Stock Act Signed, JPMorgan Settlement, SEC Warns: Compliance

President Barack Obama signed into law a bill strengthening the ban on insider trading by members of Congress and other government officials who might profit on private knowledge they gain from work.

The president had called for passage of the bill, S. 2038, in his State of the Union message in January. It is called the Stock Act, for Stock Trading on Congressional Knowledge.

The law prohibits lawmakers, their staffs and some executive branch employees from trading stocks, commodities or futures based on private information they learn on the job. It would prevent lawmakers from participating in initial public offerings that aren’t available to the general public.

Under terms of the new law, more than 28,000 senior government officials who already must file public disclosures, including the president, the vice president, cabinet members, lawmakers and their staffs, must publicly report all trades valued at $1,000 or more within 30 days after they are informed of the transaction, and in no case any later than 45 days after the transaction occurred. The rule wouldn’t apply to widely held investment funds.

The House passed the measure Feb. 9 by a 417-2 vote, and the Senate followed March 22 by a vote of 96-3.

Bills to tighten insider-trading rules on members of Congress had languished until late last year, when CBS’s “60 Minutes” program reported that lawmakers could legally trade stock based on non-public information, giving the legislation new urgency.

The law also blocks bonuses for Fannie Mae, Freddie Mac executives while the companies remain under government conservatorship.

Compliance Action

JPMorgan Pays $20 Million to End CFTC Segregated-Fund Claim

JPMorgan Chase & Co., the largest U.S. bank, will pay $20 million to resolve a U.S. regulator’s claims that the firm mishandled customer funds from Lehman Brothers Holdings Inc. from 2006 to 2008.

JPMorgan, serving as Lehman’s main clearing bank, counted client money as belonging to the firm itself while extending loans that let Lehman bet on markets, the Commodity Futures Trading Commission said yesterday in a statement. When Lehman filed for bankruptcy in September 2008, JPMorgan refused to release the money for two weeks until CFTC officials insisted, the watchdog said.

Collapses of Wall Street firms including MF Global Holdings Ltd. have spawned customer claims that their money was frozen or lost after companies improperly used their holdings. Lehman at times had more than $1 billion of clients’ funds deposited with JPMorgan, which improperly counted segregated customer funds in extending credit over a 22-month period, according to the CFTC.

JPMorgan settled claims that it violated commodities laws without admitting or denying wrongdoing, according to the CFTC.

The errors were unintentional, and JPMorgan didn’t use customer funds to meet any of Lehman’s obligations, the bank said in a statement yesterday. The entire balance of one Lehman accounts was mistakenly factored into JPMorgan’s daily calculation of the broker-dealer’s assets in determining how much credit to extend, according to the statement.

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SEC Warns Exchanges to Protect Markets From Glitches Gone Awry

More than five months before a software error ruined Bats Global Markets Inc.’s initial public offering, U.S. regulators put exchanges on notice that they need to do more to protect investors from technology gone awry.

The missive came in the form of a prologue to a Securities and Exchange Commission case against Direct Edge Holdings LLC in October over claims the exchange operator had weak internal controls that caused its trading system to fail.

The agency, working to avoid another event like the May 6, 2010, rout that erased $862 billion from equities in 20 minutes, decided to use the Direct Edge case to create a blueprint for actions against other exchanges, according to a person with direct knowledge of the decision. While the SEC didn’t fault exchanges in the 2010 crash, the event magnified pressure on the commission to show it can ensure the fragmented marketplace of high-speed, computer-driven trading is safe for investors.

The 2010 “flash crash,” as it has come to be known, spawned about 20 separate SEC investigations encompassing a dozen areas of possible securities law violations, according to the person, who spoke on condition of anonymity because the probes aren’t public. While some of the investigations involve possible illegal trading practices, those that focus on exchanges revolve around whether the venues have the right compliance structures to address trading disruptions that could spiral out of control.

Daniel Hawke, chief of the SEC enforcement’s market abuse unit, said “exchange conduct and compliance is an area of renewed enforcement interest.”

Direct Edge spokesman Jim Gorman, Bats spokesman Randy Williams, Nasdaq OMX Group Inc. spokesman Robert Madden and NYSE Euronext spokesman Richard Adamonis declined to comment.

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WTO Backs Ruling That U.S. Clove-Cigarette Ban Discriminates

A U.S. ban on clove cigarettes that’s designed to prevent teenagers from starting to smoke is discriminatory, World Trade Organization judges said as they upheld an earlier ruling backing a complaint by Indonesia.

