Broker Scrutiny, Credit-Rater Scrutiny, JPMorgan: Compliance

The U.S. Securities and Exchange Commission proposed expanding scrutiny of how brokerages handle trillions of dollars in client assets in a measure that reflects the enduring regulatory impact of Bernard Madoff’s Ponzi scheme.

SEC commissioners voted 5-0 yesterday to seek comment on a rule that would increase disclosures required of broker-dealers who hold investor funds, building on a 2009 rule for investment advisers. The measure would require enhanced audits of 300 brokers with custody of client assets and quarterly disclosures from all 5,000 registered firms on how they handle funds.

The rule -- subject to a 60-day comment period -- would require that a broker-dealer’s internal controls be checked by a registered public accounting firm and would let regulators examine audits. Brokerages would have to tell the SEC whether they have access to client money and how access is controlled.

Existing law requires broker-dealers to be audited each year by a firm registered with the Public Company Accounting Oversight Board. The PCAOB, which is required by the Dodd-Frank Act to start inspecting the audits, established an interim program for the reviews yesterday. The SEC proposal would expand what the audit watchdog sees in those examinations.

The SEC’s 2009 effort to look more deeply at investment advisers’ custodial practices was a response to Madoff, who is serving a 125-year prison term after pleading guilty to defrauding clients out of billions of dollars.

Compliance Policy

Consumer-Credit Raters to Open Books to Critics on U.S. Board

The U.S. Consumer Financial Protection Bureau is likely to place the three major credit-reporting bureaus, Equifax Inc. (EFX), Experian Plc and TransUnion LLC, under direct supervision by federal examiners.

The Dodd-Frank financial regulatory overhaul requires the new agency to propose regulations by July 21, 2012, on whether a company constitutes a “larger participant” in consumer financial services. That designation would lead to supervision similar to that of banks for the three firms, which provide credit reports on borrowers to prospective lenders.

Three credit bureaus are likely to meet that legal test, Corey Stone, the consumer agency’s assistant director for credit information markets, told consumer advocates last month, according to three people present at the meeting. Bureau officials have also delivered this message directly to two of the three firms, according to the companies.

Top officials at the consumer bureau have been critical of credit information bureaus in the past. Consumer advocates have long charged that the Big Three bureaus -- as Experian, TransUnion and Equifax are often known -- aren’t transparent about how credit scores are calculated.

Tim Klein, a spokesman for Equifax, said federal officials have told the Atlanta-based firm it will face supervision. Colleen Tunney, a spokeswoman for closely held TransUnion in Chicago, said her firm hasn’t been explicitly informed but that “we do expect to be supervised by the CFPB.”

Tony Hadley, senior vice president for government affairs and public policy at Dublin-based Experian, said the agency’s creation marks a new relationship between his company and the U.S. government, including supervision. The full impact “depends on implementation,” he said.

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Budget Cuts for Consumer Bureau, IRS Proposed by Republicans

U.S. House Republicans proposed limiting the funding for the new Consumer Financial Protection Bureau and placing the agency under the congressional appropriations process by 2013.

The House Appropriations Subcommittee on Financial Services released the measure yesterday, which would limit to $200 million the amount the Federal Reserve can transfer to the new agency in fiscal 2012.

The Dodd-Frank Act, enacted in July, created the consumer bureau and called for it to be funded by a percentage of the Fed’s budget, as much as $500 million per year, with the bureau’s director deciding how much is needed. The Republican bill includes the requirement that, effective Oct. 1, 2012, appropriations would be made by Congress.

Republicans, who almost unanimously opposed the Dodd-Frank Act, have sparred with Democrats over the new agency’s funding and mission. The appropriations measure includes $19.9 billion in funding for agencies under the panel’s jurisdiction, including the Treasury Department, the Securities and Exchange Commission, and General Services Administration. That is 9 percent less than last year and almost $6 billion less than the request of President Barack Obama.

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Haldane Eyes Shadow Banking as New BOE Panel Targets Bubbles

The U.K. Financial Policy Committee may target unregulated bank transactions as it seeks to prevent bubbles and end the pattern of rivals taking competitive risks said Andrew Haldane, a Bank of England official and member of the new panel.

The FPC must “advise government when we think risks have migrated outside of the conventional banking system into what is these days called the shadow banking system,” Haldane said in an interview in London yesterday. Evidence of “banking-type activities” in “non-regulated parts of the system” could compel the FPC to ask the government to expand its powers.

The interim FPC meets today for the first time as part of Prime Minister David Cameron’s shake-up of banking regulation. The panel will be chaired by Bank of England Governor Mervyn King. Haldane, executive director for financial stability at the bank, said officials are still deciding what tools will be used to shield the economy from financial risks.

