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As Wells Fargo & Co.’s consumer fraud scandal unfolds, it has fueled a push for stronger whistleblower protections in agencies that police the banking industry, MorningConsult.com reported yesterday. Analysts say banking regulators lack critical factors — anonymity, cash rewards and communication with compliance officers — that make whistleblower programs work. Banking regulators should take a page from the the Office of the Whistleblower at the Securities and Exchange Commission, said Jordan Thomas, a former official in the SEC’s Enforcement Division who’s now chair of whistleblower representation at the law firm Labaton Sucharow in New York. Thomas was a key figure in developing the SEC’s whistleblower program, which he suggested could be a model for other agencies. Several people who said they flagged Wells Fargo’s cross-selling tactics have spoken out publicly since the Sept. 8 enforcement action against the bank, and some former bank employees have filed lawsuits against the San Francisco-based lender. But it’s unclear, Thomas said, what recourse will be available to them under a slate of state and federal laws.

Former billionaire Samuel Wyly’s six-year battle with the U.S. Securities and Exchange Commission neared conclusion after he agreed to pay $198 million to settle a fraud suit the agency won against him and his late brother Charles two years ago, Bloomberg News reported on Friday. The amount is exactly what a New York judge ordered Wyly to disgorge after a jury agreed the brothers had used a web of offshore trusts to hide hundreds of millions of dollars in cash while getting rich building the arts-and-craft chain Michaels Stores Inc. and other companies. The SEC said in a Manhattan federal court filing on Friday that it would do its best to incorporate the settlement into a global accord with the Justice Department and Internal Revenue Service, which it said are still in negotiations with Wyly. The IRS had been seeking more than $2 billion in back taxes and penalties after the SEC won its fraud case. Under the deal, Sam Wyly will take whatever legal steps are needed to get disbursements from his various trusts in the Isle of Man to help finance the settlement and pay it by Dec. 12. Wyly will also drop his appeal of the 2014 jury verdict, and the SEC will drop his children as "relief defendants" in the case, according to the filing. Read more. 

For a further analysis of commercial fraud, make sure to pick up a copy of ABI’s Fraud and Forensics: Piercing Through the Deception in a Commercial Fraud Case. 

The U.S. Securities and Exchange Commission yesterday said that it would adopt rules to strengthen the regulatory framework for clearing agencies deemed systemically important or that are involved in complex transactions, such as security-based swaps, Reuters reported today. Clearing agencies act as a middlemen between the parties to securities transactions by ensuring the smooth transfer of funds and securities, and in some cases, serve as a backstop in case a brokerage defaults. The rules are aimed at preventing clearing agencies deemed "too big to fail" from collapsing and spreading systemic market risks. These include the Fixed Income Clearing Corp, the National Securities Clearing Corp and the Options Clearing Corp. The new rules would enhance existing regulations put in place in 2014 though policies and procedures such as requiring daily stress testing, monthly review and annual validation of credit risk models. The rules would also increase capital requirements for the agencies and require them to have plans for an orderly recovery or wind-down of their operations.

The top two U.S. securities regulators outlined rule proposals ranging from asset management to swaps dealing they will take up in coming months, indicating the agencies will be at full throttle through election season to the end of the year, Reuters reported yesterday. The Securities and Exchange Commission and Commodity Futures Trading Commission are working to enforce mandates from the 2010 Dodd-Frank Wall Street reform law, comply with international regulations and respond to technology changes as part of efforts to keep markets running smoothly and protect investors. SEC Chair Mary Jo White told an industry group the commission's staff is working on stress testing for asset managers. She said the SEC's plan for a consolidated audit trail, a database tracking equity and options trades, is on schedule and the agency is focused on all aspects of financial technology, with a forum scheduled on it for Nov. 14. Following White, CFTC Chairman Timothy Massad said that one key focus for his agency is re-proposing a rule on capital requirements for swap dealers so that it will be consistent with banking regulations but flexible enough to apply to broker-dealers and other non-banking institutions.

