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SEC Muni Rule, Peru’s Market, DOJ Ethics: Compliance

Dec. 27 (Bloomberg) -- The U.S. Securities and Exchange Commission approved a rule barring financial advisers to state and local governments from engaging in deceptive practices, one of the first steps to regulate the business.

The decision applies the Municipal Securities Rulemaking Board’s so-called fair dealing rule to those advising officials who oversee debt issuance and investments. It bars deceptive, dishonest or unfair practices by bond dealers. The change takes effect immediately, the board said Dec. 23 in a statement.

The rulemaking board gained power over the previously unregulated consultants with the passage of the Dodd-Frank law. Such advisers once recommended derivative trades known as swaps that proved costly when the 2008 financial crisis struck, and several face charges for conspiring with bankers to make local governments pay above-market rates for investments purchased with money raised with municipal bonds.

Rules made by the industry’s self-regulatory organization, based in Alexandria, Virginia, are subject to SEC review and approval.

Compliance Policy

Basel Holdings Rules May Kill Danish Bonds: Credit Markets

Denmark says the Basel Committee on Banking Supervision’s rules will force the country’s lenders to dump top-rated mortgage debt to meet new requirements on holdings and may destroy the world’s third-biggest covered-bond market.

The Nordic country is planning to challenge the rules, published on Dec. 16, and Economy Minister Brian Mikkelsen has already taken Denmark’s grievances to the European Commission. The government and the country’s lenders are now waiting to see how much the European Union will change the rules as they’re put into effect next year. The final deadline for enforcement is 2015.

Denmark’s lenders, which hold more than half the country’s $490 billion of mortgage bonds, would be forced to sell off holdings to comply with Basel’s 40 percent cap on using the securities as liquid assets, Ane Arnth Jensen, director of the Copenhagen-based Association of Danish Mortgage Banks, said in a Dec. 21 interview.

Basel, which says the rule will provide lenders with more liquid assets to guard against times of financial stress, doesn’t place any limit on sovereign-debt holdings.

Denmark’s mortgage bond market is about 1 1/2 times the size of the country’s economy and more than seven times the size of the government bond market, according to the central bank. Denmark, which isn’t one of the Basel Committee’s 27 members, is one of the most vocal critics of the liquidity rules.

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Peru’s Garcia Signs Stock Integration Bill Into Law

Peru’s President Alan Garcia signed a bill authorizing the integration of the stock exchanges of Peru, Chile and Colombia.

Garcia also signed into law a measure creating a mortgage-backed securities market. The bonds will help the construction industry expand 20 percent next year, Garcia said at a ceremony Dec. 23 in the presidential palace in Lima.

The three countries plan to establish a common exchange in a bid to increase trading volume and lure more foreign investors. The combined market value of the three bourses is $642 billion compared with Mexico’s $475 billion and Brazil’s $1.43 trillion, according to data compiled by Bloomberg.

A congressional panel on Dec. 28 will debate a capital gains tax that has halted the Andean integration project, House Speaker Cesar Zumaeta said Dec. 23.

The Lima Stock Exchange suspended the arrangement with Colombia and Chile after Congress failed to modify a tax law that makes Peru less competitive, Lima Exchange President Roberto Hoyle said Dec. 20.

Finance Firms Need Better Risk-Management Data, Regulators Say

Financial institutions need to improve their information-technology systems to better manage risk, according to a group of financial regulators.

“While most firms have made progress in developing risk appetite frameworks and begun multiyear projects to improve IT infrastructure, financial institutions have considerably more work to do in order to strengthen these practices,” William Rutledge, chairman of the Senior Supervisors Group, said in a report dated Dec. 23. Rutledge is the Federal Reserve Bank of New York’s top bank supervisor and plans to retire at year-end.

The group comprises senior regulators from 10 countries including Japan, Switzerland, the U.S., the U.K. and Italy.

Japan to Ban Short-Sale, Buy Back of Shares in Public Offerings

Japan’s Financial Services Agency will ban short-selling of stocks with the intention of buying back the shares in public offerings to rein in price volatility.

The regulators will seek to revise existing rules in the first half of fiscal 2011 starting April, the watchdog said in a faxed statement Dec. 24.

The agency was considering whether to implement a U.S.- style rule barring investors from short-selling shares of companies issuing new equity during the final days before pricing, the two people with knowledge of the matter said in November.

Under the U.S. Regulation M, investors who buy shares in a company’s secondary offering are barred from shorting the stock typically five days before the pricing.

