on both sides of the transaction.
Regulating a Global Market – Regulating the swap market is challenging because of its global and interconnected nature.  (See: www.sec.gov/swaps-chart/swaps-chart.shtml – which depicts the regulatory regime for security-based swaps trading.)  The U.S. and other countries now are implementing reforms that, when in effect, could potentially subject swap market participants to multiple and overlapping regulatory regimes.  Any resulting regulatory overlaps or conflicts could impact liquidity and efficiency in the security-based swap market.
CFTC’s July 2013 Cross-Border Guidance – The July 2013 cross-border guidance issued by the Commodity Futures Trading Commission set forth its approach to the application of Title VII to swap (as opposed to security-based swap) activity.  Many market participants engage in both swap and security-based swap activity and will be subject to regulation under Title VII by both the SEC and the CFTC.  For this reason, many commenters urged the SEC to minimize differences between its final cross-border rules and the CFTC guidance.

In developing the final rules, the SEC took into account the related elements of the CFTC guidance. As a practical matter, the final rules generally would produce similar outcomes in terms of whether an entity is a “U.S. person” and whether a particular transaction or position is counted toward the relevant dealer or major participant thresholds.  Many of the steps that market participants have taken to comply with the CFTC’s cross-border guidance may be transferable to compliance with the SEC’s final cross-border rules, thus mitigating the costs that market participants otherwise would incur.


Rule Highlights

Non-U.S. Person’s Requirement to Register with the SEC as a Security-Based Swap Dealer

Transactions Included in the Dealer Calculation

In 2012, the SEC adopted rules jointly with the CFTC, providing that a market participant would be considered a security-based swap dealer required to register with the SEC if its dealing transactions conducted in the past 12 months exceeded certain thresholds.  The final rules specify which cross-border dealing transactions count toward these dealer thresholds.

Under the final rules, U.S. persons are required to count their security-based swap dealing transactions toward the thresholds, including dealing transactions conducted through their foreign branches.

Non-U.S. persons are required to count the following against the thresholds:
  • Dealing transactions with counterparties that are U.S. persons, including foreign branches of U.S. banks (unless the foreign branch is a branch of a registered security-based swap dealer).
  • Dealing transactions with any counterparty that has rights of recourse against a U.S. affiliate of the non-U.S. person in connection with the non-U.S. person’s obligation under the security-based swap.
  • All dealing activity if a non-U.S. person acts as a “conduit affiliate.”

Definition of a U.S. Person

For purposes of these rules, a “U.S. person” is defined in a territorial manner that encompasses:
  • Any natural person who resides in the U.S.
  • Any partnership, corporation, trust, investment vehicle, or other legal person organized, incorporated, or established under the laws of the U.S. or having its principal place of business in the U.S.
  • Any discretionary or non-discretionary account of a U.S. person.
  • Any estate of a decedent who was a resident of the United States at the time of death.

Definition of a Principal Place of Business

The final rules define a principal place of business to mean the location from which the officers, partners, or managers of the legal person primarily direct, control and coordinate the activities of the legal person.  The definition provides that with respect to an externally managed investment vehicle, this location is the office from which the manager of the investment vehicle primarily directs, controls, and coordinates the investment activities of the investment vehicle.

The final “U.S. person” definition excludes certain international organizations, regardless of where they are organized or where their primary place of business is located.

For these purposes – and consistent with rules adopted by the SEC jointly with the CFTC regarding the Title VII definitions of dealer and major participant – foreign branches of U.S. banks and U.S. branches of foreign banks are not separate legal persons for purposes of Title VII and have the same U.S.-person status as the bank’s home office.

Non-U.S. Dealers Whose Counterparties Have Rights of Recourse Against a U.S. Person Affiliate

Under the final rules in response to comments on the proposal, a non-U.S. person is required to count against the dealer thresholds its dealing transactions with a non-U.S. counterparty that has rights of recourse against a U.S. affiliate of the non-U.S. person.  For these purposes, recourse is present if the counterparty has a legally enforceable right against the U.S. affiliate in connection with the non-U.S. person’s obligation under the security-based swap.


Conduit Affiliates

As an anti-evasion measure, the final rules expand the proposal’s treatment of non-U.S. affiliates of U.S. persons by requiring non-U.S. persons that act as “conduit affiliates” to count all of their dealing transactions towards the dealer thresholds.  A “conduit affiliate” is a non-U.S. affiliate of a U.S. person that enters into security-based swaps with non-U.S. persons or with certain foreign branches of a U.S. bank on behalf of its U.S. affiliates (other than U.S. affiliates that are registered as security-based swap dealers or major security-based swap participants) and enters into offsetting transactions with its U.S. affiliates to transfer the risks and benefits of those security-based swaps.

