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The Securities and Exchange Commission (SEC) will hold an open meeting on July 14 to consider whether to issue a concept release on proxy reform. A concept release would solicit public comment as to whether the SEC should consider revisions to its rules to promote greater efficiency and transparency in the U.S. proxy system, and to enhance the accuracy and integrity of shareholder voting. Proxy reform has been a top priority for the SEC for more than a year, and among the issues which could be addressed include whether to allow companies the ability to send proxy materials to their beneficial shareholders directly rather than through their financial intermediaries; whether to regulate proxy advisory firms; and whether to abolish or limit the ability of shareholders to hide their identities from corporations in which they invest. Other topics will include how to ensure accuracy in vote tabulations, “empty voting,” and “overvoting.” In the case of empty voting, investors are allowed to vote shares without holding an economic interest in the company. Overvoting refers to the practice of broker-dealers casting more votes than they are allowed to on behalf of their beneficial shareholders. The open meeting will be broadcast on the SEC’s website.

The Global Financial Stability Report Update for July 2010 was released by the International Monetary Fund, stating that despite generally improved economic conditions and a long period of healing after the failure of Lehman Brothers, progress toward global financial stability has recently experienced a setback. Sovereign risks in parts of the euro area have materialized and spread to the financial sector there, threatening to spill over to other regions and re-establish an adverse feedback loop with the economy. Further decisive follow-up is needed to the significant national and supranational policy responses that have been taken in order to strengthen confidence in the financial system and ensure continuation of the economic recovery.

The World Economic Outlook Update for July 2010 was released by the International Monetary Fund. World growth is projected at about 4.5 percent in 2010 and 4.25 percent in 2011. Relative to the April 2010 WEO, this represents an upward revision of about 0.5 percentage points in 2010, reflecting stronger activity during the first half of the year. The forecast for 2011 is unchanged. At the same time, downside risks have risen sharply amid renewed financial turbulence. In this context, the new forecasts hinge on implementation of policies to rebuild confidence and stability, particularly in the euro area. More generally, policy efforts in advanced economies should focus on credible fiscal consolidation, notably measures that enhance medium-run growth prospects, such as reforms to entitlement and tax systems. Supported by accommodative monetary conditions, fiscal actions should be complemented by financial sector reform and structural reforms to enhance growth and competitiveness. Policies in emerging economies should also help rebalance global demand, including through structural reforms and, in some cases, greater exchange rate flexibility.

Fitch Ratings upgraded Ukraine’s sovereign long-term foreign and local currency issuer default ratings by one step to B from B-. The outlooks are stable. The upgrade follows the finalization of $14.9 billion loan from the International Monetary Fund and puts Fitch’s rating in line with Standard & Poor’s and Moody’s rankings on the sovereign, five levels below investment grade. The IMF agreed the two-and-a-half year stand-by arrangement to help the eastern European country “entrench fiscal and financial stability, advance structural reforms and put Ukraine on a path of sustainable and balanced growth,” the fund said on July 3. The IMF’s Executive Board will make a final decision by late July, following “approval of legislative changes relating to the budget and financial sector,” the fund said in its July 3 statement. The IMF wants Ukraine’s government to keep its deficit at 5.5 percent of gross domestic product this year and 3.5 percent of GDP next year. Ukraine’s fiscal outlook also improved after its government secured gas subsidies from Russia in an agreement that is likely to bring to an end regular gas price disputes that had hampered supplies to Europe. Fitch cut Ukraine’s ratings three times between October 2008 and November 2009 after the global financial crisis undermined investment in the country and left about 20 banks in need of state aid. Ukraine’s economy shrank 15.1 percent last year, the deepest decline since 1994, as demands for its exports slid. Fitch expects the economy to expand 4.5 percent in 2010 and 4.7 percent in 2011, driven by stronger external demand and an improvement in Ukraine’s terms of trade.