Structured Products Scrutiny to Rise, New Jersey’s Minor Says

State regulators will increase scrutiny on sales of structured products to individuals next year, as the investments aren’t suitable for everyone, according to Marc Minor, chief of the New Jersey Bureau of Securities.

The North American Securities Administrators Association has identified the investments, which are bonds bundled with derivatives, as an “emerging risk,” said Minor, who is a member of the Washington-based group of regulators. Brokers are selling more structured products to individuals, even though some may be too complicated for buyers to understand, he said.

Minor made the remarks during a telephone interview.

Banks and brokers market the products as an alternative way to invest in stocks or commodities. Sales of structured notes rose to a record $47.1 billion in the U.S. this year, according to data compiled by Bloomberg. Investors bought $33.9 billion last year, according to, a database used by the industry.

Some of the securities combine the potential for gains when stocks rise with limited protection against declines, while others pay a high interest rate as long as certain market-related conditions are met. The investments have characteristics that make them unsuitable for certain classes of investors, Minor said.

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Compliance Action

EPA, Texas Feud Escalates Over New Carbon Regulations

The U.S. Environmental Protection Agency said it will take control of carbon-emission rules in Texas after Governor Rick Perry rejected new federal regulations intended to combat climate change.

The EPA will decide directly on greenhouse-gas permits for companies seeking to build or upgrade power plants or oil refineries in Texas, the agency said Dec. 23 in a statement. The EPA’s nationwide carbon rules, imposed under the Clean Air Act, will take effect Jan. 2.

The agency said the law gave states responsibility to carry out the rules it imposed after President Barack Obama’s administration failed to win legislation to cap carbon emissions. Perry, a Republican, has said he won’t cooperate, calling the regulations overreaching by the federal government that will cripple his state’s economy.

Texas emits about 11 percent of U.S. greenhouse-gas emissions, more than any other state, according to Texas EPA spokesman David Gray. If Texas were a country, it would be the world’s eighth-largest polluter, he said.

EPA Assistant Administrator Gina McCarthy said the agency remains in talks with Texas and views federal control of greenhouse-gas permits in the state as a temporary arrangement.

“We are more than willing and in fact anxious about how quickly we can work with them to have them take over,” McCarthy told reporters Dec. 23 on a conference call.

FDIC Sells Stake in $603 Million Mortgage Pool to RoundPoint

RoundPoint Financial Group said it bought a stake in $603 million of residential mortgages from the Federal Deposit Insurance Corp.

The company, in conjunction with RBS Financial Products Inc., acquired 40 percent of the equity of the loan pool, the Charlotte, North Carolina-based buyer and servicer of distressed mortgages said Dec. 23 in an e-mailed statement. Andrew Gray, a spokesman for the FDIC, didn’t immediately return a telephone message.

RoundPoint, which in April took a stake in $491 million of mortgages partly sold by the FDIC, is backed by investment firm Tavistock Group, according to the latter’s website. The latest deal closed Nov. 30, according to the Dec. 23 statement.

RBS Financial Products is a unit of Royal Bank of Scotland Plc. Michael Geller, a spokesman for the company’s Stamford, Connecticut-based RBS Securities Inc. unit, declined to comment.

BaFin Tells German Life Insurers to Raise Provisions, FTD Says

German financial regulator BaFin has ordered life insurers to raise provisions on some contracts as early as next year to be able to meet interest-rate guarantees to customers, Financial Times Deutschland reported, without saying where it got the information.

The higher cost for life insurers, which may exceed 1 billion euros ($1.3 billion) annually, would force them to set aside more money from their earnings, the newspaper said, adding that specific calculations aren’t available yet.

H&R Block Says ‘11th-Hour’ U.S. Bar Ends HSBC Refund-Loan Deal

H&R Block Inc. said an “11th-hour” decision by U.S. regulators prevents a lending partner from offering tax-refund loans and that it’ll be hard to fully roll out alternative products in time for the 2011 season.

The Office of the Comptroller of the Currency told HSBC Holdings Plc not to make refund-anticipation loans, called RALs, prompting the bank to end an exclusive contract with H&R Block three years early, the tax preparer said in a statement after business hours on Dec. 24. The directive scuttled a deal the two firms reached after H&R Block filed a lawsuit to force HSBC to offer the loans, according to the statement.

The U.S. Internal Revenue Service said in August it will no longer help banks, including HSBC, underwrite RALs, which consumer groups say carry unfairly high interest rates. H&R Block’s struggle to make loans available in 2011 has helped drive down its shares 44 percent this year through last week, making it the second-worst performer in the Standard & Poor’s 500 Index.