Aggregating Transactions Involving Dealing Activity of Affiliates

In 2012, the SEC adopted jointly with the CFTC a rule providing that persons engaged in dealing activity would be required to aggregate certain security-based swap dealing transactions of their commonly controlled affiliates.  The final rules clarify that a person may exclude from its dealer threshold calculations the dealing transactions of any affiliate registered with the SEC as a security-based swap dealer.  In response to comments on the proposal, the final rule does not condition the exclusion on the person and its affiliate being operationally independent.  

Cleared Anonymous Transactions

Based on comments on the proposal, the final rules provide an exclusion from non-U.S. persons having to count a transaction against the thresholds if the transaction is entered into anonymously and is cleared. 

Further Consideration of Activity in the United States Involving Only Non-U.S. Persons

The final rules do not include an element of the proposal that would have required dealing activity between two non-U.S. persons to be counted for purposes of the dealer definition if the security-based swap transaction was conducted within the United States.  Given the complex and important issues raised by that proposed requirement, the SEC expects to solicit additional comment regarding when a transaction between two non-U.S. persons should be included in the relevant dealer thresholds because one or both counterparties are engaged in security-based swap activity within the U.S.


Non-U.S. Person’s Requirement to Register with the SEC as a Major Security-Based Swap Participant

Transactions Included in the Major Participant Calculations

In 2012, the SEC adopted rules jointly with the CFTC that provide that a market participant would be deemed to be a “major security-based swap participant” if its security-based swap positions exceeded certain thresholds.

Under the final rules approved today, U.S. persons are required to count all of their security-based swap positions when determining whether they are major participants.

Non-U.S. persons are required to count the following positions against the major participant thresholds:

  • Positions with U.S. persons, including foreign branches of U.S. banks (unless the foreign branch is a branch of a registered security-based swap dealer).
  • Positions with a counterparty that has rights of recourse against a U.S. affiliate of the non-U.S. person in connection with the non-U.S. person’s obligation under the security-based swap.
  • All positions if a non-U.S. person acts as a “conduit affiliate.”

Attribution of Guaranteed Positions

The 2012 joint rulemaking by the SEC and CFTC provided that persons generally should include within their major participant calculations any positions they guarantee.
Under the final rules, guaranteed positions are attributed as follows in the cross-border context:
  • A non-U.S. person that provides a recourse guarantee of the security-based swap obligations of a U.S. person counts all of the U.S. person’s security-based swap positions that it guarantees.
  • A non-U.S. person that provides a recourse guarantee of the security-based swap obligations of another non-U.S. person counts only the guaranteed security-based swap positions arising from transactions with U.S.-person counterparties.
  • A U.S. person that provides a recourse guarantee of the security-based swap obligations of a non-U.S. person counts all of that non-U.S. person’s security-based swap positions that it guarantees.

Under the final rules, a guarantor is not required to count any guaranteed positions entered into by a non-U.S. person if the non-U.S. person is subject to Basel capital standards, to capital regulation by the SEC or the CFTC, or is regulated as a bank in the United States.

The Anti-Fraud Rule

The final rules include an antifraud rule that addresses the scope of the SEC’s cross-border antifraud civil enforcement authority, clarifying that the antifraud authority applies where sufficient conduct in furtherance of the fraud occurs or sufficient effects of the fraud are felt, within the U.S

FTC | Final Orders - June 25, 2014: FTC Approves Final Orders Settling Charges of U.S.-EU Safe Harbor Violations Against 14 Companies

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After a public comment period, the Federal Trade Commission has approved final orders that settle charges against 14 companies for falsely claiming to participate in the international privacy framework known as the U.S.-EU Safe Harbor. Three of the companies were also charged with similar violations related to the U.S.-Swiss Safe Harbor.
The FTC previously announced the settlements in JanuaryFebruary and May of 2014 with the following companies:
Under the settlements, the companies are prohibited from misrepresenting the extent to which they participate in any privacy or data security program sponsored by the government or any other self-regulatory or standard-setting organization.
Consumers who want to know whether a U.S. company is a participant in the U.S-EU or U.S.-Swiss Safe Harbor program may visit http://export.gov/safeharbor to see if the company holds a current self-certification.
The Commission vote approving the final orders was 4-0, with Commissioner McSweeny not participating.
The Federal Trade Commission works for consumers to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid them. To file a complaint in English or Spanish, visit the FTC’s online Complaint Assistant or call 1-877-FTC-HELP (1-877-382-4357). The FTC enters complaints into Consumer Sentinel, a secure, online database available to more than 2,000 civil and criminal law enforcement agencies in the U.S. and abroad. The FTC’s website providesfree information on a variety of consumer topics. Like the FTC on Facebook, follow us on Twitter, andsubscribe to press releases for the latest FTC news and resources.

Contact Information

MEDIA CONTACT:
Jay Mayfield
Office of Public Affairs
202-326-2181
More news from the FTC >>

NYT | Opinion - June 25, 2014: Tying Federal Aid to College Ratings


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Opinion

Wednesday, June 25, 2014

For more Opinion, go to NYTimes.com/opinion »

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