Truth in Lending, Solvency II Fears, Fed: Compliance

The Federal Reserve released a revision to a Truth in Lending Act rule approved in September, aiming to clarify how lenders are required to disclose changes in interest payments for adjustable-rate mortgages.

Companies offering so-called interest-only ARMs must tell borrowers the earliest date their interest rate can change, the Fed said yesterday in a statement outlining the revision. Lenders had been required to disclose the date of the first payment after a rate change, not the adjustment date, the Fed said.

The rule applies to 5-1 ARMs, loans with rate adjustments beginning five years after origination, the central bank said. It is part of an amendment to the Truth in Lending Act, which requires mortgage lenders and other creditors to disclose costs and fees to borrowers. Companies have until Oct. 1 to comply.

The mortgage industry has long complained that conflicting provisions of TILA and the Real Estate Settlement Procedures Act are expensive for lenders and confusing to borrowers. The Fed’s authority to issue regulations under TILA and RESPA will transfer to the Consumer Financial Protection Bureau when it is formally established in July.

Compliance Policy

Allianz Says ‘Excessive Caution’ on New Rules May Hurt Insurers

Allianz SE, Europe’s biggest insurer, said overly cautious rules under a proposed new European regulatory framework known as Solvency II may hurt insurance companies and their customers because of unnecessary capital costs.

Allianz Chief Financial Officer Oliver Baete made the remarks in an interview published on the Munich-based insurer’s website.

The Frankfurt-based Committee of European Insurance and Occupational Pension Supervisors, or Ceiops, is developing the Solvency II risk-based regulatory regime with local regulators. The new rules are designed to help the industry withstand future financial crises. Baete said that while he the purpose of the rules, he fears the measures will fail because there “have always been crises and there always will be.”

The latest proposals for Solvency II, due to be introduced in 2013, have been tested by “almost 70 percent of all insurance and reinsurance companies” in Europe in a fifth quantitative-impact study, known as QIS5, Ceiops said Dec. 16. The regulator plans to publish the results in March. The rules need to be simplified before their introduction, the European Commission said last month after complaints from the industry.

Insurers, banks and other financial-services providers would be “threatened with collective punishment,” even as “no insurance company got into trouble due to its insurance business during the financial crisis,” Baete said.

U.S. Congress Blunts Agency Fund Request to Enforce Dodd-Frank

U.S. financial regulators, struggling for months with budgets unequipped to handle new responsibilities imposed by the Dodd-Frank Act, will be forced to go another 10 weeks without a funding increase.

Federal lawmakers agreed yesterday to fund the government at current levels through March 4, denying budget increases sought by the Securities and Exchange Commission and Commodity Futures Trading Commission after the regulatory overhaul was enacted. Agreement on the stopgap funding measure came hours before the expiration of an earlier temporary spending bill.

The SEC and CFTC, tasked with writing most of the rules dictated by Dodd-Frank, sought budget increases to at least $1.25 billion and $261 million, respectively, for staffing, technology and infrastructure. The increases would be 10 percent for the SEC and more than 50 percent higher than the CFTC’s current $169 million budget.

Without that funding, new initiatives will be postponed or scrapped, regulators have said.

Government funding for the fiscal year ending Sept. 30 has been caught up in partisan battles over taxes, spending and the meaning of Republican gains in the November elections. Republicans taking control of the House next month have promised to reduce funding though spending cuts and more aggressive oversight of regulators, making the short-term measure potentially problematic for the two agencies.

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Reinsurers Don’t Create Systemic Risks, Insurance Watchdog Says

The International Association of Insurance Supervisors, which is helping the Financial Stability Board set up a list of insurers considered too big to fail, said reinsurers aid financial stability and don’t create systemic risks.

“Far from creating system concerns to financial markets, reinsurers have contributed positively to financial stability,” Basel, Switzerland-based IAIS said yesterday in an e-mailed statement. Reinsurers tend to focus on diversified risk-taking, it said.

IAIS said on Nov. 2 that it’s helping the FSB compile a list of systemically important banks and insurers that will face tougher capital requirements. While the FSB is seeking to prevent a repeat of the global financial crisis, insurers say it would be a mistake to classify them in the same way as banks.

Stricter Biofuel Controls May Be Outlined by Europe in 2011

The European Union may move to tighten regulation of biofuels by July in a bid to prevent their increased use in transport from causing emissions-boosting changes in land use.

The European Commission said raising the minimum emissions-saving threshold for biofuels to be counted toward EU renewable-energy targets is a possibility. Imposing extra “sustainability” criteria is another option that could be proposed by the middle of 2011, said the commission, the 27-nation EU’s regulatory arm.

