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Self-Policing Funds, EU Auditors, Austrian Banks, UBS Fine: Compliance

The shortfall in MF Global Inc.’s U.S. segregated customer accounts may exceed $1.2 billion, more than double what was previously expected, said the trustee overseeing a liquidation of the failed brokerage.

That would mean customer accounts are missing about 22 percent of their total of $5.4 billion. A shortfall of 11 percent had been previously estimated by a person with knowledge of probes into the firm’s collapse. James Giddens, the trustee, said yesterday that forensic accountants and investigators are working “around the clock,” and the estimate may change.

Kent Jarrell, a spokes for the trustee, said Giddens’s goal is still a 100 percent return of money to fund clients “and right now we’re very close to 60 percent.”

Jarrell said the $1.2 billion estimate came from the team of accountants and investigators. The spokesman declined to comment on whether there was news as to who was responsible for the funds or how they were withdrawn or used, citing ongoing investigations from the Justice Department and other agencies.

Giddens faces requests at a hearing in Manhattan bankruptcy court today from customers who say they want an immediate return of some funds.

In its Oct. 31 bankruptcy filing, parent company MF Global Holdings Ltd. listed debt of $39.7 billion and assets of $41 billion. The firm said it had about $26 million in cash.

The brokerage case is Securities Investor Protection Corp. v. MF Global Inc., 11-02790, U.S. District Court, Southern District of New York (Manhattan). The parent’s bankruptcy case is MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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Compliance Policy

SEC to Rely More on ‘Self-Policing by Securities Firms

The U.S. Securities and Exchange Commission is realigning its inspections program to focus on hedge funds with weak compliance systems, relying on stronger firms to self-police for violations, an agency official said.

The SEC is putting “an extremely high premium” on whether firms are set up to catch their employees’ misconduct because the agency lacks resources to inspect all registered investment advisers, New York regional director George Canellos said yesterday at a Practising Law Institute conference.

About 75 New York-based examiners are responsible for 2,000 advisers with $11 trillion under management, Canellos said. To cope in the face of a congressional stalemate over funding for the agency, the SEC is focusing examinations on firms judged to be the riskiest based on an initial look at their compliance and legal infrastructure, he said.

EU Said to Reconsider Multiple-Auditor Plans Amid Cost Concerns

The European Commission may abandon plans to require auditing companies to share work with smaller rivals because of concerns over the costs of implementing the measure, according to a person familiar with the matter.

The commission is still likely to propose in its draft law that businesses should rotate the auditors they use, said the person.

The EU is reviewing audit rules following the collapse of Lehman Brothers Holdings Inc. (LEHMQ), which raised questions about “the context of the audit” of the bank, Michel Barnier, the EU’s financial services commissioner, told lawmakers last year. The top four accounting firms have a market share of about 90 percent in the majority of EU member states, according to the commission’s report last year.

The commission’s draft law is also likely to include curbs on large auditing firms’ right to offer consultancy services, although the final form of these restrictions has yet to be decided, the person said. The commission, the 27-nation European Union’s executive arm, is aiming to propose the new rules for auditors on Nov. 30, the regulator said in its statement.

Chantal Hughes, a spokeswoman for the commission in Brussels, declined to comment on possible changes to the commission’s proposals.

Taiwan Financial Supervisory Commission Amends Short Sale Rules

Taiwan amended rules to cap the daily maximum short selling of borrowed stocks at 20 percent of the average transaction volume of the past 30 trading days, from a 3 percent limit of outstanding shares per stock, the Financial Supervisory Commission said in a statement on its website yesterday.

EU’s Barnier Plans Bank-Fee Transparency Proposals Next Year

Banks may face transparency rules for the fees they charge customers, the European Union’s financial services commissioner said yesterday.

Michel Barnier told members of the European Parliament in Brussels that he’s working on proposals “for 2012.”

“I’ve called for transparency,” Barnier said. “So far I’m not very impressed with banks’ responses.”