WTO appellate judges agreed with a Sept. 2 decision that the U.S. tobacco legislation, signed by President Barack Obama in June 2009, unfairly prohibits cloves and not the mint used to make menthol cigarettes. Indonesia, the world’s largest producer of clove cigarettes, or kreteks, made by companies such as PT Gudang Garam, accounted for almost all of the $15 million of clove-cigarette sales in the U.S. before the ban.

Menthol-flavored cigarettes produced by U.S. manufacturers such as Altria Group Inc.’s Philip Morris USA and Lorillard Inc. were excluded as part of a 2008 compromise by lawmakers that led Altria to endorse the legislation. Menthol cigarettes, the most popular flavor, constituted 27 percent of the U.S. market in 2008, the latest Federal Trade Commission data show.

The U.S. law “accords imported clove cigarettes less favorable treatment than that accorded to domestic menthol cigarettes,” the appellate judges said in their 103-page report on the Geneva-based WTO’s website.

“The United States is very disappointed with the outcome of this dispute,” Nkenge Harmon, a spokeswoman for the U.S. Trade Representative’s office, said in an e-mailed statement.

Studies show that 17-year-olds are almost three times more likely to use flavored cigarettes than people over 25, according to the U.S. Food and Drug Administration. Lori Wallach, director of the consumer-advocacy organization Public Citizen’s Global Trade Watch, urged the Obama administration and Congress not to “bow” to yesterday’s ruling.

Separately, Honduras complained at the WTO about an Australian law that prohibits the display of tobacco companies’ logos, labels and trademarks, saying the ban violates global rules on intellectual property.

As of Dec. 1, cigarettes in Australia will have to be sold in dark brown packets, with no symbols or images and the same font for all brands. Philip Morris International Inc., Imperial Tobacco Group Plc, British American Tobacco Plc and Japan Tobacco Inc. are challenging the law and will present their arguments against it in Canberra beginning April 17.

Yesterday’s complaint at the Geneva-based trade arbiter follows a similar move by Ukraine on March 15.

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Petroplus Gets Exemption From Regulatory Reporting Requirements

Petroplus Holdings AG said the SIX Swiss Exchange approved its application for an exemption from certain regulatory reporting and publicity requirements from now until May 11, being the last day of trading of its shares, according to a statement issued by the company.

Petroplus Holdings will continue to report information “regarding management transactions and major changes in ownership structure,” as well as complying with “the directive on ad hoc publicity,” it said the statement.

Financial Stability Board Starts Peer Review on Risk Governance

The Financial Stability Board started a review among regulators of banks’ oversight of potential risks.

“The peer review will take stock of progress in addressing the weaknesses in risk governance identified during the recent financial crisis at both national authorities and firms,” the FSB said on its website yesterday.

Basel Would Have Defeated 20% of EU’s Biggest Banks in 2011

Twenty percent of Europe’s biggest banks would have failed to meet global capital standards, known as Basel III, as of June 2011, the European Banking Authority said in an impact assessment of the planned rules.

About a fifth of the 48 largest banks in the study would have had a core tier 1 capital ratio below 4.5 percent, the absolute minimum allowed under Basel III guidelines, the EBA said in a report published on its website yesterday. Half of those would have needed to raise a combined 242 billion euros ($318 billion) to reach a 7 percent ratio, the minimum for internationally active banks, according to the report, based on June data.

“Given these results, a significant effort by banks to fulfill the risk-based capital requirements is expected,” the EBA, the region’s top banking regulator, said.

Global regulators at the Basel Committee on Banking Supervision have clashed with banks over the severity of the overhaul of capital and liquidity rules, known as Basel III, which was designed to prevent a rerun of the crisis that cascaded across financial markets after the collapse of Lehman Brothers Holdings Inc. in 2008.

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SFO Refused Trial Delay as It Probes Tchenguiz Arrest Errors

The U.K.’s Serious Fraud Office was denied more time to prepare for a trial over its handling of the 2011 arrests of real estate investors Vincent and Robert Tchenguiz.

While the watchdog started an internal review of “errors” it made, its lawyers said, the probe was complicated by the departure of key staff involved in the criminal investigation, including the man who led it, Mick Randall.

Judge John Thomas ruled the trial should be held May 22 as planned and criticized the SFO for not reporting potential delays earlier.

