(Updates Consumer Bureau item in top section and adds PwC fine and U.K. bonuses in Compliance Action and Gupta in Courts.)
Jan. 6 (Bloomberg) -- The U.S. Consumer Financial Protection Bureau will begin supervision of mortgage servicers, payday lenders and student-loan companies in an immediate expansion of its authority under the Dodd-Frank Act, agency Director Richard Cordray said in a Washington speech.
The agency will begin dealing face-to-face with nonbank firms “that often compete with banks but have largely escaped meaningful federal oversight,” Cordray said yesterday at the Brookings Institution in Washington during his first speech since President Barack Obama used a recess appointment to give him the bureau’s top job.
Obama plans to meet with the bureau’s staff and deliver remarks at the agency’s Washington office today.
Cordray said yesterday in a statement on the bureau’s website that supervising the firms is “an important step forward” for protecting consumers’’ and having a more transparent market.
Dodd-Frank, the financial-regulation overhaul that created the consumer bureau, authorizes the bureau to begin immediate supervision of mortgage originators and servicers, private student lenders and payday loan firms once a director was in place, according to the statement. The agency can now supervise these firms “regardless of size,” according to the statement.
Cordray, who ran the bureau’s enforcement unit before being named director, said the agency has taken over “a number of” investigations from other federal regulators that ceded consumer protection roles on July 21 and has also started its own investigations.
Unlike the historically patchwork oversight of consumer finance, the bureau centralizes the federal government’s authority and in some cases extends it. Consumers may benefit from its reach whenever they take out a payday loan, negotiate a mortgage rate, borrow money for school or pay a credit card fee. For those who think they’ve been wronged, there will be a complaint system to help them fight back.
The bureau was created under the Dodd-Frank Act in response to complaints that existing regulators didn’t do enough to protect consumers before the 2008 credit crisis. The rules overhaul shifted consumer protection from regulators responsible for banks’ financial stability, removing a potential source of conflict.
The consumer bureau was envisioned as a bulwark against the kind of credit bubble that inflated from 1999 to 2007, when household debt tripled to more than $12 trillion, according to the agency. Elizabeth Warren, the Harvard Law School professor credited by Obama with conceiving the bureau, viewed it as a “cop on the beat” to protect Americans against unscrupulous lenders by --among other things -- eliminating jargon-filled loan documents in favor of plain-English paperwork.
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SEC’s Schapiro Says She Regrets Loss in Investor-Access Battle
U.S. Securities and Exchange Commission Chairman Mary Schapiro said her chief regret in three years running the agency was the failure to beat a court challenge of a rule letting shareholders put their own board candidates on corporate ballots.
Schapiro made the remarks yesterday in an interview with former SEC Chairman Arthur Levitt to air on Bloomberg Radio today. She said she would have liked to find a way to structure the rule and its cost-benefit analysis so as to withstand the court challenge brought against it. Schapiro still believes the rule “could be an incredibly important tool for shareholders to hold boards accountable for the conduct of companies.”
The so-called proxy access rule, which cost the agency $2.5 million to write and defend, was rejected in a July 22 ruling by the U.S. Court of Appeals in Washington. The court cited an SEC failure to fully study the rule’s cost to companies -- inspiring a “redoubling” of agency efforts to study cost-benefit effects of its new rules, Meredith Cross, chief of the SEC’s Division of Corporation Finance, said in November.
Schapiro said another major agency effort -- potentially blending U.S. accounting practices with a unifying system of International Financial Reporting Standards -- will be decided “in the next few months.”
The agency chairman said she is “not thinking that far ahead” to consider whether she would stay on in the event President Barack Obama were re-elected and asked her to continue serving as chairman.
Levitt, who ran the SEC from 1993 to 2001, is a member of the board of Bloomberg LP, the parent of Bloomberg News.
BOE Says U.K. Lenders Expect to Tighten Criteria on Loans
U.K. banks expect to toughen the criteria on loans to companies and households in the first quarter because of strains in wholesale funding markets, which may impede investment and economic growth.
“Lenders expected a tightening of credit-scoring criteria for granting” mortgages and a “tightening of covenants on loans to large and medium-sized companies,” the Bank of England said in its fourth-quarter Credit Conditions Survey published in London yesterday. “Developments in the euro area and their impact on banks’ funding conditions would be a key determinant of credit availability over the coming quarter.”
Data from the central bank Jan. 4 showed mortgage approvals were little changed in November, underlining the fragility of the housing market. The Bank of England said in December that risks to U.K. financial stability from the euro-area sovereign debt crisis have increased and “stronger action” is needed to make banks more resilient to potential shocks so that they can continue to lend.
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PwC Fined $2.17 Million in U.K. Over JPMorgan Client-Money Audit
PricewaterhouseCoopers LLP was fined a record 1.4 million pounds ($2.17 million) for failures concerning reports on client-money accounts at JPMorgan Chase & Co.’s London securities unit.
