According to www.iamtn.org, migration patterns have been shifting and along with them, the financial impact of remittances is leaving its trail. This money trail now follows the migrants moving from one developing country to another. One of the largest impacts of this migration pattern is on real estate. A recent report 'Global Demographics 2008' by Urban Land Institute, partly sponsored by Deloitte LLP, suggests that "global remittances from immigrants to their families support residential and retail developments in their countries of origin". Firstly, one of the first priorities for a remittance recipient is to spend on housing, leading to growth in real estate markets in 'receive' countries. A blue-collar worker from rural southern India sends money from the Middle East to his wife, two children and widowed mother; his wife says, "We have been saving the amount he sends us to build a home on the outskirts of a nearby urban area."
Second, the growing number of white-collar expatriates demands high quality residential realty in 'send' markets. Even at the lower level, migrant influx translates to housing and retail space demand. Global Demographics 2008 suggests that "increasingly, migrants gravitate towards large, urban areas". Already, the price of real estate in growing urban pockets of several developing nations is starting to climb. The report claims that "new migration patterns" are amongst the key factors that shape the future of real estate internationally.
Says Lady Olga Maitland, CEO, IAMTN, "We are well aware of the impact on real estate, and this is set to grow. In some countries it plays a more significant role than others. In Nigeria, 40% of the remittances go to building a home. Broadly remittances are prioritized into first sustenance; food then health, education, house building and finally a family business."
Monday 21 July 2008
Thursday 17 July 2008
Less regulation in the case of SEC?
U.S. Securities & Exchange Commission member Paul Atkins recently co-wrote an article claiming that enforcement issues are so egregious that the SEC needs to set up an independent review panel. The last time the SEC had one was 36 years ago.
These are excerps from the article:
Financial markets and their regulatory landscape have changed markedly in the past three and a half decades since an independent panel reviewed the SEC's enforcement program. It is time to convene a similar panel to bring the program up to date. The Division of Enforcement of the U.S. Securities Exchange Commission has a proud history and many dedicated attorneys, accountants and other staff. Thirty-six years after its creation, the Enforcement Division is larger, stronger and more visible than anyone at the time could have imagined.
In the 36 years since the Wells Committee set out its recommendations, financial markets have changed tremendously, and corporate scandals have rocked both Wall Street and Main Street. In response, Congress gave the SEC significantly more enforcement authority, much of it penal in nature. The SEC now can impose multimillion-dollar penalties against corporations and individuals, bar individuals from serving as officers and directors of corporations, and prevent professionals such as accountants and securities lawyers from practicing before the SEC. Some believe that in exercising these new punitive powers, the SEC has shifted its focus without adjusting its due process protections along the way. It is time for the commission to convene a new advisory committee, in a spirit similar to that of the Wells Committee, to conduct an independent review of the SEC's enforcement program and to recommend any needed changes to modernize enforcement practices. As the Wells Committee did, this new committee also should examine whether the SEC is taking appropriate steps to protect the rights of defendants and to provide appropriate due process. Although much has changed since the original Wells Committee did its work, the same philosophical and practical concerns exist today. Therefore, the new advisory committee could adopt essentially the same mandate as that of the Wells Committee in 1972.
Among the many issues that would fall under this broad mandate would be the implementation of mechanisms to provide more efficacy, predictability and transparency to the enforcement program. As an agency tasked with enforcing laws and regulations mandating transparency, the SEC itself must provide transparency to the public in its enforcement practices. Predictability and transparency provide for a fair process that respects the rights of all parties involved and ensures adherence to the rule of law.
The SEC is governed by a five-member commission, each of whom is appointed by the president with Senate confirmation. The commission delegates to the career staff investigative authority, but the commission retains the decision by majority vote to issue subpoenas and to sue defendants or settle with them. The most important Wells Committee recommendation was that the enforcement staff should give notice to a prospective defendant of the potential charges to be asserted against him before the enforcement division seeks authority from the commission to sue. This policy change was a key protection of due process, and gave a defendant the ability to defend himself on the basis of facts and the law. Thus, the formal defense submission in response to the notice came to be known as a "Wells Submission." Often, the facts uncovered in investigations indicate that no action should be taken against a potential defendant, or a Wells Submission may be persuasive in arguing against an action. Sometimes, however, institutional and other factors may make it difficult to drop a matter altogether. The ability of the Enforcement Division to recommend that no action be taken in a particular matter based on the facts and law should be encouraged and institutionalized. This will require a re-evaluation of the incentives for bringing actions and obtaining penalties, such as through promotions, awards and public recognition of SEC staff. An evaluation system should focus on rewarding high-quality efforts and professionalism regardless of the outcome of particular actions. In some instances, exercising discretion may not be appropriate. There should not be institutional encouragement for using discretion to formulate theories of liability that overstep the boundaries of existing law.
