Canada Regulator Decision, Volcker Rule, BNY Mellon Settles: Compliance

The Supreme Court of Canada ruled that Finance Minister Jim Flaherty’s proposal to create a national securities regulator is unconstitutional, arguing that the federal government overstepped its authority into provincial jurisdiction.

The nine members of the country’s highest court said in its unanimous opinion that the federal government’s proposal “overreaches genuine national concerns.”

While the “economic importance and pervasive character of the securities market” may support federal action, it doesn’t “justify a wholesale takeover of the regulation of the securities industry,” the court said yesterday in Ottawa.

Canada is the only industrialized country in the world without a national securities regulator. Flaherty had pushed for a single model, saying the current system of 13 provincial agencies is more costly and reduces the country’s ability to regulate the securities industry.

The government will “respect” the ruling, a spokesman for Flaherty said after the opinion was released.

“It is clear we cannot proceed with this legislation,” Chisholm Pothier, Flaherty’s director of communications, said in an e-mail. The government will review the opinion “carefully and act in accordance with it.”

Flaherty proposed legislation last year to create a national agency and sought the court’s opinion on whether it was constitutional. The case turned on whether the federal government has the authority to create a national regulator under a section of the Canadian constitution that gives Parliament the power to regulate “trade and commerce.”

Provinces that opposed the plan, such as Alberta, Quebec and Manitoba, argued it encroached on the constitutional right of provinces to regulate local matters and industries within their borders.

Ontario, home to the Ontario Securities Commission and the Toronto Stock Exchange, has been supportive of a single regulator. Its Minister of Finance Dwight Duncan said in a statement he remains committed to pursuing a national securities regulator.

The court said in its opinion that Canada may still adopt a “cooperative approach” that recognizes the provincial nature of securities laws while addressing national concerns.

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Compliance Policy

U.S. Regulators Extend Comment Period on Volcker-Rule Proposal

U.S. regulators will extend the comment period for the so- called Volcker rule, giving lawmakers and banks more time to seek changes in the proposed ban on proprietary trading, said a government official familiar with the process.

The comment deadline, initially set for Jan. 13, will be pushed back 30 days to Feb. 13, said the official, who declined to be identified because the decision isn’t public. The change may extend the comment period until a vote by the Commodity Futures Trading Commission, the last of five agencies required to approve the Dodd-Frank Act measure. CFTC Chairman Gary Gensler said on Dec. 20 that the vote may come next month.

The proposed rule, named for former Federal Reserve Chairman Paul Volcker, was included in the regulatory overhaul to rein in risky trading by banks that benefit from deposit insurance and Fed borrowing privileges. The Fed, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Securities and Exchange Commission released a joint notice of proposed rulemaking in October.

The rule goes “significantly beyond congressional intent,” and will make it difficult for banking entities to manage risk prudently, Representative Randy Neugebauer said, a Texas Republican, said in a letter yesterday urging a delay that was signed by 121 House lawmakers, including four Democrats.

Neugebauer sought a 30-day extension and an interim proposed rule reflecting comments from banks and the CFTC.

The proposed rule would ban banks from making trades for their own accounts while allowing them to continue short-term trades for hedging or market-making. It also would limit banks’ investments in private-equity and hedge funds.

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Hungary Suffers Second Downgrade to Junk as IMF Talks Stall

Hungarian Prime Minister Viktor Orban’s drive to consolidate power at the cost of delaying an International Monetary Fund bailout prompted Standard and Poor’s to become the second ratings company in a month to downgrade the country’s debt to junk.

Proposed changes to Hungary’s central bank laws are complicating financing aid talks.

Hungary’s sovereign-credit ratings were cut one step to BB+ from BBB-, S&P, which had rated the eastern European nation at investment grade since 1996, said Dec. 21 in a statement, assigning a negative outlook. Moody’s Investors Service lowered its assessment to Ba1, the highest junk grade, on Nov. 24, while Fitch Ratings has assigned its lowest investment grade, BBB-.

Lawmakers are scheduled to approve changes to a draft central bank law today and pass the bill next week, which the European Central Bank said yesterday may “undermine” monetary policy independence. The IMF and the European Union cited the draft for breaking off financing talks with Hungary last week. IMF backing would bolster policy credibility, S&P said.