PwC’s “acts of misconduct merit a severe reprimand,” the Accountancy & Actuarial Discipline Board said in a judgment released today. PwC failed to notice that J.P. Morgan Securities Ltd. hadn’t properly segregated an average of $8.6 billion of client funds from the firm’s accounts in reports to the U.K.’s Financial Services Authority for the seven years through 2008.
JPMorgan discovered the error in 2009 and reported it to PwC and the FSA, which fined the bank a record 33.3 million pounds in 2010. The U.K. financial regulator has focused on client-money segregation after the winding up of Lehman Brothers Holdings Inc.’s former European unit was slowed by years of litigation among creditors fighting over the issue.
“We regret that one aspect of our work on the private client money report to the FSA fell beneath our usual high standards,” PwC said in an e-mailed statement. “When the issue was identified, and before any complaint had arisen, we took action to ensure that staff received additional training in the client monies area.”
The AADB, the U.K.’s audit regulator, sought a record fine against PwC to top the 1.2 million-pound sanction against Coopers & Lybrand LLP in 1999. The tribunal also ordered that PwC pay costs to the AADB totaling 83,902 pounds.
The firm earned a reduction in the fine, which would have been 2 million pounds, for cooperating.
SNB’s Hildebrand Won’t Resign as He Turns Fire on Opponents
Philipp Hildebrand said he’ll stay at the helm of the Swiss National Bank and expressed regret that he didn’t curb his wife’s currency trading as he rounded on political opponents for trying to undermine his position.
Hildebrand, 48, said he acted appropriately in his role, speaking publicly for the first time about a currency transaction that led to calls for his resignation. He made the remarks at a briefing in Zurich yesterday.
Hildebrand also said the Zurich-based central bank will look into ways of improving transparency and regulations on personal financial ethics. He said he realized that people have “questions” and that he shouldn’t have let his wife make the dollar purchase.
Pressure on the SNB head to step down increased after local media reported he used insider knowledge to his advantage. While the central bank agreed to publish its rulebook Jan. 4 and an independent probe cleared him of wrongdoing, the purchase of $504,000 by his wife in August, three weeks before the SNB imposed a franc cap, was seen as “sensitive” by investigators. An employee at private bank Bank Sarasin helped leak the transactions to Hildebrand’s political opponents.
He said his spouse, Kashya, made the dollar transaction without his knowledge. Hildebrand informed the SNB on the following day and later gave the resulting profit to charity.
A report commissioned by the SNB Bank Council, the central bank’s supervisory board, last month said that there was “no evidence of misuse of privileged information.” Under SNB compliance rules, board members are forced to maintain currency positions for at least six months. The government reiterated yesterday that it had “confidence” in Hildebrand and said it had no reason to doubt the findings of the probe.
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J&J Said to Agree to $1 Billion Accord in Risperdal Sales Probe
Johnson & Johnson will pay more than $1 billion to the U.S. and most states to resolve a civil investigation into marketing of the antipsychotic Risperdal, according to people familiar with the matter.
J&J, the world’s largest health products company, reached an accord last week with the U.S. attorney in Philadelphia, according to the people, who weren’t authorized to speak about the matter. It doesn’t resolve negotiations over a possible criminal plea, they said.
The U.S. government has been investigating Risperdal sales practices since 2004, including allegations the company marketed the drug for unapproved uses, J&J has said in Securities and Exchange Commission filings. The company said it has been in negotiations with the U.S. to settle this investigation.
J&J, based in New Brunswick, New Jersey, disclosed in August that it reached an agreement to settle a misdemeanor criminal charge related to Risperdal marketing. The company is in negotiations to pay about $400 million more to settle this portion of the investigation, one of the people said.
“We’re not going to comment on rumor or speculation,” Teresa Mueller, a J&J spokeswoman, said in a phone interview.
Company officials said in an SEC filing in May that they had reserved funds to resolve the government’s claims over Risperdal marketing. The company didn’t say how much had been set aside. The drugmaker said in an August filing it added an unspecified amount to the reserve to cover criminal penalties.
When the final settlement will be announced isn’t clear. A majority of U.S. states will join the settlement, the people said.
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Japan Seeks Olympus Information From Regulators, Nikkei Says
Japan’s Securities and Exchange Surveillance Commission is seeking information from regulators in the U.S. and elsewhere about Olympus’s positions in foreign funds used to hide losses, the Nikkei newspaper said.
The SESC is seeking fund balances, transaction records and other information, according to the Nikkei newspaper, citing people familiar with the requests.
U.K. Finance Regulator Meets With Bank Executives on Bonus Plans
Officials at the U.K.’s Financial Services Authority are holding meetings with senior executives at banks to discuss compliance with rules on pay.
Liam Parker, an FSA spokesman, said in a telephone interview that the Financial Policy Committee is “vigorously engaging” with the “major U.K. banks” to ensure compliance with committee recommendations on retaining capital by reducing distributions such as bonuses.
The watchdog will discuss matters including the effect of pay packages on banks’ level of capital reserves as well as “the ratio between fixed and variable remuneration” with senior executives and members of lenders’ compensation committees, Andrew Bailey, head of U.K. banking supervision, said in a letter to banks’ chief executives last year.