Any new draft legislation to tighten environmental controls on biofuels, which are made primarily from crops such as rapeseed, wheat, corn and sugar, will depend on a “detailed” assessment of indirect land-use change related to such fuels, said the commission. A third option is to attribute a quantity of greenhouse-gas emissions to biofuels reflecting the impact on indirect land-use change.

An EU requirement that at least 10 percent of energy for road and rail transport in 2020 come from renewable sources in all member nations risks causing side-effects that undermine the battle against global warming. The question of indirect land-use change covers whether greater use of crops for biofuels would displace food production.

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Compliance Action

New York Fed Revises Bylaws to Prevent Conflicts of Interest

The Federal Reserve Bank of New York revised bylaws and committee charters for members of its board of directors to avert conflicts of interest and to reflect changes required by under regulatory overhaul legislation passed this year.

The new rules “further ensure that the board functions free from conflicts of interests, or the perception of such conflicts,” the New York Fed said in a statement yesterday.

Nine Insurers Fail Swiss Test, Handelszeitung Says

Nine of Switzerland’s 133 insurers would fail a solvency test to be introduced by market regulator Finma in January, Handelszeitung reported, citing Finma spokesman Alain Bichsel.

The low interest rates that insurers are now earning on the market make it hard for them to meet legally required minimum returns on life and pension policies, the Zurich-based newspaper said. Finma reached its conclusions based on initial filings by the insurers, Bichsel was quoted as saying.

Six of the companies that would fail are life insurers, Finanz said.

SEC Probe Signals ‘Buyer Beware’ for China, ISIG Says

The Securities and Exchange Commission’s probe into auditors of China-based companies listed on U.S. share exchanges is a signal for investors to approach these stocks with caution, said International Strategy & Investment Group.

The SEC on Dec. 21 sanctioned a California audit firm for signing off on fraudulent financial statements made by a Chinese energy company. Auditors have come under scrutiny for signing the financial statements of China-based firms accessing U.S. markets through reverse mergers, in which a closely held company acquires a publicly traded company and can then sell shares without an initial public offering.

Donald Straszheim, director of China research at ISI, which was ranked first in the Macro and Economics categories in Institutional Investor magazine’s 2009 survey, estimates there are “hundreds of tiny companies in China” that have sold shares in the U.S. through reverse mergers, aiming to tap into booming demand from U.S. investors who want access to the Chinese economy. Straszheim said it is the “ultimate ‘buyer beware’ sector of investing.”

ISI is based in Los Angeles.

Xia Lihua, a spokeswoman at the China Securities Regulatory Commission, declined to comment on the SEC probe.

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Courts

ASIC Sues Macquarie, Bank of Queensland Over Storm

Bank of Queensland Ltd. and Macquarie Bank Ltd. (MQG) breached contracts with investors and together with the Commonwealth Bank of Australia (CBA) were involved in an unregistered investment scheme related to the collapse of Storm Financial Ltd., Australia’s securities regulator said.

The Australian Securities & Investments Commission sued the three banks in federal court yesterday seeking compensation for investors in Storm, which had managed A$4 billion ($4 billion). The suit was filed after the regulator said it failed to reach an out-of-court settlement with the banks. The regulator said last month that it planned to file the lawsuits.

Storm induced investors to mortgage their homes, take out margin loans, and put the money into Storm Australian Index Trusts with the promise their returns would be enough to pay the loans and live off the proceeds in retirement, according to ASIC’s statement of claim filed in federal court in Sydney yesterday.

The company collapsed in January, 2009, after banks notified customers they were in breach of their margins. Storm said at the time trading losses resulted in a decline in income which the company couldn’t absorb any longer.

Bank of Queensland said in a regulatory filing yesterday it intends to defend itself. The bank didn’t act illegally or dishonestly, it said.

Commonwealth Bank said it has been helping its affected customers for 18 months.

The case is Australian Securities and Investments Commission v. Bank of Queensland Ltd. (BOQ) NSD1797/2010. Federal Court of Australia (Sydney).

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Ex-UBS Banker Poteroba Pleads Guilty to Insider Scheme

Igor Poteroba, a former UBS AG (UBSN) investment banker, pleaded guilty to insider-trading charges after being accused of tipping friends to potential mergers.

Poteroba, 37, pleaded guilty to one count of conspiracy to commit securities fraud and three counts of securities fraud yesterday before U.S. District Judge Paul A. Crotty in Manhattan, according to court records. Poteroba agreed to forfeit $465,000 in proceeds from the crime. He’s in a federal jail in Manhattan, unable to post $5 million bail set in March.

A spokeswoman for the office of U.S. Attorney Preet Bharara in Manhattan didn’t immediately respond to an e-mail seeking a copy of Poteroba’s plea agreement.