The European Commission hasn’t decided on whether to resume financial aid talks with Hungary, the EU executive’s representative in Budapest, Tamas Szucs, said in an e-mail yesterday. Earlier in the day yesterday, Olivier Bailly, a spokesman for the Commission, told reporters in Brussels that preliminary formal discussions over an aid package will begin in January.

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U.K. Treasury Plans Curbs on Excessive Credit-Card Charges

The British Treasury plans to stop airlines, retailers and other companies from levying excessive fees on customers paying with credit and bank cards by limiting the amount they charge to the cost of the transaction.

The Office of Fair Trading, the U.K.’s antitrust regulator, said in June that the law should be changed. A three-month investigation found evidence of “drip pricing” surcharges that cost U.K. consumers 300 million pounds ($470 million) in 2009 in the airline industry alone, the OFT said.

The Treasury will consult business and consumer groups and plans to have legislation in place by the end of next year, according to today’s statement.

Which?, a consumer-rights group, said in a statement that the move will be a “huge victory” for shoppers and called on companies to “be up front” about charges immediately and not wait for legislation. Which? filed a so-called supercomplaint with the OFT in March about the practice, singling out taxi services and low-cost airlines as surchargers.

Compliance Action

Bank of New York Mellon Settles Auction-Rate Investigation

Bank of New York Mellon Corp. (BNY) will pay $1.3 million to New York, Texas and Florida to resolve a probe into manipulative trading of auction-rate securities.

The joint investigation by the Texas State Securities Board, the Florida Office of Financial Regulation and New York Attorney General Eric Schneiderman was tied to the actions of Mellon Financial Markets as an intermediary broker on behalf of Citizens Property Insurance Corp. of Florida, according to statements from Schneiderman’s office and the Florida and Texas agencies. The settlement includes penalties, fees and costs.

Auction-rate securities are municipal bonds, corporate bonds and preferred stocks whose rates of return are periodically reset through auctions. The market for the securities collapsed in February 2008 after major dealers withdrew their support for the auctions, causing most of them to fail.

“BNY Mellon Capital Markets is pleased to have resolved this matter, which centered on the isolated conduct of three individuals who are no longer with the company,” Ron Sommer, a Bank of New York Mellon spokesman, said in an e-mailed statement.

Mellon Financial Markets was a separate financial entity at the time the activity occurred, the Texas agency said.

Citizens Property Insurance didn’t immediately respond to a telephone message seeking comment on the settlement.

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Hedge Fund Centaurus Fined for Violating Gas Position Limits

Centaurus Energy Master Fund LP, a Houston-based energy hedge fund run by former Enron Corp. trader John Arnold, was fined $75,000 by the New York Mercantile Exchange for violating position limits in natural-gas trading.

CME Group Inc. (CME), owner of the Nymex, ordered Centaurus on Jan. 21 not to increase its short position in natural gas futures for May delivery, CME said in a disciplinary notice yesterday. Five days later, the fund violated the limit, its fourth position-limit infraction in 24 months and a breach of a Jan. 6 cease-and-desist order from the exchange, CME said.

Centaurus neither admitted nor denied wrongdoing, CME said. Arnold didn’t immediately respond to an e-mail seeking comment.

The Centaurus Energy Master Fund, founded in 2002, has $5 billion under management, Arnold told regulators in August 2009.

Sen. Brown Calls for Fannie, Freddie Probe: Boston Herald

Sen. Scott Brown, a Massachusetts Republican, called for a criminal investigation into Federal National Mortgage Association (FNMA) and its executives in a letter to Attorney General Eric Holder, SEC Commissioner Mary Schapiro, the Boston Herald reported.

The current lawsuit doesn’t go far enough, Brown said in the letter, referring to a lawsuit commenced last week by the Securities and Exchange Commission against former Fannie Mae Chief Executive Officer Daniel Mudd and Ex-Freddie Mac Chief Executive Richard Syron, according to the newspaper.

U.S. Clears NYSE-Deutsche Boerse Deal With Direct Edge Sale

NYSE Euronext’s (NYX) acquisition by Deutsche Boerse AG was cleared by the U.S. Department of Justice, putting the transaction in the hands of European antitrust authorities who have resisted approval.