Audit Watchdog Finds Higher Deficiency Rates at Two of Big Four

Public-company audits conducted by two of the so-called Big Four accounting firms showed greater deficiency rates last year than in previous reviews, according to findings released by a Washington-based watchdog.

The Public Company Accounting Oversight Board found flaws in 28 of 75 reviewed audits by PricewaterhouseCoopers LLP and 12 of 54 from KPMG LLP, according to inspection reports posted to the PCAOB website yesterday. Both totals reflected increases from previous years, according to PCAOB data.

PwC “failed to obtain sufficient appropriate audit evidence to support its audit opinion” in some cases, and KPMG neglected “to identify, or to address appropriately, financial statement misstatements, including failures to comply with disclosure requirements,” according to the reports, which were based on inspections conducted last year.

On Oct. 17, the PCAOB issued its first public report of unresolved deficiencies against one of the Big Four, saying Deloitte & Touche LLP repeatedly failed to support assumptions in audits examined in a 2007 inspection and hadn’t fixed the problems in its allotted time. Firms have at least a year to respond to concerns raised in the inspections, and if they do so, no further reports are released.

Compliance Action

Austria Tells Banks to Rely on Local Funds for East Europe Loans

Austrian banks will have to curb new loans in eastern Europe, where they are among the biggest lenders, under rules imposed by Austrian authorities seeking to protect the country’s AAA credit rating.

Erste Group Bank AG (EBS), Raiffeisen Bank International AG (RBI) and UniCredit SpA (UCG)’s Bank Austria AG, Austria’s and eastern Europe’s biggest lenders, will be prevented from loaning significantly more than they raise in local deposits in countries such as Hungary, Romania and Ukraine starting next year, the Austrian central bank said in a statement yesterday. That would limit their ability to fund local units with loans from the parent company.

Austrian banks have loaned $266 billion to borrowers in the formerly communist parts of Europe, the most of all countries reporting to the Bank for International Settlements and equivalent to about 70 percent of Austria’s gross domestic product. Those numbers don’t include the investments of Vienna- based Bank Austria, which are attributed to Italy.

Western European banks, which own about three-quarters of the banking assets in the former communist nations in Europe, have funded loans in many countries with money from their home bases. This allowed banks to lend more than they raise in local deposits in Eastern Europe, boosting credit growth in some countries.

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Ex-UBS Wealth CEO Was ‘Confused’ Over FSA Attempt to Fine Him

The former chief executive officer of UBS AG (UBSN)’s wealth- management unit in the U.K. said he was “confused” by the British finance regulator’s attempt to fine him for failing to prevent unauthorized trading.

John Pottage, now an executive at the lender’s headquarters in Zurich, said at a court hearing yesterday, where he is challenging the 100,000-pound ($157,000) fine, that he thought the Financial Services Authority didn’t understand his role at the bank. During a 2009 meeting with the regulator, Pottage said he was “concerned that the interviewer thought the CEO was a fully empowered individual.” He also said at the meeting that he didn’t have a position of influence and wasn’t a line manager until mid-2008, according to his testimony yesterday.

The regulator fined the bank in 2009 for not preventing international wealth-management employees from making as many as 50 unauthorized trades a day with funds from at least 39 customer accounts. UBS has had to pay $42 million to compensate customers for losses incurred.

The regulator said it intends to fine Pottage for not ensuring the division had systems and controls in place to prevent the trades. Pottage said in court papers he worked to improve systems and controls at the unit when he started as CEO in September 2006 and doesn’t deserve a fine.

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EU Gives Hungary 10 Weeks to Address FX Loan Law Concerns

The European Commission gave Hungary 10 weeks to respond in a mediation procedure on a dispute over a law that forces the conversion of foreign currency loans below market prices.

The deadline is in January, Chantal Hughes, spokeswoman for EU Financial Services Commissioner Michel Barnier, said yesterday.

