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CFTC Rule Votes, EU Payments Industry, PCAOB: Compliance

The U.S. Commodity Futures Trading Commission completed Dodd-Frank Act regulations to protect swap traders’ collateral that is used to reduce risk in trades.

CFTC commissioners voted 4-1 yesterday to complete the so-called segregation rule, which gained urgency after as much as $1.2 billion in client funds went missing as MF Global Holdings Ltd. collapsed last year. The CFTC, Securities and Exchange Commission, Justice Department and bankruptcy trustee are investigating if funds were misused before the New York-based broker filed for bankruptcy protection Oct. 31.

The rule approved yesterday seeks to insulate clients’ collateral if their broker defaults, while also allowing the customer funds to be pooled before a bankruptcy, according to a CFTC summary.

In a separate 4-to-1 vote, U.S. regulators moved to soften Dodd-Frank Act rules designed to protect less-sophisticated customers in swap trades after banks, pension funds and municipalities said the original plan could damage the market.

The Commodity Futures Trading Commission, meeting in Washington yesterday, voted 4-1 for revised regulations that ease responsibilities initially proposed for Wall Street banks. The changes loosen requirements that trades be suitable for clients and limit banks’ obligation to act in the best interest of public agencies, so long as they don’t recommend specific swaps.

Lawmakers in the Dodd-Frank Act called for regulators to crack down on abuses in the sales of derivatives to states, cities and school districts after municipalities lost billions of dollars on interest-rate swaps during the 2008 credit crisis. Jefferson County, Alabama, became the biggest municipal bankruptcy in U.S. history as the result of such deals.

CFTC commissioners also voted 3-2 to propose a version of the Volcker rule curbs on proprietary trading required by Dodd-Frank, becoming the last of five regulators to seek comment on the measure. Yesterday’s vote opens the measure to 60 days of public comment. The rule, named for former Federal Reserve Chairman Paul Volcker, was included in the regulatory overhaul to rein in risky trading at banks that benefit from federal deposit insurance and Fed borrowing privileges.

The business-conduct rules for municipal investors have been the subject of lobbying since they were introduced in December 2010.

For more, see Interviews section, below.

EBA to Review 9% Capital Rule Based on Steps to Fight Crisis

The European Banking Authority will review banks’ need to hold a 9 percent capital buffer as governments take steps to address the sovereign-debt crisis, Andrea Enria, the EBA’s chairman, said in a speech.

The EBA told banks last month to raise 114.7 billion euros ($145.8 billion) in fresh capital by the end of June as part of measures introduced to respond to the euro area’s fiscal woes. Lenders should look to bolster reserves by cutting bonuses, retaining earnings or issuing shares, it said.

German banks need to raise an additional 13.1 billion euros, Italian banks 15.4 billion euros, and Spanish lenders 26.2 billion euros in core tier 1 capital, the European Banking Authority in London said. The capital shortfalls include 15.3 billion euros for Spain’s Banco Santander SA and 7.97 billion euros for Italy’s UniCredit SpA.

Concerns have arisen at the EBA and the European Central Bank that lenders may seek to scale down their loans to meet the capital rules, Richard Reid, research director for the International Centre for Financial Regulation, said in an e-mail.

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Compliance Policy

EU Weighs Rules to Spur Competition in Payments Industry

European Union regulators may draft new rules for the payments industry by next year to tackle possible obstacles to competition.

The European Commission is seeking views on potential problems in the market for payments made via cards, the Internet and mobile phones, it said in an e-mailed statement yesterday.

The EU is seeking to boost payments by mobile phones and the Internet as other regions take the lead in services, attracting investments from companies including Google Inc., Apple Inc. and Visa Inc. The Brussels-based commission is already investigating whether a group of banks shut out a rival payment provider from talks to create standards for online payments. This follows earlier probes into Visa Europe and MasterCard Inc. into the fees they charge on card payments made outside a user’s home country.

Regulators said they will decide by the middle of this year whether new rules are necessary and, if so, may follow up by publishing draft rules in late 2012 or early 2013.

The commission is considering allowing retailers across the EU to impose surcharges on consumers who use payment cards with relatively high fees, Michel Barnier, the EU’s financial services chief, told reporters. Such surcharging is currently banned in some countries.

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U.K. to Talk RBS Liabilities With Scots, Cameron Spokesman Says

The U.K. government will discuss how liabilities for Royal Bank of Scotland Group Plc’s bad debts should be divided with Scotland if Scots vote for independence in a referendum, Prime Minister David Cameron’s spokesman Steve Field said.

Field made the remarks to reporters in London today. He was responding to comments by Scottish First Minister Alex Salmond on Channel 4 television last night that the responsibility for state-owned RBS’s near-collapse lies with the U.K. Treasury and the Financial Services Authority, so the U.K. government should remain liable.

Compliance Action

SEC Approves 11 Percent Spending Boost for U.S. Audit Watchdog

The U.S. Securities and Exchange Commission approved a $227.7 million budget for the auditing industry’s regulator, boosting its spending by 11 percent as it takes on new duties overseeing broker-dealer audits.

SEC commissioners voted 5-0 for the Public Company Accounting Oversight Board’s 2012 spending plan yesterday at a meeting in Washington. The board, a nonprofit corporation established by the Sarbanes-Oxley Act of 2002 to regulate and inspect auditors of U.S.-listed firms, is funded by an accounting fee on companies and registered broker-dealers.