Standards are set through the legislative process in Congress and through the SEC's rule-making process; it is not the function of the Enforcement Division. Rule making through enforcement violates the fundamental principles of due process that Congress established in the Administrative Procedure Act, which requires regulatory agencies to give notice and seek (and respond to) comment from the public before adopting or changing rules. In the recent past, federal courts have nullified various SEC rule-making attempts because the agency did not follow proper procedure or overstepped its authority in adopting rules.
The U.S. General Accountability Office in 2007 strongly criticized the Enforcement Division for not promptly closing investigations at their conclusion. When the commission or its staff determines that an investigation should be closed or action is not warranted, the agency should promptly send a closing letter, not only to those who have made a Wells Submission but also to any significant nonparty who has been involved in the investigation. The advisory committee also should consider bolstering the Wells Submission process by permitting a proposed defendant to appear before the commission to oppose the initiation of an enforcement proceeding. Although it would be both unnecessary and unmanageable to allow such an "oral Wells Submission" in every matter, it may be beneficial to both the commission and proposed defendants for the commission to have a discretionary avenue to hear from proposed defendants prior to taking action, particularly in complex cases or those in which character assessment is important. A review of the enforcement process would not be complete without a review of the costs to parties responding to an investigation. The SEC must ensure that its investigations and enforcement actions do not impose unnecessary costs. Overly broad subpoenas or document or interview requests add to a responding entity's costs--and not every responding entity becomes a defendant. Compliance with notices to preserve--and subsequent requests to produce--electronic data, including e-mails, voice mails and server backup tapes, is undeniably burdensome and can be very expensive.
It is critical for the SEC to have certain electronic data, but preservation notices and requests for their production are often generic and extend well beyond the boundaries of an existing investigation. The new advisory committee should recommend ways to minimize costs while still ensuring that the SEC can get the information it needs for its investigations. With respect to enforcement policies, the advisory committee should examine the usage, effects, amount and appropriateness of corporate penalties in financial fraud cases, to determine if they are consistent with the SEC's mission to protect investors; maintain fair, orderly and efficient capital markets; and facilitate capital formation.
When evaluating the use of penalties against issuers of securities in financial fraud cases, the advisory committee should, for example, ask, Do penalties protect investors? Do they harm or benefit shareholders? Is the circularity of "Fair Fund" penalty distributions (the company pays--meaning, in effect, the shareholders pay--a penalty, which is put into a fund and then distributed to the company's shareholders) consistent with ensuring fair, orderly and efficient capital markets? Is capital formation impeded by the threat of large, unpredictable issuer penalties? Do we create a moral hazard if we permit officers of companies to agree to a large corporate penalty to avoid or soften actions against culpable individuals? Are individuals deterred from wrongdoing if they expect that shareholders will pay the penalties for the misconduct? And, most important, does the prospect of large issuer penalties and the inevitable press coverage cause the SEC to misallocate resources to use the government's power to pursue weaker cases to the detriment of other types of enforcement actions?.
But thigs may are not giving the reason to Mr. Atkins. The SEC is getting into the act as well with its “emergency order” restricting short trading — not in general, but specifically in the shares in Fannie Mae and Freddie Mac, both of whom are protectorates of the federal government anyway. The SEC’s supposed target is “unlawful manipulation,” which is illegal.
All this in a not very serious maner. Normally in a functioning democracy, lawmakers and federal agencies craft rules through a deliberative process, and those rules apply prospectively across the board. When the government acts through orders rather than legislation or established administrative procedurees to identify emergencies and bogey men, and then seeks to outlaw their practices with hastily drafted decrees — well, that’s when the market makers, who depend on freedom and the established rule of law, should start to worry.
Paul S. Atkins is a commissioner at the U.S. Securities and Exchange Commission. Bradley J. Bondi is legal counsel and policy adviser to Commissioner Atkins. Their article is extracted from “Evaluating the Mission: A Critical Review Of The History And Evolution Of The SEC Enforcement Program,” first published in the Fordham Journal of Corporate and Financial Law.
These are excerps from the article:
Financial markets and their regulatory landscape have changed markedly in the past three and a half decades since an independent panel reviewed the SEC's enforcement program. It is time to convene a similar panel to bring the program up to date. The Division of Enforcement of the U.S. Securities Exchange Commission has a proud history and many dedicated attorneys, accountants and other staff. Thirty-six years after its creation, the Enforcement Division is larger, stronger and more visible than anyone at the time could have imagined.
In the 36 years since the Wells Committee set out its recommendations, financial markets have changed tremendously, and corporate scandals have rocked both Wall Street and Main Street. In response, Congress gave the SEC significantly more enforcement authority, much of it penal in nature. The SEC now can impose multimillion-dollar penalties against corporations and individuals, bar individuals from serving as officers and directors of corporations, and prevent professionals such as accountants and securities lawyers from practicing before the SEC. Some believe that in exercising these new punitive powers, the SEC has shifted its focus without adjusting its due process protections along the way. It is time for the commission to convene a new advisory committee, in a spirit similar to that of the Wells Committee, to conduct an independent review of the SEC's enforcement program and to recommend any needed changes to modernize enforcement practices. As the Wells Committee did, this new committee also should examine whether the SEC is taking appropriate steps to protect the rights of defendants and to provide appropriate due process. Although much has changed since the original Wells Committee did its work, the same philosophical and practical concerns exist today. Therefore, the new advisory committee could adopt essentially the same mandate as that of the Wells Committee in 1972.