Haldane said lenders will welcome an end to the “Chuck Prince dynamic,” where the former Citigroup Inc. (C) Chief Executive Officer was quoted in 2007 as saying that so long as rivals were taking big risks, he would too. Haldane said the FPC may solve the problem of banks being powerless to act against the tide when the environment is “a bit on the risky side.”

The central bank will hold a press conference on June 24 to discuss the results of today’s meeting.

Spain Rejects Proposal to Reform Mortgage Foreclosures

Spain’s Parliament rejected a law that would have eased the effect of mortgage foreclosures for as many as 300,000 homeowners who have lost their properties.

The Galician National Block, known as the BNG in Spain, had asked legislators to amend the law to allow mortgage holders to walk away from their debt by handing over the keys to their properties, as well as permitting homeowners to delay mortgage payments beyond agreed-upon deadlines. Lawmakers rejected the proposals, Parliament said on its website late last night.

Under Spanish law, if a foreclosed property is sold for less than the outstanding mortgage on the asset, the bank can claim the difference from the borrower, pursuing all of a borrower’s present and future assets and earnings.

The number of foreclosed properties in Spain has climbed tenfold in three years. Spain’s Parliament has created a committee to study possible changes to the country’s mortgage rules and whether the current law allows for abusive practices, the assembly said on its website on June 8. The commission has until December to present a report on its findings.

For more, click here.

Compliance Action

JPMorgan Pays $27 Million to OCC, Clients Over Car-Loan Tactics

JPMorgan Chase & Co. (JPM) will pay a $2 million fine to the Comptroller of the Currency and $25 million to reimburse customers after using “high pressure” tactics to sell credit insurance on car loans, the regulator said.

The bank’s customer-service representatives deceived borrowers about costs and terms of credit protection offered to cover missed payments in 2008 and 2009, the OCC said in a settlement document released yesterday.

“Chase Auto used written scripts together with oral high-pressure sales tactics that included statements which were materially false, deceptive or otherwise misleading in violation of the Federal Trade Commission Act,” the regulator said in a statement.

JPMorgan didn’t admit or deny wrongdoing. In consultation with the OCC, the firm developed a plan to reimburse customers and fix deficiencies in credit protection linked to Chase auto, home and credit-card loans, the OCC said.

Kristin Lemkau, a spokeswoman for JPMorgan’s retail unit, wasn’t immediately available for comment.

Tussle Over Indonesian Agency Raises Bank Supervision Risks

A tussle between lawmakers and the government over Indonesia’s planned financial regulator has raised the risk of political interference in bank supervision, highlighting the nation’s struggle to eliminate corruption.

The Financial Services Authority parliamentary working committee, which is holding meetings this month to debate whether lawmakers can appoint two members to the nine-person board of commissioners for the agency, hadn’t reached a “compromise” as of yesterday, said Andi Rachmat, deputy chairman of the working group. The government’s proposal for the board would exclude members of parliament.

The outcome may influence the effectiveness and independence of an authority set to take over regulation of capital markets, insurers, pension funds and banks from the finance ministry and central bank.

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SEC Postpones Most Dodd-Frank Swaps Rules Scheduled for July

The U.S. Securities and Exchange Commission postponed almost all Dodd-Frank Act rules for the $601 trillion swaps market that were scheduled to take effect in mid-July.

The agency provided the delay in an order released yesterday.

The delay will give the SEC and Commodity Futures Trading Commission more time to complete rules for the market that are aimed at increasing transparency and reducing risk after largely unregulated swaps helped fuel the 2008 credit crisis.

The CFTC on June 14 proposed a six-month delay of Dodd-Frank provisions scheduled to take effect July 16. The agency’s commissioners could decide to push the deadline into 2012 if they find that more time is needed, according to the CFTC.

UBS ‘Pleased’ With Swiss Upper House Decision on Capital Rules

UBS AG (UBSN), Switzerland’s biggest bank, said it is “pleased” with the decision by the upper house of parliament June 15 to cap capital requirements at 19 percent at the group level.

The upper house is debating the government’s proposal to raise capital requirements for UBS and Credit Suisse Group AG (CSGN), the biggest Swiss banks, to avoid the need for a bailout in a crisis. The parliamentarians June 15 approved the government’s clarification that total capital needs would be capped at 19 percent of assets weighted according to the risks at the group level. The banks had said enforcing the requirement at unit level may result in higher capital needs for the groups.

A final vote in the upper house on the so-called too-big-to-fail legislation is expected for today, said parliament spokesman Mark Stucki. The proposals, which require approval from the lower house of parliament, will be debated in the next three-week session starting Sept. 12.