The FSA introduced stricter bonus guidelines in 2010, implementing European Union rules, and must approve pay plans before they are announced to staff.
CFTC Asks Court to Dismiss Challenge to Position Limits Rule
The U.S. Commodity Futures Trading Commission asked a federal appeals court to dismiss a challenge by two Wall Street groups to its rule that limits commodity speculation, one of the financial industry’s highest-profile efforts to weaken last year’s Dodd-Frank law.
The CFTC filed its request Jan. 4 in the U.S. Court of Appeals in Washington, arguing the appeals court doesn’t have jurisdiction to consider the lawsuit. The agency said that the district court must first consider a challenge to the rule.
The International Swaps and Derivatives Association Inc. and Securities Industry and Financial Markets Association filed lawsuits in two federal courts in Washington last month, arguing that the CFTC used a flawed analysis of Dodd-Frank when it decided to impose the restrictions. The associations also said the CFTC failed to properly weigh the rule’s costs and benefits.
In response to questions from the district court judge, the groups said last month they didn’t oppose putting the district court case on hold while the appeals court considers the challenge.
The case is International Swaps and Derivatives Association v. CFTC, 11-01491, is U.S. Court of Appeals for the District of Columbia (Washington).
Rajaratnam Got Tip From Gupta on P&G’s Folgers Sale, U.S. Says
Rajat Gupta, the former Procter & Gamble Co. director indicted last year for insider trading, illegally tipped now- convicted hedge fund manager Raj Rajaratnam about P&G’s 2008 sale of Folgers Coffee Co. to J.M. Smucker Co., federal prosecutors said.
J.M. Smucker, the Orrville, Ohio-based maker of jams and other food products, bought Folgers for about $3 billion in June 2008. Prosecutors told U.S. District Judge Jed Rakoff in Manhattan yesterday at a pre-trial hearing that the government may file a superseding indictment against Gupta, also a former director of Goldman Sachs Group Inc., by the end of the month.
Also yesterday, Rakoff said Gupta should “not be too optimistic” about his request to bar Rajaratnam’s wiretapped calls as evidence in the case.
Gupta’s lawyer, Gary Naftalis, asked Rakoff to direct prosecutors to provide more specific details about their case against his client. Naftalis described as “vague” the indictment filed in October which alleges Gupta passed tips about Cincinnati-based Procter & Gamble, Goldman Sachs, and other “companies.”
“In June 2008, Procter & Gamble sold its Folgers Coffee business to J.M. Smucker,” Assistant U.S. Attorney Richard Tarlowe told Rakoff in court yesterday. “The allegation is that Mr. Gupta disclosed the information about that before it was public to Mr. Rajaratnam.”
The U.S. will probably argue at the April 9 trial that Rajaratnam told another person that Gupta gave him illegal tips, defense lawyers said in a Jan. 3 filing. Gupta contends that prosecutors are trying to make Rajaratnam a government witness by using statements he made about his alleged sources of inside information. Defense lawyers note that prosecutors at the same time have challenged Rajaratnam’s veracity, and even called the Galleon Group LLC co-founder a liar.
Gupta, 63, who also led McKinsey & Co., was indicted in October on accusations that he passed inside information to Rajaratnam.
The cases are U.S. v. Gupta, 11-cr-00907, and SEC v. Gupta, 11-cv-07566, U.S. District Court for the Southern District of New York (Manhattan).
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Comings and Goings
FCC’s Genachowski Appoints Zachary Katz Chief of Staff
Zachary Katz will become chief of staff at the Federal Communications Commission, the agency said in an e-mailed statement. He was appointed to the position by FCC Chairman Julius Genachowski. Katz will succeed Eddie Lazarus, who will leave the position at the end of January, the agency said in the statement.
Katz joined the FCC in 2009. He previously worked in the White House Counsel’s office. Since joining the FCC, Katz has led projects such as Connect America Fund.
Administrative Law Judge Robert G. Mahony Retires, SEC Says
Robert G. Mahony, an administrative law judge at the U.S. Securities and Exchange Commission, has retired, the agency said in a statement yesterday.
Mahony worked for the federal government for 46 years, 14 of which were spent at the SEC. While at the agency, Mahony presided over administrative proceedings brought by the SEC’s Division of Enforcement and issued decisions in the matters, the agency said in the statement. His proceedings covered a range of alleged securities law violations, including insider trading, the sale of unregistered securities, and disciplinary actions involving corporate officers and directors, and brokers, according to the statement.
--With assistance from Carter Dougherty, Nicholas Johnston, Jesse Hamilton and Tom Schoenberg in Washington; Klaus Wille in Zurich; Jennifer M. Freedman in Geneva; Scott Hamilton and Ben Moshinsky in London; Margaret Cronin Fisk in Southfield, Michigan; Jef Feeley in Wilmington, Delaware; David Voreacos in Newark, New Jersey; and Patricia Hurtado and David Glovin in New York. Editor: Mary Romano.
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