Among the many issues that would fall under this broad mandate would be the implementation of mechanisms to provide more efficacy, predictability and transparency to the enforcement program. As an agency tasked with enforcing laws and regulations mandating transparency, the SEC itself must provide transparency to the public in its enforcement practices. Predictability and transparency provide for a fair process that respects the rights of all parties involved and ensures adherence to the rule of law.
The SEC is governed by a five-member commission, each of whom is appointed by the president with Senate confirmation. The commission delegates to the career staff investigative authority, but the commission retains the decision by majority vote to issue subpoenas and to sue defendants or settle with them. The most important Wells Committee recommendation was that the enforcement staff should give notice to a prospective defendant of the potential charges to be asserted against him before the enforcement division seeks authority from the commission to sue. This policy change was a key protection of due process, and gave a defendant the ability to defend himself on the basis of facts and the law. Thus, the formal defense submission in response to the notice came to be known as a "Wells Submission." Often, the facts uncovered in investigations indicate that no action should be taken against a potential defendant, or a Wells Submission may be persuasive in arguing against an action. Sometimes, however, institutional and other factors may make it difficult to drop a matter altogether. The ability of the Enforcement Division to recommend that no action be taken in a particular matter based on the facts and law should be encouraged and institutionalized. This will require a re-evaluation of the incentives for bringing actions and obtaining penalties, such as through promotions, awards and public recognition of SEC staff. An evaluation system should focus on rewarding high-quality efforts and professionalism regardless of the outcome of particular actions. In some instances, exercising discretion may not be appropriate. There should not be institutional encouragement for using discretion to formulate theories of liability that overstep the boundaries of existing law.
Standards are set through the legislative process in Congress and through the SEC's rule-making process; it is not the function of the Enforcement Division. Rule making through enforcement violates the fundamental principles of due process that Congress established in the Administrative Procedure Act, which requires regulatory agencies to give notice and seek (and respond to) comment from the public before adopting or changing rules. In the recent past, federal courts have nullified various SEC rule-making attempts because the agency did not follow proper procedure or overstepped its authority in adopting rules.
The U.S. General Accountability Office in 2007 strongly criticized the Enforcement Division for not promptly closing investigations at their conclusion. When the commission or its staff determines that an investigation should be closed or action is not warranted, the agency should promptly send a closing letter, not only to those who have made a Wells Submission but also to any significant nonparty who has been involved in the investigation. The advisory committee also should consider bolstering the Wells Submission process by permitting a proposed defendant to appear before the commission to oppose the initiation of an enforcement proceeding. Although it would be both unnecessary and unmanageable to allow such an "oral Wells Submission" in every matter, it may be beneficial to both the commission and proposed defendants for the commission to have a discretionary avenue to hear from proposed defendants prior to taking action, particularly in complex cases or those in which character assessment is important. A review of the enforcement process would not be complete without a review of the costs to parties responding to an investigation. The SEC must ensure that its investigations and enforcement actions do not impose unnecessary costs. Overly broad subpoenas or document or interview requests add to a responding entity's costs--and not every responding entity becomes a defendant. Compliance with notices to preserve--and subsequent requests to produce--electronic data, including e-mails, voice mails and server backup tapes, is undeniably burdensome and can be very expensive.
It is critical for the SEC to have certain electronic data, but preservation notices and requests for their production are often generic and extend well beyond the boundaries of an existing investigation. The new advisory committee should recommend ways to minimize costs while still ensuring that the SEC can get the information it needs for its investigations. With respect to enforcement policies, the advisory committee should examine the usage, effects, amount and appropriateness of corporate penalties in financial fraud cases, to determine if they are consistent with the SEC's mission to protect investors; maintain fair, orderly and efficient capital markets; and facilitate capital formation.
When evaluating the use of penalties against issuers of securities in financial fraud cases, the advisory committee should, for example, ask, Do penalties protect investors? Do they harm or benefit shareholders? Is the circularity of "Fair Fund" penalty distributions (the company pays--meaning, in effect, the shareholders pay--a penalty, which is put into a fund and then distributed to the company's shareholders) consistent with ensuring fair, orderly and efficient capital markets? Is capital formation impeded by the threat of large, unpredictable issuer penalties? Do we create a moral hazard if we permit officers of companies to agree to a large corporate penalty to avoid or soften actions against culpable individuals? Are individuals deterred from wrongdoing if they expect that shareholders will pay the penalties for the misconduct? And, most important, does the prospect of large issuer penalties and the inevitable press coverage cause the SEC to misallocate resources to use the government's power to pursue weaker cases to the detriment of other types of enforcement actions?.