CFPB Bank Supervisor Says Agency Oversight Set to Start July 21

Steven Antonakes, the top bank supervisor at the Consumer Financial Protection Bureau, said oversight of banks with more than $10 billion in assets will start as planned on July 21.

He made the remarks at a conference of the American Bankers Association in Washington.

Antonakes’s unit will supervise 111 banks, thrifts and credit unions controlling about 80 percent of U.S. banking assets, about $10 trillion worth, he said. The consumer bureau will conduct “point-in-time examinations” that will last four to 12 weeks, depending on the size and complexity of the firm.

He said the supervision will continue for two years, if “the exam is clean.”

At firms with more than $100 billion in assets, there will be “continuous supervision in which we will have a presence at the institution throughout most of the year,” Antonakes said. That regular presence may include, for example, product reviews of credit cards or mortgage origination, he said.

The consumer bureau has completed the task of transferring bank examiners from other federal regulators and is wrapping up that process so it can recruit more examiners from outside the government, Antonakes said.

The agency, created by the Dodd-Frank Act, is scheduled to begin work on July 21.

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Interviews/Speeches/Testimony

Gibson, Gensler Testify On Capitol Hill About Derivatives

Michael Gibson, senior associate director of the Federal Reserve, and Gary Gensler, chairman of the Commodity Futures Trading Commission, testified about regulations on derivatives and swaps.

“The goal of all of these efforts is to develop a consistent international approach to the regulation and supervision of derivatives products and market infrastructures,” Gibson told lawmakers at a Senate Agriculture Committee hearing yesterday in Washington. “Our aim is to promote both financial stability and fair competitive conditions to the fullest extent possible.”

Brooksley Born of the Financial Crisis Inquiry Commission, Daniel Roth of the National Futures Association, Charles Conner of the National Council of Farmer Cooperatives and Adam Cooper of the Managed Funds Association were also scheduled to speak before the panel yesterday.

For the video, click here.

For more about Gibson’s testimony, click here.

Osborne to Back Vickers Plan for U.K. Retail-Bank Firebreaks

Chancellor of the Exchequer George Osborne will back proposals to erect firebreaks around the consumer-banking units of British banks as he seeks to protect taxpayers and depositors during future financial crises.

Osborne was scheduled to express his support for recommendations drawn up by the Independent Commission on Banking in April for the first time in public during his annual Mansion House speech to bankers in London yesterday evening, according to a Treasury official who declined to be named in line with government practice.

The head of the panel, John Vickers, a former Bank of England chief economist, was asked by the government last year to recommend ways to boost stability and competition in the British banking industry. The Treasury spent 65.8 billion pounds ($108 billion) rescuing Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc (LLOY) during the financial crisis.

While endorsing the principles of the proposals by Vickers’s panel, Osborne won’t give details of how much extra protection he will require for retail banks, the official said. Instead, the chancellor will wait for Vickers’s final recommendations on Sept. 12 before deciding how much extra capital the retail operations of banks should hold above the 7 percent recommended by international regulators.

Fed’s Parkinson Says High Quality Capital Should Back Surcharge

The Federal Reserve’s top banking supervisor said the largest global banks should retain an additional buffer against potential losses in the form of “high quality capital.”

The Fed and banking regulators around the world are currently discussing the size of capital cushions for the largest financial firms, considering whether that buffer should be in the form of common equity or hybrid securities.

“The Federal Reserve strongly supports such efforts to increase the level and quality of regulatory capital for our internationally active banking organizations,” Patrick Parkinson, director of the division of Banking Supervision and Regulation, said yesterday in the text of a speech in Washington.

“The additional requirement should be met with high-quality capital that can reliably absorb losses and allow the institution to remain a going concern,” he said.

For audio of Parkinson speech, click here.

Comings and Goings

Draghi Wins EU Parliament Panel Support to Be New ECB President

Bank of Italy Governor Mario Draghi won a European Parliament committee’s endorsement to succeed Jean-Claude Trichet as head of the European Central Bank.

The Parliament’s Economic and Monetary Affairs Committee yesterday in Brussels approved Draghi’s nomination to become ECB president for an eight-year term starting on Nov. 1. The full 736-seat European Union assembly is due to give its verdict on June 23.

Draghi completed a confirmation hearing before the panel yesterday.

Kenya Names Gatabaki as New Chair of Capital Markets Authority

Kenyan President appointed Kungu Gatabaki as the new chairman of the Capital Markets Authority, the regulator said. Gatabaki replaces Micah Cheserem, who resigned in January.

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

To contact the editor responsible for this report: Michael Hytha at mhytha@bloomberg.net.

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