Hungarian households are struggling to repay foreign- currency mortgages, which account for more than two-thirds of housing loans, after a slump in the forint boosted repayments and triggered defaults. Lawmakers on Sept. 19 voted to allow the early repayment of mortgages denominated in euros and Swiss francs at more than 20 percent below market rates, forcing lenders to swallow losses.

Domestic banks turned to the Constitutional Court over the repayments. The European Central Bank said Nov. 8 that the plan may “substantially weaken” financial stability and poses risks to public finances.

Turkey Regulator Investigates 12 Banks on Interest Rates

Turkey’s antitrust regulator started an investigation into 12 banks on suspicion of collaborating in setting rates on loans and deposits.

The investigation involves a possible breach of regulations that protect competition, a spokesman for the regulator in Ankara said on the usual condition of anonymity by phone yesterday.

The probe involves possible breaches by Akbank TAS (AKBNK), Denizbank AS, Finansbank AS, HSBC Bank AS (HSBA) and ING Bank AS. The regulator is also investigating Turk Ekonomi Bankasi AS (TEBNK), Turkiye Garanti Bankasi AS (GARAN), Turkiye Halk Bankasi AS (HALKB), Turkiye Is Bankasi AS (ISCTR), Turkiye Vakiflar Bankasi TAO (VAKBN), Yapi & Kredi Bankasi AS and TC Ziraat Bankasi AS, according to a statement on its website yesterday.

The probe may be done within a year, CNBC-e television said, citing Nurettin Kaldirimci, chief of the regulator.

China Fines Some Insurers for Non-Compliant Brokerage Businesses

China’s insurance regulator fined insurers including Ping An Insurance Group Co. (2318)’s Henan unit and China Life Insurance Group Co. (2628)’s units in Inner Mongolia for non-compliant brokerage activities.

Ping An’s Henan unit was fined 600,000 yuan and China Life’s two units in Inner Mongolia were fined a combined 350,000 yuan, according to a statement on the China Insurance Regulatory Commission’s website yesterday.

Olympus Adviser Shut Brokerage After SEC, FINRA Inspection

Axes America LLC, the now-defunct brokerage firm that advised Olympus Corp. in a transaction being investigated by the FBI, ceased operations in March 2008 soon after U.S. regulators began examining its books, records show.

Beginning in 2006, New York-based Axes America served as adviser to Olympus in its $2.1 billion acquisition (7733) of Gyrus Group Plc, a British medical device manufacturer, in 2008. PriceWaterhouseCoopers LLP, which examined the transaction for the Olympus board, reported last month that the Tokyo-based company paid $687 million in fees to Axes America and a related Cayman Islands fund, Axam Investments Ltd.

Olympus, which subsequently said it paid inflated fees to advisers to hide losses, is under investigation in the U.S., U.K. and Japan.

Axes America disclosed in a Feb. 28, 2008, filing with the U.S. Securities and Exchange Commission that the SEC had examined its books and records in November 2007 and FINRA -- the Financial Industry Regulatory Authority -- had done so in January 2008. The firm described both actions as “routine” and said it was “confident of a favorable outcome.”

Axes withdrew its registration as a broker-dealer on March 5, 2008 -- six days after its disclosure of the SEC and FINRA reviews, according to SEC records.

Investigators including the Federal Bureau of Investigation and the SEC have begun an examination of the Gyrus deal and three other acquisitions by Olympus, according to a person familiar with the matter.

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U.K. Watchdog Fines Former Dynamic Decisions Compliance Officer

The Financial Services Authority fined Sandradee Joseph, the former compliance officer at Dynamic Decisions Capital Management, 14,000 pounds ($22,000) for breaking U.K. rules.

The fund lost about 85 percent of its total assets under management in the wake of the collapse of Lehman Brothers Holdings Inc. in 2008. The firm invested in a bond of “doubtful provenance and legitimacy” to conceal the losses, according to investors cited in the FSA’s report. Joseph failed to respond to clients’ concerns that the product breached their risk rules.