But thigs may are not giving the reason to Mr. Atkins. The SEC is getting into the act as well with its “emergency order” restricting short trading — not in general, but specifically in the shares in Fannie Mae and Freddie Mac, both of whom are protectorates of the federal government anyway. The SEC’s supposed target is “unlawful manipulation,” which is illegal.
All this in a not very serious maner. Normally in a functioning democracy, lawmakers and federal agencies craft rules through a deliberative process, and those rules apply prospectively across the board. When the government acts through orders rather than legislation or established administrative procedurees to identify emergencies and bogey men, and then seeks to outlaw their practices with hastily drafted decrees — well, that’s when the market makers, who depend on freedom and the established rule of law, should start to worry.
Paul S. Atkins is a commissioner at the U.S. Securities and Exchange Commission. Bradley J. Bondi is legal counsel and policy adviser to Commissioner Atkins. Their article is extracted from “Evaluating the Mission: A Critical Review Of The History And Evolution Of The SEC Enforcement Program,” first published in the Fordham Journal of Corporate and Financial Law.
Lack of preparedness for the European Payment Services Directive
A recent IAMTN survey of money service businesses shows a serious lack of preparedness for the implementation of the European Payment Services Directive which comes into force in November 2009 - just 16 months away. Despite the fact that the Payment Services Directive which will impact on all those financial services providing money transfer facilities, IAMTN survey shows that companies have not got to grips with the changes which will impact on their business. The IAMTN response is similar to a survey put out by PSE Consulting exclusively to banks.
Addressing a conference organized by Sidley Austin on the European Payments Services Directive, Lady Olga Maitland, CEO, IAMTN said "Our findings are worrying for the money service sector. Most companies we found have chosen to ignore the changes or make any preparation at all - despite being only 16 months away from the deadline. Bearing in mind that the PSD will have a beneficial effect on the money service sector; giving them a level playing field with banks in Europe - and a great opportunity for both themselves and their customers, it is interesting to note how little attention has been paid to changes which will undoubtedly change the way they operate. "Indeed we found, as indeed did PSE in their survey, that the vast majority of businesses and banks are light years away from preparedness. This will cause massive last minute problems for them."
The Payment Services Directive was approved by the European Parliament in December 2007. Charlie McCreevy, the European Commissioner for Internal Markets and Services, described its objectives as 'generating more competition' providing a simple, harmonized set of rule and ensuring a high level of consumer protection." The PSD will have a revolutionary effect on the legal framework between banks and their customers setting stringent rules for information disclosure, conduct of business rules and service provision. It addition it introduces a new lightly regulated licensed entity called a 'Payments Institution' which may allow non-banks ie. Money service businesses etc to join the bankers' payment schemes and associations across the European Union. It could be said that the money service sector and banks are into new territory. They are unused to implementing prescriptive legislation from the EU. As a consequence smaller institutions appear to be unaware of the potential impact of the PSD on their customers and operations.
While the major international institutions expect to be ready by November 1st, 2009, substantial concerns have appeared for the lack of readiness by smaller banks - let alone the money service businesses. "What was interesting in our survey were those who did NOT respond when it was in their interests for their businesses to take advantage of the new opportunities. Lack of awareness of the changes ahead, like it or not, have not hit them. Among those who did respond, they had a moderate understanding of the changes. Most felt that the impact would be modest. Interestingly it was the small and medium sized businesses who felt that the PSD would be implemented on time. The major institutions did not."
The Majority of respondents to our questionnaire who are more aware than most, admitted they have not yet made any effort to prepare for the changes. Others are keeping their heads down and waiting for the implementation by national governments. Only 11% had made an impact assessment and of that only 7% had agreed a budget for implementation. The others had not got started. As a result they had not consulted with third party providers who would also be involved, ie. The software companies, agency banks, agents and so on. For those who had given some thought, they felt that the greatest effort will fall on adjusting the IT, and updating the terms and conditions. Interestingly we should recall the Capgemini World Payments Report 2007 who also lamented lack of preparedness. But in addition they pointed out that the greatest beneficiaries would be the card sector. They anticipated that by 2012 44% of all non-cash transactions in Europe will be via cards - to the point that Europe needs a 'any card at any terminal solution. Costs. Most believe it will not be that bad.
Banks though are fearful. According to PSE Consulting over 40% of banks surveyed believe that implementation will cost them more than 10m Euros and almost 25% believe it will cost over 50mEuros. Significantly nearly 60% of the banks surveyed do not believe there will be any benefits. Broadly though there is a positive feel about the opportunities. Indeed 61% in the IAMTN survey said there would be a revenue benefit. If there is a wind of change, it will affect the banks the most, who face highly competitive, agile and innovative money service business competition."