Kelly Smith, a spokeswoman for Zurich-based UBS, declined to comment on Poteroba’s guilty plea.

The case is U.S. v. Poteroba, 10-mag-00562, U.S. District Court, Southern District of New York (Manhattan).

Bloomberg Sues ECB to Force Disclosure of Greece Swaps

Bloomberg Finance LP, the parent of Bloomberg News, filed a lawsuit against the European Central Bank, seeking the disclosure of documents showing how Greece used derivatives to hide its fiscal deficit and helped trigger the region’s sovereign debt crisis.

The lawsuit asks the European Union’s General Court in Luxembourg to overturn a decision by the ECB not to disclose two internal documents drafted for the central bank’s six-member executive board in Frankfurt this year. The notes show how Greece used swaps to hide its borrowings, according to a March 3 cover page attached to the papers obtained by Bloomberg News.

ECB President Jean-Claude Trichet withheld the documents after the EU and International Monetary Fund led a 110 billion-euro bailout ($144 billion) for Greece. The dossier should be disclosed to stop governments from employing the derivatives in a similar way again and to show how EU authorities acted on information they had on the swaps, according to the suit, filed by Bloomberg Finance LP, the parent of Bloomberg News.

An ECB spokeswoman declined to comment on the lawsuit, which is based on the EU’s freedom of information rules.

For more, click here, and see Interviews section, below.

GN Sues German Regulator for $1.45 Billion Over Sonova Sale Ban

GN Store Nord A/S (GN) sued German antitrust regulators for 1.1 billion euros ($1.45 billion) for blocking the 2007 sale of its hearing-aid unit to Sonova Holding AG. (SOON)

GN filed the suit yesterday in Bonn, Germany, after the country’s highest civil tribunal in April overturned the Federal Cartel Office’s ruling, the Ballerup, Denmark-based company said in a statement. The suit is the first against the antitrust agency.

GN and Sonova dropped the 15.5 billion-krone sale of GN ReSound after losing a lower court challenge to the veto. GN pursued an appeal to the top court to expand merger options in the hearing-aid industry. Sonova said after the April ruling that it didn’t plan another bid for ReSound.

Kay Weidner, spokesman for the Bonn-based cartel office, said that they had not received the complaint, “But if it comes, I don’t think it would have a good chance of success.”

Martek Biosciences Option Buyers Accused by SEC of Inside Trades

Unknown buyers of Martek Biosciences Corp. options were sued by the U.S. Securities and Exchange Commission over claims they traded on inside information of Royal DSM NV (DSM)’s acquisition of the company.

The SEC said in a complaint filed yesterday in federal court in Manhattan that the unknown purchasers used an anonymous UBS AG account to buy 2,615 call options on Martek stock from Dec. 10 to Dec. 15 and then sold the options on Dec. 21, the same day the acquisition was announced, realizing a profit of approximately $1.2 million. Martek, based in Columbia, Maryland, develops products made from microalgae.

The SEC is seeking an order blocking the buyers from violating U.S. securities law and requiring them to turn over the profits and pay civil fines.

The case is Securities and Exchange Commission v. One or More Unknown Purchasers of Securities of Martek Biosciences Corp., 10-cv-09527, U.S. District Court, Southern District of New York (Manhattan).

Interviews/Speeches

Cohan Calls Ernst & Young Suit Cuomo’s Parting ‘Present’

William Cohan, author of “House of Cards” and a Bloomberg Television contributing editor, talked about New York Attorney General Andrew Cuomo’s lawsuit against Ernst & Young LLP.

Cuomo, who will become New York’s governor next month, alleges the accounting firm helped Lehman Brothers Holdings Inc. deceive the public about the investment bank’s finances before it collapsed in 2008 and filed for bankruptcy protection. Cohan spoke with Erik Schatzker on Bloomberg Television’s “InsideTrack.”

For the video, click here.

Winkler Says Bloomberg Sues ECB Over Swaps Disclosure

Matthew Winkler, editor-in-chief of Bloomberg News, discussed the news agency’s lawsuit against the European Central Bank.

The lawsuit, filed by Bloomberg Finance LP, the parent of Bloomberg News, asks the European Union’s General Court in Luxembourg to overturn a decision by the ECB not to disclose documents that show how Greece used derivatives to hide its fiscal deficit. Winkler spoke with Lisa Murphy on Bloomberg Television’s “Fast Forward.”

For the video, click here.

To contact the reporter on this story: Carla Main in New Jersey at cmain2@bloomberg.net.

To contact the editor responsible for this report: David E. Rovella at drovella@bloomberg.net.

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