The firm will still offer customers a way to speed checks and is developing “other financial products we intend to put in place by the early part of the tax season,” said Kate O’Neill Rauber, a spokeswoman for the Kansas City, Missouri-based company.

HSBC spokesman Rob Sherman said the bank is terminating its relationship with H&R Block after the OCC’s decision. Spokesmen for the agency didn’t respond to messages over the weekend.

For more, click here.


Daimler Case Over Schrempp Resignation Is Referred to EU Court

A German court asked European Union judges to review several issues in a shareholder lawsuit over the timing of Daimler AG’s disclosure of Chief Executive Officer Juergen Schrempp’s 2005 resignation.

The Federal Court of Justice, Germany’s highest civil tribunal, said Dec. 23 it needed guidance on how EU laws on market manipulation and inside information are to be interpreted. The court suspended proceedings and “presented questions to the European Union’s Court of Justice for an advance decision,” the court said in an e-mailed statement.

Daimler shareholders claim the automaker didn’t disclose Schrempp’s resignation as quickly as it should have. The Stuttgart, Germany-based manufacturer published the former CEO’s departure on July 28, 2005. Following the release of second-quarter earnings and the news that Schrempp was to leave, Daimler rose 3.16 euros, or 8.7 percent, to 39.49 euros.

Daimler’s legal spokeswoman, Ute Vellberg, didn’t return calls seeking comment. Wolfgang Eick, a spokesman at the Karlsruhe-based court, also couldn’t be reached.

InterMune Investors Sued by SEC for Insider Trading

The U.S. Securities and Exchange Commission sued unknown buyers of options on the stock of InterMune Inc., a biopharmaceutical maker, claiming they had inside information about regulatory approval of its drug Esbriet, a treatment for idiopathic pulmonary fibrosis, a fatal lung disease.

In a complaint filed Dec. 23 in federal court in Manhattan, the SEC said the unknown parties bought 637 options contracts on the Chicago Board Options Exchange and the Philadelphia Stock Exchange between Dec. 7 and Dec. 13. The options to buy shares were bets that their price would rise.

Using the inside information, the unknown options buyers may have made profits of $912,000, the SEC said. The trades were made using anonymous accounts held at UBS Securities Ltd. and Barclays Capital Inc. in London, according to the complaint.

The SEC on Dec. 22 sued unknown buyers of Martek Biosciences Corp. options, alleging insider trading violations. The customer ID number on the UBS account that bought the Martek options is the same as the UBS account used to buy the InterMune options, according to the two complaints.

The case is Securities and Exchange Commission v. One or More Unknown Purchasers of Options of InterMune Inc., 10-cv-09560, U.S. District Court, Southern District of New York (Manhattan).

For more, click here.

Interviews/Special Reports

Kerviel’s Trading Loss Examined in ‘The Rogue Trader’

Ryan Chilcote presents a Bloomberg Television special “The Rogue Trader,” examining the background to Jerome Kerviel’s 4.9 billion-euro ($6.4 billion) trading loss at Societe Generale SA, the biggest in history.

For the video, click here.

Comings and Goings

FASB’s Seidman Named to Finish Herz’s Term as Panel’s Chairman

Leslie F. Seidman, who has been acting chairman of the Financial Accounting Standards Board since Robert H. Herz stepped down on Sept. 30, was appointed to serve the remaining 2 1/2 years of Herz’s term.

The selection of Seidman, 48, to lead the panel that sets rules for evaluating the financial health of U.S. companies was announced Dec. 23 in a statement by the Financial Accounting Foundation, the Norwalk, Connecticut-based nonprofit that oversees FASB.

As chairman, Seidman will lead FASB’s efforts to converge U.S. reporting standards with those of the International Accounting Standards Board, which sets rules for more than 110 countries, including Germany, France and the U.K.

Holder Names New Head of Justice Department’s Ethics Division

U.S. Attorney General Eric Holder named a career prosecutor to oversee the Justice Department’s ethics office after a U.S. judge this year criticized the department’s handling of charges against the late Senator Ted Stevens of Alaska.

Robin Ashton will serve as head of the Office of Professional Responsibility, according to a department press statement. Ashton most recently was an executive assistant in the U.S. attorney’s office for the District of Columbia, directing actions on civil and criminal cases, according to the department.

To contact the reporter on this story: Carla Main in New Jersey at

To contact the editor responsible for this report: David E. Rovella at

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