UCITS-Depositary, Glaxo’s $3 Billion, Libor: Compliance

The European Union will unveil tougher rules for banks that safeguard investment funds’ assets as part of a push to prevent a fraud similar to the Ponzi scheme orchestrated by Bernard Madoff.

The European Commission, the 27-nation EU’s executive arm, will publish the measures today in a package of draft laws on retail financial services, according to a statement on the authority’s website. The proposals will include pay rules for managers of EU-regulated funds known as UCITS.

The EU’s proposal will set how banks and other depositary institutions should carry out their safe-keeping and oversight duties, as well as establishing common rules on liability. It would also ensure that national regulators have the power to impose fines and other sanctions on funds and depositaries that break the rules.

Madoff, 74, pleaded guilty in 2009 to orchestrating what prosecutors called the biggest Ponzi scheme in history and is serving a 150-year sentence in U.S. federal prison. The fall-out of the fraud included the liquidation of four UCITS funds, a type of investment vehicle targeted at retail investors that is allowed to operate across the EU.

Luxembourg has been the center of more than 100 lawsuits over Madoff-related funds. The country is the second-largest mutual fund market after the U.S.

The plans must be approved by national governments and by lawmakers in the European Parliament before they can enter into force.

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Compliance Policy

Libor Changes May Boost Costs for Borrowers, Credit Suisse Says

Millions of households and businesses may pay more to borrow under proposed changes to Libor, the benchmark interest rate at least a dozen banks are being investigated for manipulating, Credit Suisse AG (CSGN) analysts said.

U.K. regulators are working on plans to overhaul the London interbank offered rate, the reference rate for $500 trillion of contracts from mortgages to student loans.

Changes such as increasing the number of banks that contribute to Libor would add 15 basis points to the interest payments on financial contracts that reference Libor, Credit Suisse analysts led by Michael Chang said in a note to clients.

Barclays, the U.K.’s second-largest lender, was fined a record $451 million and its top executives agreed to forgo bonuses after investigators found traders and senior managers “systematically” tried to rig the Libor and Euribor, its equivalent in euros.

The British Bankers’ Association, which has overseen Libor for 26 years, is working with the government and the U.K. regulator to restore credibility to the rate and eliminate the likelihood of manipulation. Options include increasing the number of banks on the panel to more than 30, the Credit Suisse analysts said. That would push the rate higher because smaller, less creditworthy banks would contribute to the rate for the first time, they said.

Another option would be to base the rate on actual trades, although that remains “highly unlikely,” the analysts said, because some banks rarely borrow cash at some maturities.

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Finra Lets Parties Bypass Arbitration Rules Under Pilot Program

The Financial Industry Regulatory Authority, which oversees brokerages and exchange markets in the U.S., has begun a pilot program that lets parties bypass “certain Finra arbitration rules,” according to a statement on its website.

The pilot program, which is voluntary, started yesterday, Finra said in the statement. It is aimed at cases involving claims of $10 million or more. To be eligible, parties must pay for any additional program costs and must be represented by counsel, according to the statement.

U.K. Banks Limit Fees on Structured Products Before FSA Rules

U.K. banks are withdrawing commission payments to independent financial advisers that are typically included in structured products sales agreements before new rules forbidding the practice.

Barclays Plc (BARC) offered four securities tied to the performance of the FTSE 100 index last week that will be distributed via advisers and investors were given the choice to pay for the advice via a separate fee or have commission included in the price of buying the products, according to an offer document.

The so-called autocall notes come six months before the Financial Services Authority’s Retail Distribution Review is due to be implemented, affecting how advisers make and disclose charges. A degree of uncertainty remains about how fees will be paid, even though the FSA’s drive for greater transparency on pricing is not in dispute, said Jamie Smith, chairman of the U.K. Structured Products Association.

Clare Murphy-McGreevey, a spokeswoman for the FSA in London said following a consultation with the market earlier this year, investors can pay adviser charges directly or can agree that an adviser charge can be deducted from the investment.

Special Section: Libor Probe

Diamond Quits Barclays Amid Libor-Manipulation Scandal

Robert Diamond, the architect of Barclays Plc’s investment banking expansion, stepped down as chief executive officer after the bank admitted to rigging global interest rates. Mark Barton and Caroline Hyde report on Bloomberg Television’s “Countdown.”

This was a turnabout from the position taken yesterday, in which he had defied demands that he step down.

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Yesterday, Diamond defied pressure to quit after the bank was fined for rigging interest rates, saying he has the “full support” of directors.

