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D.C. Inquiry, Europe Circuit Breakers, Sifma: Compliance

The U.S. Securities and Exchange Commission opened an “informal inquiry” into Washington, D.C.’s finances after the city’s finance chief faced scrutiny for failing to disclose internal audits of his agency.

The SEC on Oct. 22 asked the chief financial officer for records of internal audits and investigations conducted since the beginning of 2010, the District of Columbia said in a disclosure to investors yesterday.

The federal request follows a city council hearing this month at which officials faulted Chief Financial Officer Natwar Gandhi for not disclosing internal audits documenting failures at the agency. The Washington Post this month reported the audits show security lapses in the tax department since 2007, when an employee was caught embezzling $48 million.

On Oct. 16, the city council approved a measure requiring disclosure of the chief financial officer’s internal audits.

Washington is the second city this month to face a fresh inquiry from the SEC, which has been stepping up its investigations of the municipal securities market.

David Umansky, a spokesman for the city’s chief financial officer, said the department is complying with the SEC’s request.

“This is an informal inquiry, not an investigation,” Umansky said. “We don’t think there’s any problems with our disclosures, which is what the SEC would be concerned about.”

Special Section: Sifma Annual Meeting

U.S. Derivatives Regulator Proposes Rules for Customer Funds

U.S. derivatives regulators, faulted for poor oversight of failed brokerages MF Global Holdings Ltd. and Peregrine Financial Group Inc., proposed new rules to improve segregation and protection of customer funds.

Commodity Futures Trading Commission members voted 5-0 to approve the proposals Oct. 22 without a public meeting, CFTC Chairman Gary Gensler said yesterday at a Securities Industry and Financial Markets Association conference in New York.

The proposals will be open to public comment before they are completed.

The CFTC and National Futures Association, an industry self-regulator, are bolstering oversight after Peregrine, a commodities brokerage, collapsed in July with at least $200 million in client funds missing. MF Global, which filed the eighth-largest U.S. bankruptcy last Oct. 31, is returning money to customers who faced a $1.6 billion shortfall as part of the firm’s liquidation.

The CFTC, Securities and Exchange Commission and Justice Department have been investigating the collapse of MF Global, and congressional investigators are preparing a report. The coalition has urged regulators to file civil and criminal charges following MF Global’s collapse and to take steps to improve customer protection.

Under the CFTC proposal, regulators would have direct electronic access to futures brokers’ bank accounts to monitor customer funds. The proposals also would require heightened disclosure by brokers about how client collateral is held at custodial banks.

Gensler Favors ‘Back to Basics’ Stance on Swaps Rules

Gary Gensler, chairman of the Commodity Futures Trading Commission, talked about derivatives regulation with Scarlet Fu and Stephanie Ruhle on Bloomberg Television’s “Market Movers” from the Sifma conference in New York.

For the video, click here.

Sifma’s Ryan Says Volcker Rule Has Most Complexity Risk

Timothy Ryan, president and chief executive officer of the Securities Industry and Financial Markets Association, talked about financial regulatory overhaul and the potential impact of the U.S. presidential election on the industry.

Ryan spoke with Peter Cook at Sifma’s annual meeting in New York on Bloomberg Television’s “Market Makers.”

For the video, click here.

Schapiro Says SEC Working at ‘Good Pace’ on Dodd Frank

U.S. Securities and Exchange Chairman Mary Schapiro talked about the SEC’s role in financial regulation.

Schapiro spoke with Peter Cook at the Securities Industry and Financial Markets Association’s annual meeting in New York on Bloomberg Television’s “Lunch Money.”

For the video, click here.

Swaps Users Granted Grace Period to Clear Trades, Gensler Says

Swaps-market participants will have a grace period before trades are required to be cleared, settling confusion over a rule that will begin early next year, said Commodity Futures Trading Commission Chairman Gary Gensler.

Firms dealing in $648 trillion of outstanding swaps contracts expected that trading during a phase-in period wouldn’t need to be processed by central clearinghouses, according to an Oct. 5 e-mail sent to clients by Davis Polk & Wardwell LLP, which represents the Securities Industry and Financial Markets Association. While the firms were wrong, misreading one sentence in 17,000 words of regulation, Gensler said yesterday the idea was always to allow a grace period.

Dealers and money managers that trade swaps had faced the potential need to find cash and Treasuries to back the trades sooner than they anticipated. The 2010 Dodd-Frank Act is requiring that swaps be moved to the central counterparties to limit the kinds of risks that fueled panic during the 2008 credit crisis.

Referring to the Davis Polk e-mail, Gensler said some market users were confused about how the final rule, passed by the CFTC on June 30, was written.

For more, click here, and click here.

Compliance Policy

U.K. Offers Firms Chance to Defer Economic-Crime Prosecutions

The U.K. government, seeking to speed up prosecution of complex cases of economic crime, said companies may be offered the chance to defer prosecution for fraud, money-laundering and bribery if they agree to terms that might include paying a “substantial financial penalty.”

Justice Minister Damian Green announced the introduction of “Deferred Prosecution Agreements,” which can be made between a prosecutor and an organization to defer prosecution for alleged economic wrongdoing as long as stringent conditions are met. These include making amends to victims, publicly admitting wrongdoing, reforming practices and paying a fine.

Fraud costs the U.K. 73 billion pounds ($116 billion) a year, Green said.