The Tchenguiz brothers claim their detentions in March 2011 were unlawful. They were among seven men arrested as part of an SFO investigation into the collapse of Iceland’s Kaupthing Bank Hf.

SFO spokesman David Jones didn’t respond to phone calls requesting comment.

The brothers are seeking millions of pounds in damages, attorneys for the SFO said. The court granted a request from the brothers in February for a review of their arrests, which the men claim were unlawful because the warrants were obtained with incorrect information.

The case is Robert Tchenguiz v. Director of the Serious Fraud Office & Anr, High Court of Justice, Queen’s Bench Division, Administrative Court, CO/4468/2011.

Bouygues Rights Complaints Against France Found Inadmissible

Bouygues SA’s complaints against France for violations of its rights were declared “manifestly ill-founded” by the European Court of Human Rights, which said the appeal is therefore inadmissible.

Bouygues argued its rights to a fair trial and presumption of innocence were breached by France’s competition regulator in 2005 during regulatory proceedings against its Bouygues Telecom unit for colluding with other mobile-phone operators, according to a statement today by the court on its website.

Appellate courts rejected the Paris-based company’s efforts to overturn the decision in 2006 and 2007. A 2010 decision by France’s highest appeals court upheld the anti-competitive findings against Bouygues, the rights court said in summarizing the dispute.

A spokeswoman for Bouygues declined to immediately comment on the ruling by the Strasbourg, France-based court.


Fed’s Lacker Says Volcker Rule May Be ‘Impossible’ to Implement

Federal Reserve Bank of Richmond President Jeffrey Lacker said a U.S. law restricting proprietary trading at banks and scheduled for enactment in July may be “impossible” to implement.

The so-called Volcker rule, named for its original champion, former Fed Chairman Paul Volcker, is aimed at reducing the odds that banks will make risky investments with their own capital and put depositors’ money at risk. Lacker said bank trading books were “kind of tangential” to the financial crisis of 2008-2009, when bank capital was eroded by losses on risky mortgages, many of them bundled into complex securities.

The Volcker rule is “fairly difficult if not impossible to implement in a way that is at all reasonable,” Lacker said yesterday in an interview with Bloomberg Television’s Trish Regan.

The proposal is one of the most contentious provisions of the 2010 Dodd-Frank act on financial oversight, and Lacker said it would be “high on the list” of things he would change if he could.

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SEC’s Paredes Sees Review Prior to New Access Rule, BNA Says

U.S. Securities and Exchange Commissioner Troy Paredes April 2 told a gathering of institutional investors that until the commission has reviewed the experience of proxy access through private ordering, he would be “hesitant” for the agency to tackle another federal access regulation, BNA reported yesterday.

Paredes made the remarks at the Council of Institutional Investors’ spring meeting in Washington, noting that he was expressing his own opinions, which didn’t necessarily reflect those of the SEC, the other commissioners, or commission staff.

Paredes remarks about proxy access were made in response to a question from Jane Hamblen, chief legal counsel of the State of Wisconsin Investment Board, about what kind of data institutional investors can provide to the SEC to help another federal access rule withstand court scrutiny.

In terms of the process, costs and benefits, “data is always extraordinarily important” Paredes told Hamblen.

In July 2011, the U.S. Court of Appeals for the District of Columbia Circuit struck down the SEC’s mandatory proxy access rule. The regulation would have allowed qualifying shareholders, for the first time, to have their director nominees included in corporate proxy solicitation materials. The appellate court found that the SEC failed to properly evaluate the economic impact of the rule.

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Comings and Goings

Bank of Japan Nominee Kono Rejected as Lawmakers Seek Easing

Prime Minister Yoshihiko Noda’s nominee to the Bank of Japan board was rejected by the upper house of parliament in a victory for lawmakers pressing for more monetary easing to spur growth and end deflation.

BNP Paribas SA economist Ryutaro Kono was blocked by a vote of 127 to 111 in the house, where the ruling Democratic Party of Japan is a minority.

Japanese stocks pared losses on the decision, which leaves the central bank with two vacant seats on a nine-person board and gives lawmakers a platform for urging Governor Masaaki Shirakawa to take bolder action. The central bank has pledged “powerful easing” until a 1 percent inflation goal is in sight.

Japan has a history of wrangling over central bank appointments, with the DPJ blocking appointments in 2008 and 2009 when the party was in opposition.

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