Diamond had written in a letter to employees yesterday that the rate-rigging events were not representative of the bank’s culture and it is his responsibility to “get to the bottom of that and resolve it.”

He made the comments after Marcus Agius resigned as chairman in a bid to shield Diamond after the bank was fined a record 290 million pounds ($451 million). British lawmakers were pushing for his resignation after U.K. and U.S. regulators found the lender “systematically” attempted to rig the London and euro interbank offered rates for profit. Diamond has been called to appear before British lawmakers on the Treasury Select Committee on July 4 and Agius the day after.

Michael Rake, who was named deputy chairman, will oversee an inquiry into the bank’s business practices, the lender said yesterday.

Diamond had pledged to bolster the controls surrounding the firm’s Libor submissions and take “appropriate action” against those involved with rigging the benchmark interest rate. That includes clawing back compensation and asking people to resign, he said.

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Separately, investigations into banks’ attempted manipulation of Libor are at various stages “reflecting the cooperation of firms and their willingness to settle,” Adair Turner, chairman of the U.K. Financial Services Authority, said today in London. In addition, Prime Minister David Cameron yesterday announced a parliamentary inquiry into the U.K. banking industry after Barclays Plc was fined and Agius resigned.

Cameron set the inquiry a year-end deadline for reporting, so that its recommendations can be incorporated into the bill on overhauling bank regulation that will be submitted to Parliament in January.

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Turner said in a speech today that banks must purge a culture of “cynical entitlement” after the Libor scandal that led to Diamond’s Turner’s resignation. Turner added that the FSA’s probes into the London interbank offered rate requires significant resources and caused a huge blow to the reputation of the nation’s banking industry.

His comments come hours after Diamond, the lender’s chief executive officer, stepped down following the bank’s admission that it submitted false Libor rates to benefit derivatives trades and bolster its own positions.

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SVM’s McLean Sees Regulators Tainted in Libor Inquiry

Colin McLean, chief executive officer of SVM Asset Management, talks about the resignation of Barclays Plc CEO Robert Diamond and the regulation of the U.K.’s financial services industry.

He speaks with Mark Barton on Bloomberg Television’s “Countdown.”

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Osborne Says SFO Seeing if Libor Charges Can Be Brought

U.K. Chancellor of the Exchequer George Osborne spoke in the House of Commons in London yesterday about the Serious Fraud Office’s investigation into whether criminal charges can be brought over the Libor-rigging scandal, fines paid by financial- services firms and regulation of the London interbank offered rate.

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Fed’s Hawks, Doves Fighting ‘Civil War,’ Blinder Says

Former Federal Reserve Vice Chairman Alan Blinder, an economics professor at Princeton University, talked about the investigation into manipulation of the London interbank offered interest rate, or Libor, system and the outlook for Fed monetary policy and the U.S. economy.

Blinder spoke with Erik Schatzker and Scarlet Fu on Bloomberg Television’s “Market Makers.”

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Compliance Action

Google Makes Concessions to EU Regulators to End Antitrust Probe

Google Inc. (GOOG) offered concessions to European Union regulators in an effort to end an antitrust investigation that the operator of the world’s largest search engine discriminates against rivals.

Google Executive Chairman Eric Schmidt sent EU antitrust chief Joaquin Almunia a letter responding to the probe, the EU said in a statement. The settlement offer addresses the “four areas the European Commission described” as potential concerns, Google spokesman Al Verney said in a separate e-mail. Details of the proposals weren’t disclosed.

Almunia in May asked Google to make an offer to settle concerns that it promotes its own specialist search services, copies rivals’ travel and restaurant reviews, and that agreements with websites and software developers stifle competition in the advertising industry. He said last month that he would send Google a formal antitrust complaint if the company’s proposal was unsatisfactory.

Google, based in Mountain View, California, is under growing pressure from global regulators probing whether the company is thwarting competition in the market for Web searches.

German Free Voters Unite With Euro Skeptics in Bid to Block ESM

Germany’s Free Voters party, a grassroots movement that has formed a stronghold in the state of Bavaria, is joining forces with euro skeptics seeking to block the currency area’s permanent bailout fund through the courts.

Hubert Aiwanger, the party’s chairman, said yesterday that he backs complaints filed on June 29 at the Karlsruhe-based Federal Constitutional Court against the European Stability Mechanism.