Addressing a conference organized by Sidley Austin on the European Payments Services Directive, Lady Olga Maitland, CEO, IAMTN said "Our findings are worrying for the money service sector. Most companies we found have chosen to ignore the changes or make any preparation at all - despite being only 16 months away from the deadline. Bearing in mind that the PSD will have a beneficial effect on the money service sector; giving them a level playing field with banks in Europe - and a great opportunity for both themselves and their customers, it is interesting to note how little attention has been paid to changes which will undoubtedly change the way they operate. "Indeed we found, as indeed did PSE in their survey, that the vast majority of businesses and banks are light years away from preparedness. This will cause massive last minute problems for them."
The Payment Services Directive was approved by the European Parliament in December 2007. Charlie McCreevy, the European Commissioner for Internal Markets and Services, described its objectives as 'generating more competition' providing a simple, harmonized set of rule and ensuring a high level of consumer protection." The PSD will have a revolutionary effect on the legal framework between banks and their customers setting stringent rules for information disclosure, conduct of business rules and service provision. It addition it introduces a new lightly regulated licensed entity called a 'Payments Institution' which may allow non-banks ie. Money service businesses etc to join the bankers' payment schemes and associations across the European Union. It could be said that the money service sector and banks are into new territory. They are unused to implementing prescriptive legislation from the EU. As a consequence smaller institutions appear to be unaware of the potential impact of the PSD on their customers and operations.
While the major international institutions expect to be ready by November 1st, 2009, substantial concerns have appeared for the lack of readiness by smaller banks - let alone the money service businesses. "What was interesting in our survey were those who did NOT respond when it was in their interests for their businesses to take advantage of the new opportunities. Lack of awareness of the changes ahead, like it or not, have not hit them. Among those who did respond, they had a moderate understanding of the changes. Most felt that the impact would be modest. Interestingly it was the small and medium sized businesses who felt that the PSD would be implemented on time. The major institutions did not."
The Majority of respondents to our questionnaire who are more aware than most, admitted they have not yet made any effort to prepare for the changes. Others are keeping their heads down and waiting for the implementation by national governments. Only 11% had made an impact assessment and of that only 7% had agreed a budget for implementation. The others had not got started. As a result they had not consulted with third party providers who would also be involved, ie. The software companies, agency banks, agents and so on. For those who had given some thought, they felt that the greatest effort will fall on adjusting the IT, and updating the terms and conditions. Interestingly we should recall the Capgemini World Payments Report 2007 who also lamented lack of preparedness. But in addition they pointed out that the greatest beneficiaries would be the card sector. They anticipated that by 2012 44% of all non-cash transactions in Europe will be via cards - to the point that Europe needs a 'any card at any terminal solution. Costs. Most believe it will not be that bad.
Banks though are fearful. According to PSE Consulting over 40% of banks surveyed believe that implementation will cost them more than 10m Euros and almost 25% believe it will cost over 50mEuros. Significantly nearly 60% of the banks surveyed do not believe there will be any benefits. Broadly though there is a positive feel about the opportunities. Indeed 61% in the IAMTN survey said there would be a revenue benefit. If there is a wind of change, it will affect the banks the most, who face highly competitive, agile and innovative money service business competition."
Sunday 13 July 2008
Why the threat of a free fall is growing
The BusinessWeek cover story The Home Price Abyss: Why the threat of a free fall is growing. is very interesting. The core argument is that price declines could potentially feed on themselves. Big price declines make people unable to keep paying their mortgages (because their ARMs are resetting and the banks won’t refinance) or unwilling to keep paying their mortgages (because they see no point in throwing good money after bad). That drives up the foreclosure rate, which drives the prices of neighboring homes, adding to the downward spiral.We’re already seeing this happening in some of the markets with the worst price declines such as southern California, Nevada, Arizona, and southern Florida. The question is whether it could spread to more areas and become a national problem. One person which was quote in the story says that the taboo on walking away from your home and leaving the keys behind could be diminishing. He says that in commercial real estate it’s business as usual.
We would like to know what Banksit readers think about the idea of walking out on a mortgage.
We would like to know what Banksit readers think about the idea of walking out on a mortgage.
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Tuesday 8 July 2008
SEC Finds Shortcomings in Credit Rating Agencies'
The Securities and Exchange Commission today released findings from extensive 10-month examinations of three major credit rating agencies that uncovered significant weaknesses in ratings practices and the need for remedial action by the firms to provide meaningful ratings and the necessary levels of disclosure to investors.
Under new statutory authority from Congress that enabled the SEC to register and examine credit rating agencies, the agency's staff conducted examinations of Fitch Ratings Ltd., Moody's Investor Services Inc., and Standard & Poor's Ratings Services to evaluate whether they are adhering to their published methodologies for determining ratings and managing conflicts of interest. With the recent subprime market turmoil, the SEC has been particularly interested in the rating agencies' policies and practices in rating mortgage-backed securities and the impartiality of their ratings.
The SEC staff's examinations found that rating agencies struggled significantly with the increase in the number and complexity of subprime residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDO) deals since 2002. The examinations uncovered that none of the rating agencies examined had specific written comprehensive procedures for rating RMBS and CDOs. Furthermore, significant aspects of the rating process were not always disclosed or even documented by the firms, and conflicts of interest were not always managed appropriately.