At the conclusion of the Republic of Lithuania’s Article IV consultation with the IMF, the Executive Board commended the authorities for their decisive fiscal and financial sector policies during the crisis, which helped stabilize the economy and generate a recovery. Notwithstanding encouraging signs, the Lithuanian economy faces important challenges of high fiscal deficits and rapidly growing public debt as well as a high stock of non-performing bank loans. In addition, growth needs to rebalance towards exports. Addressing these challenges will sustain the recovery and facilitate euro adoption. Directors emphasized that far-reaching reform of the social insurance system will be necessary to tackle its large deficit. They saw scope to reduce generous social benefits and restore the viability of the pension system by increasing the retirement age and gradually moving towards a mandatory funded system, while ensuring adequate funding for the minimum basic pension. Expenditure adjustment will need to be complemented with revenue enhancing measures as part of a broad-based package. In particular, it will be important to exploit new, less distortive revenue sources, such as wealth taxes and to strengthen tax compliance. On the financial sector, Directors noted that overall the sector had weathered the crisis well, with both liquidity and capital indicators improving despite rising levels of non-performing loans. They cautioned however that some banks are not as well provisioned and capitalized, and also face pressure on interest rate margins. Directors considered it important that banks be subjected to forward-looking stress tests to ensure their viability. They commended the ongoing efforts to fine-tune the legal framework to facilitate voluntary debt restructuring and cautioned against mandatory moratoriums on debt payments that risk increasing the level of non-performing loans in the banking system.

In the context of the third review of Guatemala’s precautionary Stand-By Arrangement with the International Monetary Fund, the IMF staff welcomed the authorities’ continued efforts in improving public expenditure management, including issuance of norms to increase the transparency of public procurement and investment contracts, and restricting the role of trust funds in the execution of expenditure. The staff noted that there is scope to further improve expenditure control and transparency by taking full advantage of the Integrated Financial Management System (SIAF) and the National System of Public Investment (SNIP). The mission welcomed the authorities’ intention to seek a full understanding of the size and sources of floating debt, including domestic arrears, and strongly supported their request for Fund technical assistance to develop a methodology to measure that debt. The authorities are stepping up efforts to comply with the requirements of the Special Data Dissemination Standard (SDDS). With Fund technical assistance, an action plan has been developed which, if fully implemented, would allow Guatemala to subscribe to the SDDS by end-2010. Key components of this plan are the compilation and dissemination of labor statistics and consolidated general government operations, and improvements to balance of payments statistics.

European banks expect the International Monetary Fund to raise concerns about a bank tax introduced by Hungary’s new government which they claim would undermine economic recovery. Hungary plans to collect Ft200bn ($855m, €700m) from banks, insurance companies, and other financial companies this year and the same amount in 2011, as part of an effort to keep its budget deficit within a 3.8 percent target. Bankers have warned that the tax risks destabilizing the financial system by raising the cost and availability of credit and weakening capital adequacy ratios. There is also anxiety that other cash-strapped governments in the region will copy the idea, hitting banks with extensive regional networks and increasing the risk of double taxation. The IMF is scheduled to begin talks July 6 in Budapest with Hungarian officials about budget proposals. As part of Hungary’s €20 billion Stand-by Arrangement with the IMF, foreign-owned banks agreed to maintain their exposure to the country. However, the IMF is not in a position to offer the government flexibility on this year’s budget deficit target, after comments by officials comparing the country with Greece frightened international investors. The levy is also popular with some ordinary Hungarians who blame banks for issuing large numbers of foreign currency loans that have become harder to repay as the forint has weakened.

Standard & Poor’s (S&P) raised Qatar’s long-term ratings to AA from AA-, citing “strengthening fiscal and external balance sheets.” The ratings agency highlighted expected GDP per capita growth of 11 percent in 2010 thanks to increased natural gas output. Qatar now holds the highest long-term debt rating of any country in the Persian Gulf, according to Bloomberg. S&P last changed Qatar’s long-term rating in March 2007, raising it to AA- from A+. Qatar weathered the 2008 global financial crisis relatively well, due to government support of its financial institutions. The Qatari government provided banks with capital and purchased their real estate and equity portfolios. S&P said Qatar faces “structural weaknesses and challenges” including a lack of government transparency and public institutions that are in the “early stages of development.” The country is also exposed to political risks including an escalation of tensions between the West and Iran, the ratings agency said.