Even if the complaint fails, the Free Voters plan to run in the fall 2013 federal elections, Aiwanger said. The third- strongest party in Bavaria’s parliament will seek to derail ESM aid, provided the party clears the 5 percent hurdle required in Germany for parliamentary representation, he said.

Germany’s top court has limited Chancellor Angela Merkel’s discretion in EU bailout policies in at least three rulings.

German lawmakers and a democracy group filed suits challenging the country’s participation in Europe’s fiscal pact and the permanent bailout fund after parliament approved the measures last week. The cases are holding up German ratification of the two measures.

Nomura Dropped From DBJ Bond Sale Due to Insider Leak Case

Nomura Holdings Inc. (8604), Japan’s biggest brokerage, was dropped as a lead underwriter for state-owned Development Bank of Japan Inc.’s bond sale this month because of its involvement in leaking insider information.

Nomura was replaced by Mitsubishi UFJ Morgan Stanley Securities Co. on the deal, according to a faxed statement from Mizuho Securities Co. today. DBJ, which had said in May that it had hired Tokyo-based Nomura as well as Daiwa Securities Group Inc. (8601) and Mizuho Financial Group Inc., today said it made the change to avoid “any disruption” to the offering.

The lost mandate may increase pressure on Nomura Chief Executive Officer Kenichi Watanabe to take more steps to restore clients’ confidence after employees gave out information ahead of transactions managed by the bank in 2010. Nomura last week said it will cut top executives’ pay and suspend some operations amid a government crackdown on insider trading.

Keiko Sugai, a Tokyo-based spokeswoman for Nomura, declined to comment. DBJ hasn’t decided how much to raise from selling the three- and five-year bonds, Daisuke Inaba, a Tokyo-based spokesman for DBJ, said by telephone today.

Regulators are yet to complete their inspection of Nomura. The brokerage concluded an internal investigation on June 29.

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Courts

Glaxo to Plead Guilty, Pay $3 Billion in Marketing Accord

GlaxoSmithKline Plc (GSK) agreed to plead guilty and pay $3 billion to resolve criminal and civil allegations that it illegally promoted prescription drugs and failed to report safety data, the U.S. said.

The settlement, the largest-ever in a largest health-care fraud case in the U.S., includes a criminal fine of $956.8 million, the Justice Department said yesterday. London-based Glaxo will also forfeit $43 million, the U.S. said.

GSK will plead guilty to marketing the drugs Paxil and Wellbutrin for uses not approved by the U.S. Food and Drug Administration and for failing to report clinical data on Avandia, federal prosecutors said. The company has agreed to admit to the charges, which are misdemeanors, according to filings yesterday by the U.S. in federal court in Boston.

Glaxo, the U.K.’s largest drugmaker, last year set aside 2.2 billion pounds ($3.5 billion) to cover the cost of the settlement, which resolves a seven-year investigation of the company’s marketing practices for the three drugs.

The settlement “brings to resolution difficult, long- standing matters for GSK,” Chief Executive Officer Andrew Witty said yesterday in a statement. “Whilst these originate in a different era for the company, they cannot and will not be ignored.”

Yesterday’s agreement includes a $300 million civil settlement for failing to provide best prices and underpaying rebates owed under the Medicaid drug program. GSK doesn’t admit wrongdoing on pricing practices, the company said.

The case is U.S. v. GlaxoSmithKline LLC, 12-10206, U.S. District court, District of Massachusetts (Boston).

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Judge Strikes Down Rule, Restoring Funds To For-Profit Colleges

A U.S. judge struck down regulations the day before they were to take effect that could have cut off federal money to for-profit colleges.

The Obama administration has said it’s seeking to protect taxpayers from loan defaults and stop students from taking on debt for degrees that don’t pay off with higher incomes. The for-profit college industry lobbied against the rules, saying they would reduce access to higher education for working adults and military veterans.

U.S. District Judge Rudolph Contreras in Washington held in a June 30 opinion that the requirement that at least 35 percent of a school’s graduates be repaying their loans for a college to qualify for federal funds wasn’t based on enough facts to survive a challenge as arbitrary under the law.

Contreas sent the matter back to the administration for reconsideration of the rules.

Peter Cunningham, a spokesman for the Department of Education, said yesterday in an e-mailed statement the ruling upholds its ability to regulate such schools. Contreras said the U.S. can require institutions to tell students graduation and placement rates, and disclose students’ median debt-load.

The case is Association of Private Colleges and Universities v. Arne Duncan, 11-cv-01314, U.S. District Court for the District of Columbia (Washington).

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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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