U.S. regulators, who in May blocked Nasdaq OMX Group Inc. (NDAQ) from pursuing a hostile bid for the New York Stock Exchange owner, agreed yesterday to allow the purchase by Frankfurt-based Deutsche Boerse as long as the company sells its 31.5 percent stake in another U.S. equity market, Direct Edge Holdings LLC.

Scrutiny of the proposed acquisition has been greater in Europe, where the merger would unite the region’s two biggest derivatives exchanges, NYSE’s Liffe and Deutsche Boerse’s Eurex. In the U.S., trading in interest-rate, agricultural and commodity futures is dominated by one company, CME Group Inc., after it merged with the Chicago Board of Trade in 2007 and the New York Mercantile Exchange in 2008.

Deutsche Boerse agreed to acquire NYSE Euronext on Feb. 15, creating the world’s biggest stock exchange operator, for stock worth $9.53 billion. The value of the acquisition has fallen to less than $7 billion as stocks around the world tumbled.

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Courts

SEC Says Judge Orders Executive to Pay $49.5 Million

The U.S. Securities and Exchange Commission said a federal judge ordered Alfred S. Teo Sr. and a trust he controlled to pay $49.5 million for lying in SEC filings about his ownership of Musicland Stores Corp. stock.

U.S. District Court Judge Susan D. Wigenton issued the final judgment in the case Dec. 21, the SEC said in a statement.

In May, a jury returned a verdict finding Teo liable for securities fraud and disclosure violations on all counts against him.

Interviews/Speeches

Wallison Says Fannie, Freddie Deceit Fueled 2008 Crisis

Peter Wallison, co-director of financial policy studies at the American Enterprise Institute, talked about the Securities and Exchange Commission’s against former Fannie Mae Chief Executive Officer Daniel Mudd and Ex-Freddie Mac (FMCC) Chief Executive Richard Syron for understating by hundreds of billions of dollars the subprime loans held by the firms.

He spoke with Lisa Murphy on Bloomberg Television’s “In the Loop.”

For the video, click here.

ESRB’s King Says Banks Must Have Range of Contingencies

European Systemic Risk Board Vice Chairman and Bank of England Governor Mervyn King spoke at an ESRB news conference in Frankfurt about risks facing Europe’s banking system and liquidity measures.

Andrea Enria, chairman of the European Banking Authority, also spoke.

For the video, click here.

Juncker Comments on European Rating Agency, Transaction Tax

Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said he’s in favor of creating a European rating agency and is “having some discussions on this.”

He made the remarks today on Luxembourg DNR radio.

“But one shouldn’t think that a European rating agency, because it’s European, will come to the conclusion that we don’t have any problems in the euro area,” Juncker said during the radio interview. “Even if I am critical toward rating agencies, not everything they say is wrong.”

“A European rating agency would maybe be more tactful concerning the moment it chooses to give a warning, but not necessarily completely different in its estimation,” he said. “What disturbed me with the rating agencies this year is that they always came out with their warnings just when a country decided in its parliament to take economy measures, just before an important meeting, two days after an important meeting happened.”

Juncker, who leads the group of euro-area finance ministers, also said the 17 euro-region countries may succeed in imposing a tax on financial transactions.

“I would of course like that such a financial transaction tax would be introduced worldwide,” Juncker said during the radio interview. “But we haven’t managed to do that.”

Alternatively, he suggested a transaction tax at the level of the 27 EU countries or the 17 euro countries.

Comings and Goings

Lehman Banker, Budget Expert Picked to Steer Spain’s Economy

Spanish Prime Minister Mariano Rajoy named a former Lehman Brothers Holdings Inc. banker and a budget professor as his finance chiefs, tasking them with overhauling an economy that risks being engulfed by the debt crisis.

Luis de Guindos, former deputy finance minister and head of Lehman in Iberia, was sworn in as minister for economy and competition yesterday. Cristobal Montoro, budget minister when the People’s Party was last in power, returns to the same post with further responsibility for public administration. Rajoy created the roles to replace Elena Salgado, who did both jobs in the last government as well as being deputy prime minister.

Spain’s financing costs last month approached the level that pushed Greece, Ireland and Portugal to seek bailouts, and the European Commission expects the nation to miss its budget goal this year.

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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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