A report by Inter-Governmental Action Group Against Money-Laundering in West Africa (GIABA) indicates that Ghana is not yet prepared to effectively combat money-laundering and terrorist financing in harmony with international best practice. Ghana has been placed on an expedited regular follow-up process, and is expected to present a follow-up report at GIABA's plenary meeting in November 2010 to rectify the deficiencies that have been identified. Major deficiencies include non-existence of a financial intelligence center, and ineffective application of powers by appropriate authorities to investigate and confiscate proceeds of crime. Other deficiencies include inconsistency in the implementation of a currency declaration system across designated entry and exit points, and a lack of role awareness by customs and excise officials. The evaluation also cited a lack of comprehensive preventive measures by financial institutions in the areas of customer due diligence and politically exposed persons; application of a risk-based approach to anti-money laundering and combating the financing of terrorism; combating the financing of terrorism compliance functions; monitoring of cross-border and domestic wire transfers; mechanisms with regard to cross-border correspondent banking relationships; and clear guidelines with respect to the use of third parties and intermediaries.

The Reserve Bank of India (RBI) has proposed that increases in the fixed compensation of full time directors and chief executive officers of private and foreign banks operating in India be capped in the range of 10-15 percent a year. In cases where the variable component constitutes a substantial portion of the total pay, 40 to 60 percent of the variable pay would be deferred for a minimum period of three years under draft guidelines. Compensation packages of executives in the public banking sector, which accounts for 70 percent of the industry in India, is currently governed by an industry-wide wage pact. Foreign and private banks would have to incorporate the new compensation policy before December 31, in time for the financial year ending March 2012. Private and foreign banks would also have to introduce a remuneration committee on their boards, which would include non-executive independent directors. The proposals have been placed on the RBI’s website, and are available for comments until July 31.

Nepal is expected to sign a Memorandum of Understanding (MoU) with Mongolia, Thailand and Malaysia regarding financial information exchange to prevent money laundering and terrorist financing at the 13th annual general meeting of the Asia-Pacific Group on Money Laundering (APG) to be held in Singapore from July 12-16. Nepal is a member of the APG. The MoU will make it mandatory for the countries to provide each other financial information on bank balances, investments in real estate, and persons suspected to be involved in money laundering and terrorist financing. A similar agreement with India is expected within a few months. The government has also expressed interest in an MoU with Hong Kong in light of alleged capital flight under the guise of wool imports.

The U.S. government has recently signed a treaty with 15 other government agencies around the world known as the Convention on Mutual Administrative Assistance in Tax Matters. The treaty will enable the countries to share information regarding tax fraud, money laundering, and other financial-related issues. The U.S. says it loses $8.5 billion annually in tax revenue from tax evasion associated with offshore accounts. Currently it is impossible for the Internal Revenue Service (IRS) to know of an offshore account unless a taxpayer or bank notifies the agency.
Switzerland, however, did not sign the agreement last month. The U.S. has accused UBS, and as many as 20 other Swiss banks, with helping wealthy Americans hide as much as $20 billion worth of income and assets from the IRS. In February 2009, regulators sued UBS—which reportedly has 52,000 accounts with U.S. connections—but later dropped the suit when the company promised to pay a $780 million penalty. UBS also agreed to hand over the names of 4,450 American clients suspected of tax evasion, but the agreement was rescinded upon review by the Swiss Supreme Court, citing bank secrecy laws. The dispute was settled June 15 when the Swiss Parliament voted to reinstate the agreement. The IRS offered American clients with offshore bank accounts a chance to file voluntary disclosure statements for any unreported income last year while it negotiated with UBS for information. Filers were granted amnesty, and although total relief from penalties was not provided, approximately 14,500 people responded.
The IRS and the Department of Justice are continuing to expand efforts to address offshore banking in Singapore, Hong Kong, Israel, Panama, and the British Virgin Islands which have attracted undeclared money that left Switzerland, particularly in Asia. Banks in Singapore and Hong Kong hold estimated offshore wealth worth $700 billion against Switzerland's $2 trillion, according to the 2010 Boston Consulting Group Wealth Report.

In the largest overhaul of its kind since 2005, the International Swaps and Derivatives Association (ISDA) is reviewing the master document of all commodity definitions used in financial transactions and derivatives, which will include new products to reflect market developments. The trade body is looking at the whole Annex A of ISDA commodity definitions, which includes all global commodity reference prices across all asset classes from agriculture to gas, palm oil, metals, bullion, and plastics contracts among others. It includes 1,200-1,300 reference prices, which have to be updated on a regular basis under ISDA policy. The reviewed document is significant for the financial services industry as it could affect the types of contracts institutions use to trade commodity derivatives contracts in the future. ISDA aims to publish the revision by the end of 2010.