"We've uncovered serious shortcomings at these firms, including a lack of disclosure to investors and the public, a lack of policies and procedures to manage the rating process, and insufficient attention to conflicts of interest," said SEC Chairman Christopher Cox. "When the firms didn't have enough staff to do the job right, they often cut corners. That's the bad news. There's also good news. And that's that the problems are being fixed in real time. The recent events affecting our economy and our markets have galvanized regulators around the world to re-examine the regulatory framework governing credit rating agencies, but ultimately the responsibility for providing meaningful ratings to investors begins with the credit rating firms themselves."
Lori Richards, Director of the SEC's Office of Compliance Inspections and Examinations, said, "These examinations found shortcomings in the ratings processes used by each of the firms examined. The firms have all agreed to implement broad reforms to address the letter and the spirit of the findings, to better ensure that investors can have confidence in their ratings."
The Summary Report of Issues Identified in the Commission Staff's Examinations of Select Credit Rating Agencies describes the significant weaknesses in the rating agencies' processes in rating subprime RMBS and CDOs linked to subprime residential mortgage-backed securities from January 2004 to the present.
Specifically, the examinations found:
- There was a substantial increase in the number and in the complexity of RMBS and CDO deals since 2002, and some of the rating agencies appear to have struggled with the growth.
- Significant aspects of the ratings process were not always disclosed.
- Policies and procedures for rating RMBS and CDOs can be better documented.
- The rating agencies are implementing new practices with respect to the information provided to them.
- The rating agencies did not always document significant steps in the ratings process - including the rationale for deviations from their models and for rating committee actions and decisions - and they did not always document significant participants in the ratings process.
- The surveillance processes used by the rating agencies appear to have been less robust than the processes used for initial ratings.
- Issues were identified in the management of conflicts of interest and improvements can be made.
- The rating agencies' internal audit processes varied significantly.
The examinations were conducted by staff in the SEC's Office of Compliance Inspections and Examinations, Division of Trading and Markets, and Office of Economic Analysis. The report summarizes generally the remedial actions that credit rating agencies are expected to take as a result of the examinations, and includes observations by the SEC's Office of Economic Analysis about conflicts of interest that are unique to these products. A factual summary of the models and methodologies used by the rating agencies is provided in the report to provide transparency to the ratings process and the activities of the rating agencies in connection with the recent subprime mortgage turmoil.
The SEC last month proposed a three-fold set of comprehensive reforms to regulate the conflicts of interests, disclosures, internal policies, and business practices of credit rating agencies. The first portion of rulemaking would address conflicts of interest in the credit ratings industry and require new disclosures designed to increase the transparency and accountability of credit ratings agencies. The second portion would require credit rating agencies to differentiate the ratings they issue on structured products from those they issue on bonds through the use of different symbols or by issuing a report disclosing the differences. The third part of the SEC's proposed rulemaking would clarify for investors the limits and purposes of credit ratings and ensure that the role assigned to ratings in SEC rules is consistent with the objectives of having investors make an independent judgment of credit risks.
Under new statutory authority from Congress that enabled the SEC to register and examine credit rating agencies, the agency's staff conducted examinations of Fitch Ratings Ltd., Moody's Investor Services Inc., and Standard & Poor's Ratings Services to evaluate whether they are adhering to their published methodologies for determining ratings and managing conflicts of interest. With the recent subprime market turmoil, the SEC has been particularly interested in the rating agencies' policies and practices in rating mortgage-backed securities and the impartiality of their ratings.
The SEC staff's examinations found that rating agencies struggled significantly with the increase in the number and complexity of subprime residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDO) deals since 2002. The examinations uncovered that none of the rating agencies examined had specific written comprehensive procedures for rating RMBS and CDOs. Furthermore, significant aspects of the rating process were not always disclosed or even documented by the firms, and conflicts of interest were not always managed appropriately.
"We've uncovered serious shortcomings at these firms, including a lack of disclosure to investors and the public, a lack of policies and procedures to manage the rating process, and insufficient attention to conflicts of interest," said SEC Chairman Christopher Cox. "When the firms didn't have enough staff to do the job right, they often cut corners. That's the bad news. There's also good news. And that's that the problems are being fixed in real time. The recent events affecting our economy and our markets have galvanized regulators around the world to re-examine the regulatory framework governing credit rating agencies, but ultimately the responsibility for providing meaningful ratings to investors begins with the credit rating firms themselves."
Lori Richards, Director of the SEC's Office of Compliance Inspections and Examinations, said, "These examinations found shortcomings in the ratings processes used by each of the firms examined. The firms have all agreed to implement broad reforms to address the letter and the spirit of the findings, to better ensure that investors can have confidence in their ratings."
The Summary Report of Issues Identified in the Commission Staff's Examinations of Select Credit Rating Agencies describes the significant weaknesses in the rating agencies' processes in rating subprime RMBS and CDOs linked to subprime residential mortgage-backed securities from January 2004 to the present.