Much of this year’s increase is attributed to a new inspection program for auditors of broker-dealers established under the Dodd-Frank financial-regulation overhaul. Brokers are being assessed about $18 million for 2012.

Banks Said to Face New York Inquiry Over Home Insurance Rates

Banks and insurers are being investigated by New York’s insurance regulator over the prices charged to mortgage borrowers for home insurance, a person familiar with the matter said.

The Department of Financial Services, which regulates banks and insurers in New York State, is looking into whether homeowners were burdened with overpriced “force-placed” insurance, said the person, who declined to be identified because the person didn’t have authority to speak publicly about the matter. The department is examining pricing practices, relationships between the companies involved and whether there were kickbacks, the person said.

Ron Klug, a department spokesman, declined to comment on the investigation.

The department has issued subpoenas or demands for information to 31 companies.

The investigation was reported earlier by the Wall Street Journal.

American Apparel Says SEC Ends Inquiry Without Enforcement

American Apparel Inc., the young-adult clothing retailer, said an investigation by the U.S. Securities and Exchange Commission into its accounting practices ended without enforcement.

The investigation was completed and the SEC doesn’t recommend any action, the Los Angeles-based company said yesterday in a regulatory filing.

The SEC requested documents from the chain in 2010 after Deloitte & Touche LLP quit as its accounting firm and was replaced by Marcum LLP. Before ending the relationship, Deloitte notified the retailer that its 2009 financial statements may not be reliable.

The retailer, led by Chief Executive Officer Dov Charney, has improved results in the past few months after posting losses for most of the past two years as sales fell. Revenue grew 15 percent to $56.3 million in December, following a 4.8 percent gain last quarter.

Bilateral Talks for U.S. Audit Inspections in China ‘Imminent’

Chinese and U.S. regulators will meet soon to discuss lifting barriers for U.S. inspectors to review auditors of U.S.- listed companies in China, said James R. Doty, head of the Public Company Accounting Oversight Board.

Doty’s nonprofit corporation is required by law to inspect all auditors of public companies and has been blocked from inspections in China. He said the meetings in the U.S. were “imminent,” and declined to reveal the time and place.

A delegation from the SEC and the audit board traveled to China last year to discuss joint inspections of auditors in both countries. The Chinese then canceled a plan to hold U.S. meetings. Doty and Securities and Exchange Commission Chairman Mary Schapiro proposed the resumption of talks in letters to Guo Shuqing, the new chief of the China Securities Regulatory Commission, Doty said in November.

Separately, Chinese officials met with U.S. regulators in Washington to discuss enforcement coordination between the two countries amid efforts to resolve a standoff on oversight of auditors.

A delegation from China came to the Securities and Exchange Commission’s Washington headquarters yesterday “as part of our ongoing dialogue to address issues of mutual interest,” said John Nester, an SEC spokesman, who declined to comment further on the talks.


Ex-Sullivan & Cromwell Lawyer Gets 28 Months for Tax Crime

John J. O’Brien, a former partner with the New York law firm Sullivan & Cromwell LLP who specialized in corporate mergers and acquisitions, was sentenced to 28 months in prison for failing to pay his taxes.

O’Brien, who earned about $10.8 million from 2001 to 2008, didn’t file federal tax returns for those years, according to the government. He used his unreported income to buy a rare-book business, which failed, according to prosecutors.

U.S. Magistrate Judge Henry Pitman yesterday in a hearing in Manhattan federal court rejected O’Brien’s request to avoid prison. As part of a plea agreement, O’Brien must pay $2.9 million in unpaid taxes, plus interest.

O’Brien, who is admitted to practice law in New York, is the subject of a legal disciplinary proceeding, Assistant U.S. Attorney Stanley Okula told Pitman. Because he pleaded guilty to four misdemeanor charges, he won’t be automatically disbarred.

The case is U.S. v. O’Brien, 11-cr-0652, U.S. District Court, Southern District of New York (Manhattan).

U.K. Regulator Charges Man With 8 Counts of Insider Trading

Britain’s finance regulator charged Richard Anthony Joseph with insider trading and money laundering following his May, 2010, arrest for the crimes.

The Financial Services Authority said Joseph, 42, was released on conditional bail after a hearing in London today. He is scheduled to appear at a higher criminal court in March to face the eight counts of insider trading and two counts of money laundering, the regulator said in a statement.

Joseph, who is not approved by the FSA to hold a regulated position in Britain’s finance industry, faces as long as seven years in jail for insider trading, plus a fine if he’s found guilty.

The FSA prosecutes market abuse in the U.K.

Karen Roberts, a spokeswoman for Joseph’s law firm, Irwin Mitchell, didn’t immediately respond to a phone call or e-mail seeking comment. FSA spokesman Christopher Hamilton declined to comment further.


Flaherty Wants Canada-Provincial Talks on Securities Regulator

Canadian Finance Minister Jim Flaherty said he is reviewing a Supreme Court opinion that found his plans to set up a single regulator would be unconstitutional, and said he will talk to his provincial counterparts about the ruling.

Flaherty, who spoke to reporters in Calgary, also said the government should speed approvals of major energy projects.

CFTC’s Gensler Says Swap Rules Aim to Protect Customers

Commodity Futures Trading Commission Chairman Gary Gensler spoke about proposed rules on swaps and proprietary trading.

Gensler spoke at a CFTC meeting in Washington, where the commission voted 4-1 for revised swap-trade regulations that ease responsibilities initially proposed for Wall Street banks under the Dodd-Frank Act.

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