The U.S. Supreme Court yesterday rejected a request by Lynn Tilton, the New York financier accused by the Securities and Exchange Commission of defrauding investors, to put on hold an SEC enforcement action as she challenges the agency's in-house judicial proceeding against her, Reuters reported. The Court's action means that Tilton will face an Oct. 24 hearing before an SEC administrative law judge over whether she and her firm, Patriarch Partners, hid the poor performance of assets underlying her Zohar collateralized loan obligation funds, and collected nearly $200 million in improper fees. Tilton has said that SEC administrative proceedings are unfair to defendants like her, and that the means by which presiding judges are appointed violates the U.S. Constitution. In a June ruling, the New York-based U.S. Court of Appeals for the Second Circuit rejected her challenge to the process, saying it was premature because the SEC had not finished its administrative case, and thus the court where she sued lacked jurisdiction. Tilton and Patriarch sued the SEC again in Manhattan federal court on Sept. 9, seeking to prevent the commission from pursuing in-house enforcement actions.

Regulators are warning that years of stubbornly low interest rates and expectations they will remain low for years to come have prompted U.S. banks to shift their balance sheets in ways that put them at risk if rates suddenly spike, Reuters reported yesterday. Banks have been stocking up on long-term loans, often tied to real estate and property development that promise higher yields than the miniscule returns on short-term debt. However, the widening gap between long-term loans and mostly short-term funding means higher interest rates could trap banks in a corner: forcing them to pay more to cover their immediate financing needs than they earn on their loans. The dynamic "raises the interest rate risk issue that we are very focused on," Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation(FDIC), said this week. Banks are broadly positioned according to the signals the Federal Reserve has been sending — that it will lift rates only gradually and spread the increases over a long period. Regulators point out, though, that central banks can move quickly too, even if that now appears unlikely. Short-term rates could also climb in a weakening economy, they say.

The Securities and Exchange Commission’s proposal to ease the burden of financial reporting on smaller companies should go further, according to comment letters filed in recent months, the Wall Street Journal reported today. The regulator proposed raising the threshold for “smaller reporting company” status to $250 million in publicly traded shares, up from $75 million. Such companies are allowed to file streamlined financial reports with reduced audit requirements. Supporters of the proposal, including the New York Stock Exchange and groups representing small corporations, said that the SEC missed a chance for a more aggressive rule change. The proposal, they argue, doesn’t include lifting similar thresholds for its “accelerated filer” definition. Such filers, with a public float of $75 million or more, are required to independently audit their internal controls over financial reporting. The internal controls audit “is often the most burdensome requirement from a cost perspective and reforming the accelerated filer definition would provide small companies with a great deal of relief,” wrote Thomas Farley, president of NYSE Group, in a letter to the SEC. The SEC, in its proposal, said it aims to reduce compliance costs for more companies and boost business formation without reducing investor protections. The public comment period closed on August 30.

One source of great frustration from the financial crisis has been the dearth of cases against individuals over subprime lending practices and the related securitization of bad loans that caused so much financial havoc, according to a commentary in yesterday's New York Times DealBook blog. On Aug. 22, the Securities and Exchange Commission settled its last remaining case against a former Fannie Mae chief executive for securities fraud related to the disclosure of the company’s subprime mortgage exposure. The agency accepted a mere token payment that will not even come out of the individual’s own pocket, according to the commentary. On the same day, a federal appeals court refused to reconsider its May ruling that Bank of America’s Countrywide mortgage unit and one of its former executives did not commit fraud by failing to disclose to Fannie Mae and Freddie Mac that the subprime loans it was selling to them did not come close to the contractual requirements for such transactions.

A Securities and Exchange Commission proposal to place caps on registered investment firms’ exposures to derivatives is shaping up to be a contentious fight as industry representatives and advocacy groups’ are squaring off in a lobbying battle, MorningConsult.com reported yesterday. Although the SEC hasn’t announced its plans, lobbyists who have been watching the derivatives rule expect the agency to move forward in the coming months. Watchdog groups like Better Markets and Americans for Financial Reform have championed the proposal, but it has come under fire from the financial industry, which says it could harm the manner in which funds safely manage assets. The proposal has been the subject of public discussions since formal stakeholder comments came out in March, and it has continued to be scrutinized by lawmakers such as Sen. Sherrod Brown (D-Ohio), who weighed in on the debate last month. The SEC’s proposal would limit the derivatives exposures of mutual funds and exchange-traded funds to 150 percent of their total net assets. Funds would also have the option of a 300 percent ratio if they meet the criteria of a risk test.