Specifically, the examinations found:
- There was a substantial increase in the number and in the complexity of RMBS and CDO deals since 2002, and some of the rating agencies appear to have struggled with the growth.
- Significant aspects of the ratings process were not always disclosed.
- Policies and procedures for rating RMBS and CDOs can be better documented.
- The rating agencies are implementing new practices with respect to the information provided to them.
- The rating agencies did not always document significant steps in the ratings process - including the rationale for deviations from their models and for rating committee actions and decisions - and they did not always document significant participants in the ratings process.
- The surveillance processes used by the rating agencies appear to have been less robust than the processes used for initial ratings.
- Issues were identified in the management of conflicts of interest and improvements can be made.
- The rating agencies' internal audit processes varied significantly.
The examinations were conducted by staff in the SEC's Office of Compliance Inspections and Examinations, Division of Trading and Markets, and Office of Economic Analysis. The report summarizes generally the remedial actions that credit rating agencies are expected to take as a result of the examinations, and includes observations by the SEC's Office of Economic Analysis about conflicts of interest that are unique to these products. A factual summary of the models and methodologies used by the rating agencies is provided in the report to provide transparency to the ratings process and the activities of the rating agencies in connection with the recent subprime mortgage turmoil.
The SEC last month proposed a three-fold set of comprehensive reforms to regulate the conflicts of interests, disclosures, internal policies, and business practices of credit rating agencies. The first portion of rulemaking would address conflicts of interest in the credit ratings industry and require new disclosures designed to increase the transparency and accountability of credit ratings agencies. The second portion would require credit rating agencies to differentiate the ratings they issue on structured products from those they issue on bonds through the use of different symbols or by issuing a report disclosing the differences. The third part of the SEC's proposed rulemaking would clarify for investors the limits and purposes of credit ratings and ensure that the role assigned to ratings in SEC rules is consistent with the objectives of having investors make an independent judgment of credit risks.
Saturday 5 July 2008
UK HMRC lost in a case about European "tax havens"
The UK government has lost a court battle of 6 years against Vodafone, in a failled effort to prevent companies using European tax havens. A UK judge ruled that Vodafone does not have to pay extra corporation tax on a Luxembourg-based subsidiary.
The UK HMRC has the right to appeal the decision, and if success for Vodafone, the ruling is likely to be closely watched by many other major multinational businesses with overseas subsidiaries, which are waiting the end of the case.
In an article about the case from The Guardian, it is remembered that the case centres around the Controlled Foreign Companies (CFC) legislation introduced in 1988 to try to claw back tax from companies with overseas businesses.
In the article, it was also remembered that two years ago the European court of justice ruled in a case involving Cadbury Schweppes that the legislation is restrictive and can only be justified where subsidiaries are set up artificially to gain a tax advantage. Today's high court judgment relates to the question of the compatibility of the CFC legislation with EU law rather than the facts of the Vodafone case. The judge said that as a result of the Cadbury ruling that no charge could be imposed on Vodafone, or any other company in the same position, under the 1988 legislation and parliament needs to rectify the situation with a new set of rules.
"In my judgement, the CFC legislation must be disapplied so that, pending amending legislation or executive action, no charge can be imposed on a company such as Vodafone under the CFC legislation".
"It seems to me that all UK taxpayers, including Vodafone, were and are entitled to be told by legislation, of which the meaning is plain, what the tax consequences for them will be if they decide to incorporate a controlled foreign company in a (EU) member state."
Vodafone Investments Luxembourg Sarl (VIL) was set up in 2000 as a vehicle for the holding of investments, and it is resident for tax purposes in Luxembourg.
The UK HMRC has the right to appeal the decision, and if success for Vodafone, the ruling is likely to be closely watched by many other major multinational businesses with overseas subsidiaries, which are waiting the end of the case.
In an article about the case from The Guardian, it is remembered that the case centres around the Controlled Foreign Companies (CFC) legislation introduced in 1988 to try to claw back tax from companies with overseas businesses.
In the article, it was also remembered that two years ago the European court of justice ruled in a case involving Cadbury Schweppes that the legislation is restrictive and can only be justified where subsidiaries are set up artificially to gain a tax advantage. Today's high court judgment relates to the question of the compatibility of the CFC legislation with EU law rather than the facts of the Vodafone case. The judge said that as a result of the Cadbury ruling that no charge could be imposed on Vodafone, or any other company in the same position, under the 1988 legislation and parliament needs to rectify the situation with a new set of rules.
"In my judgement, the CFC legislation must be disapplied so that, pending amending legislation or executive action, no charge can be imposed on a company such as Vodafone under the CFC legislation".
"It seems to me that all UK taxpayers, including Vodafone, were and are entitled to be told by legislation, of which the meaning is plain, what the tax consequences for them will be if they decide to incorporate a controlled foreign company in a (EU) member state."