The firm’s main hedge fund, with a net asset value of $550 million at the end of 2008, was liquidated in the Cayman Islands in 2009 after investors raised questions about some of its holdings. The FSA said Joseph agreed to settle during the course of the FSA investigation and qualified for a reduction on her financial penalty, reducing it from 20,000 pounds.

FSA Tests Bank Readiness for Hackers, U.K. Olympic Travel Chaos

U.K. banks face a day of disaster today, as part of a simulation led by the Financial Services Authority to test firms’ responses to a cyber-attack on payment systems and travel chaos during the London 2012 Olympic Games.

The FSA was to contact 87 firms, beginning the exercise at 8 a.m. The drill includes a simulated computer-hacking attack on the financial system which disrupts communications and Internet access as well as wholesale- and retail-payment systems. The FSA also tested banks’ ability to deal with travel disruptions that leave employees unable to get to work. The Bank of England and U.K. Treasury also took part.

Five thousand bank employees battled against imaginary floods, “structural damage to office buildings” and “flying debris,” as part of the FSA’s 2009 exercise, according to the watchdog’s report on the results in February 2010. The regulator examined lenders’ emergency plans to handle severe weather conditions leading to power, travel and communication outages.

The watchdog will publish a report in February on how well firms performed in today’s test.

Courts

Ex-Schwab Executive to Pay $150,000 in SEC YieldPlus Case

Ex-Charles Schwab Corp. (SCHW) investment company manager Randall Merk agreed to pay a $150,000 civil fine to resolve a U.S. Securities and Exchange Commission lawsuit accusing the company of misleading investors in its YieldPlus fund.

Merk and another Schwab executive misrepresented to investors that the fund was comparable to a cash investment and only slightly riskier than a money market fund, the SEC said in its complaint filed in federal court in San Francisco in January.

The YieldPlus Fund fell to $1.8 billion in assets in 2008 from a peak of $13.5 billion in 2007 after deviating from its stated policy by investing more than 25 percent of fund assets in private-issuer, mortgage-backed securities, the SEC said.

Merk, who left Schwab this year, didn’t admit wrongdoing, according to a filing yesterday. Steven Goldberg, a spokesman for Merk, declined to comment on the settlement.

Schwab, based in San Francisco, agreed to pay $119 million to resolve the SEC lawsuit and $235 million to settle investor lawsuits.

The case is SEC v. Merk, 11-00137, U.S. District Court, Northern District of California (San Francisco).

Ex-UBS Trader Adoboli Given One-Month Delay to Offer Plea

Kweku Adoboli, a former UBS AG trader, was given a four- week delay to enter a plea to charges he caused the largest unauthorized trading loss in U.K. history.

Adoboli was remanded into custody at a hearing in London today until another hearing, around Dec. 20. The 31-year-old, who holds a Ghanaian passport, didn’t apply for bail when he appeared at Southwark Crown Court in London.

His legal team said it needs more time to prepare.

Adoboli has been in custody since Sept. 15 when UBS asked London police to arrest him for causing a $2.3 billion loss. The case led to the departures of Chief Executive Officer Oswald Gruebel and the co-heads of the Swiss bank’s global equities business. UBS has also said it suspended some front office staff pending further discipline.

British and Swiss finance regulators are investigating the control failures at UBS that allowed the unauthorized trades to go undetected.

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Interviews/Speeches

Brad Hintz Says Volcker Rule May Hit Managing Directors

David Pearl, co-chief investment officer at Epoch Investment Partners Inc., and Brad Hintz, an analyst at Sanford C. Bernstein & Co., talked about corporate finance, balance sheets and government financial regulations. In particular, Hintz talked about the impact of the Volcker Rule.

“It’s going to disproportionately fall on the managing directors. They get a disproportionate amount of the compensation,” Hintz said in the interview. “Volcker regulations as they came out fundamentally kill the corporate bond market as it currently exists within the United States.”

Hintz and Pearl spoke with Tom Keene on Bloomberg Television’s “Surveillance Midday.”

For the video, click here.

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

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

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