The DPAs will be overseen by a judge, agreed on in open court and the outcome will be published to ensure transparency, the Ministry of Justice in London said in a statement. A failure to live up to the agreement can result in referral of the case to prosecutors once again, the ministry said.

Regulators Should Avoid Choking HFT Benefits, U.K. Panel Says

European regulators should coordinate controls on high-frequency trading to prevent disruptions in markets without choking off its benefits, the U.K. government’s lead scientific adviser said.

His report recommended pan-European circuit breakers to halt trading when swings become too great and proposed minimum trading price increments to boost liquidity. Tighter restrictions, such as forcing traders to hold orders for a certain period or limiting how often they may be canceled, are “likely to be problematic,” it said.

While computerized trading has increased liquidity and lowered costs, regulators should work on managing instances of sudden instability and disruptions, John Beddington, Britain’s chief scientific adviser, said at a presentation in London Oct. 21. The recommendations follow research his group published in September 2011 that found high-frequency trading isn’t spurring broad increases in volatility even as it sometimes creates “instability” that may lead to crashes.

The two-year study, produced by about 150 people from more than 20 countries, found no direct evidence that faster trading increased volatility or market abuse, Beddington said.

The report, “The Future of Computer Trading in Financial Markets,” was produced by Foresight, a division of the Government Office for Science. The program provides evidence to aid the formulation of policy and doesn’t reflect the views of the government.

For more, click here.

Compliance Action

Google, Carmakers Discuss Robotic Autos With U.S. Regulators

Google Inc. and automakers are having “extensive discussions” with U.S. safety regulators about self-driving cars such as the one the search-engine leader has developed, the top U.S. auto regulator said.

Google, which developed its autonomous car in secret, is testing it on U.S. roads. California Governor Jerry Brown last month signed a law allowing trials of self-driving cars on the state’s highways, as long as there’s a human in the driver’s seat to take over if needed.

NHTSA, which evaluates vehicles for safety in crash tests and sets standards for parts from headlights to windshield wipers, will have to find a way to evaluate the software or other systems that control an autonomous vehicle, said Ron Medford, the agency’s deputy administrator.

Google, as a technology company getting attention for its foray into the automotive sector, “has to be right the first time” on autonomous vehicles, said Chris Urmson, the company’s technical leader on the project.

Volvo sees autonomous vehicles as part of its strategy to eliminate deaths among people driving its cars by 2020.

Nevada, where the housing market has suffered during the U.S. economic downturn, rushed regulations for testing autonomous vehicles in part because it wanted to attract the testing business, said Bruce Breslow, director of the state’s motor vehicles department.

NHTSA’s discussions about state autonomous vehicle laws and regulations have been mostly with Nevada and California, Medford said.

Mortgage Lenders Seeing ‘Perfect Storm’ of Rules on the Horizon

Mortgage bankers and Realtors are warning that it could become even harder for borrowers to qualify for a home loan early next year as the industry faces what some are calling a “perfect storm” of new rules.

Regulators are preparing to release the language of two rules taking effect in January to set standards for non-abusive lending and require banks to hold a slice of risky mortgages on their books. In addition, U.S. banking overseers must also complete new capital standards mandated in the international Basel III accords next year.

The industry’s main worry is that the rules, coming almost simultaneously, may overlap or conflict, creating what National Association of Realtors President Maurice “Moe” Veissi called a perfect storm of regulation.

Mortgage credit is already tight. U.S. regulators including Federal Reserve Chairman Ben S. Bernanke and Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, have expressed concern that banks are preventing qualified borrowers from taking advantage of interest rates driven to record lows by the Fed’s quantitative easing strategy.

Lenders say they’ll probably make only the safest mortgages as defined by the rule, commonly known as the QM regulation, after it is issued.

For more, click here.

ThyssenKrupp Investigates Board Member Over Antitrust Case

ThyssenKrupp AG, Germany’s largest steelmaker, said it’s investigating a possible breach of duty by executive board member Edwin Eichler in connection with antitrust violations in the railway-steel market.

Its supervisory board hired Freshfields Bruckhaus Deringer LLP as well as a criminal law professor from Munich to probe the executive on behalf of the company, according to Alexander Wilke, a spokesman for the steelmaker. Eichler faces possible dismissal, Handelsblatt reported yesterday.

ThyssenKrupp GfT Gleistechnik GmbH, a unit of the Essen-based company, was fined 103 million euros ($134 million) earlier in the year for cartel collusion in Germany. The executive board of ThyssenKrupp Services AG, which oversaw the unit and was headed by Eichler, “had taken all measures to prevent cartel-related offenses,” ThyssenKrupp said yesterday in a statement.

Stefan Ettwig, another company spokesman, said Eichler declined to comment on the probe.

Comings and Goings

EU Fails to Agree on Proposed Female Quotas for Company Boards

European Union plans to set a 40 percent quota for women on company supervisory boards by 2020 stalled after EU commissioners failed to agree on the measures at a meeting yesterday.

The European Commission’s legal service warned that a binding quota for women may be illegal ahead of the meeting, according to a person familiar with the talks. Lawyers said EU regulators don’t have the right to mandate binding targets for results obtained by companies, said the person, who asked not to be identified because the process is private. EU rules can require companies to make efforts toward a target.

EU commissioners postponed discussion of EU Justice Commissioner Viviane Reding’s plan until Nov. 14. Reding said she has “strong support” from other commissioners and drafted a compromise in line with lawyers’ guidelines to win consensus from her colleagues. She declined to give details, beyond saying she would retain the 40 percent target.

For more, click here.

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