Vodafone Investments Luxembourg Sarl (VIL) was set up in 2000 as a vehicle for the holding of investments, and it is resident for tax purposes in Luxembourg.
Tuesday 1 July 2008
SEC Proposal to Reduce Reliance on Credit Ratings
The Securities and Exchange Commission today published for public comment proposed rule changes to make the limits and purposes of credit ratings clear to investors and ensure that the role assigned to ratings in SEC rules is consistent with the objectives of having investors make an independent judgment of credit risks.
The Commission voted unanimously on June 25, 2008, to issue for public comment this third set of proposed recommendations to bring increased transparency to the credit ratings process and curb practices that contributed to recent turmoil in the credit markets. The Commission voted to propose the first two sets of recommendations on June 11, 2008.
"This action is designed to ensure that the role we assign to ratings in our rules is consistent with the objective of having investors make an independent judgment of the risks associated with a particular security," said SEC Chairman Christopher Cox. "It should be neither the purpose nor the effect of any SEC rule to discourage investors from paying close attention to what credit ratings actually mean."
Erik R. Sirri, Director of the SEC's Division of Trading and Markets, said, "These proposals complete the rulemaking initiative begun two weeks ago with respect to NRSROs. I believe the proposed amendments will further promote the Commission's goals of strengthening the ratings process by reducing any undue reliance on NRSRO ratings and by encouraging independent evaluation and analysis of credit risk."
John White, Director of the SEC's Division of Corporation Finance, added, "These proposals are an important step toward clarifying the appropriate role of credit ratings in investors' decisions about the securities in which they invest. Not only do the proposals establish new criteria, independent of ratings, for issuers to access our forms and utilize the shelf registration process, they do so in a manner that protects the interests of investors."
The Commission has reviewed the requirements in its rules and forms that rely on credit ratings. In many cases, it has concluded that such references can be removed or revised. These proposals also address recent recommendations issued by the President's Working Group on Financial Markets, the Financial Stability Forum, and the Technical Committee of the International Organization of Securities Commissions (IOSCO). Consistent with these recommendations, the SEC has considered whether the inclusion of requirements related to ratings in its rules and forms has, in effect, placed an "official seal of approval" on ratings that could adversely affect the quality of due diligence and investment analysis. The SEC's proposal would reduce undue reliance on credit ratings and result in improvements in the analysis that underlies investment decisions.
Public comments on this third set of proposed rules should be received by the Commission no later than Sept. 5, 2008.
The proposing releases comprising this third set of rule proposals have been posted to the SEC Web site:
http://www.sec.gov/rules/proposed/2008/34-58070.pdf
http://www.sec.gov/rules/proposed/2008/33-8940.pdf
http://www.sec.gov/rules/proposed/2008/ic-28327.pdf
The Commission voted unanimously on June 25, 2008, to issue for public comment this third set of proposed recommendations to bring increased transparency to the credit ratings process and curb practices that contributed to recent turmoil in the credit markets. The Commission voted to propose the first two sets of recommendations on June 11, 2008.
"This action is designed to ensure that the role we assign to ratings in our rules is consistent with the objective of having investors make an independent judgment of the risks associated with a particular security," said SEC Chairman Christopher Cox. "It should be neither the purpose nor the effect of any SEC rule to discourage investors from paying close attention to what credit ratings actually mean."
Erik R. Sirri, Director of the SEC's Division of Trading and Markets, said, "These proposals complete the rulemaking initiative begun two weeks ago with respect to NRSROs. I believe the proposed amendments will further promote the Commission's goals of strengthening the ratings process by reducing any undue reliance on NRSRO ratings and by encouraging independent evaluation and analysis of credit risk."
John White, Director of the SEC's Division of Corporation Finance, added, "These proposals are an important step toward clarifying the appropriate role of credit ratings in investors' decisions about the securities in which they invest. Not only do the proposals establish new criteria, independent of ratings, for issuers to access our forms and utilize the shelf registration process, they do so in a manner that protects the interests of investors."
The Commission has reviewed the requirements in its rules and forms that rely on credit ratings. In many cases, it has concluded that such references can be removed or revised. These proposals also address recent recommendations issued by the President's Working Group on Financial Markets, the Financial Stability Forum, and the Technical Committee of the International Organization of Securities Commissions (IOSCO). Consistent with these recommendations, the SEC has considered whether the inclusion of requirements related to ratings in its rules and forms has, in effect, placed an "official seal of approval" on ratings that could adversely affect the quality of due diligence and investment analysis. The SEC's proposal would reduce undue reliance on credit ratings and result in improvements in the analysis that underlies investment decisions.
Public comments on this third set of proposed rules should be received by the Commission no later than Sept. 5, 2008.
The proposing releases comprising this third set of rule proposals have been posted to the SEC Web site:
http://www.sec.gov/rules/proposed/2008/34-58070.pdf
http://www.sec.gov/rules/proposed/2008/33-8940.pdf
http://www.sec.gov/rules/proposed/2008/ic-28327.pdf
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