The government of Ukraine and the International Monetary Fund have reached an agreement on an economic policy program that can be supported by a Stand-By Arrangement in the amount equivalent to $14.9 billion. The agreement reached between the IMF staff and government authorities is subject to approval by the IMF’s Executive Board, which is expected in late July, following approval of legislative changes relating to Ukraine’s budget and financial sector. The Ukrainian economy suffered one of the most severe retractions of 2009, declining 15 percent. Approximately $11 billion of IMF support helped to keep Ukraine financially afloat in 2009, but more assistance was frozen because of a lack of economic reform before the presidential election held in 2010. Resuming cooperation in the form of a Stand-By Arrangement would be conditional on fiscal adjustment to contain the 2010 consolidated general government deficit to 5.5 per cent of GDP in 2010 and 3.5 per cent in 2011, with a view to setting public debt firmly on a declining path. The fiscal adjustment is to be achieved by tax and social security reforms and expenditure rationalization, combined with efforts to improve tax administration. Renewed cooperation with the IMF could reopen Ukraine’s access to international debt markets. After covering a budget deficit this year with a $2 billion bridging loan from Russia, the government wants to offer a Eurobond $1.3 billion placement.

The Committee of European Securities Regulators (CESR) will outline its position on multi-lateral trading facilities (MTFs) and dark pools of finance in July. CESR meets on July 16 to comment on revisions to the markets in financial instruments directive (MifID), which will become MifID II. CESR’s comments will be passed to the European Commission in October and subsequently to the European Parliament. A completed version of the revised directive is not expected before the end of 2012. The chairman of CESR, Eddy Wymeersch, has said that CESR’s proposals on over-the-counter derivatives would be in line with the U.S. approach, and that CESR has been in constant dialogue with the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission about various matters of common concern.

Representatives of member states and the European Parliament failed to unblock talks stalled over how much power to give three new pan-EU authorities to supervise banks, insurers and markets. The EU has pledged that its new framework would be up and running by January 2011. The European Commission authored the legislation and acts as a broker to reach agreement, but Parliament is pushing for a far tougher version than member states. The U.K., for instance, fears the new bodies will hold too much sway over day-to-day supervision of its financial center, the EU’s largest. The Commission has proposed a compromise that would narrow the powers of the new authorities. Focus would be placed where EU rules have been broken and where specific agreements allow for direct intervention. There would only be direct EU supervision of credit rating agencies and perhaps clearing houses and trade repositories, meaning the new authorities would not directly intervene in a bank or insurer. Parliamentary officials have said they could still hold a first reading vote next week which, unless backed by EU states, would trigger a second reading in September, adding further delay.

More than 100 banks in Europe, 15 of them in Germany, will be examined in a second round of stress tests, as proposed by the European Central Bank and the Committee of European Banking Supervisors. A first round of stress tests covered three German banks—Deutsche Bank, Commerzbank, and BayernLB—and results are expected next month. The second round will cover lenders accounting for around half of the total banking assets in individual countries. Regulators, however, cannot force banks to comply with demands for full transparency of stress test results. European banks have a legal right against publishing confidential data that would show whether a bank is properly capitalized and does not pose a threat to the rest of the financial system. An earlier round of stress tests on the EU’s top 22 banks unveiled in October drew criticism because the tests did not name the banks or provide country-by-country breakdowns or other details.

New disclosure rules designed to increase transparency and accountability in the extractive industries went into effect July 1 for petroleum and mineral companies listed with the Hong Kong stock exchange (HKEx), with beneficial implications for Hong Kong’s investment climate. Under the new reporting requirements, applicant oil and mineral companies would disclose significantly more details about their operations including taxes, royalties, and other payments made to governments on a country-by-country basis. “Hong Kong’s new reporting regulations set an important precedent for establishing country-by-country reporting for extractive industry companies and send a clear message about the importance of transparency to investors,” said Heather Lowe, Director of Government Affairs for Global Financial Integrity. Similar to Hong Kong’s new rules, the Energy Security Through Transparency Act (ESTTA) would entail similar reporting for companies in the extractive industry sector that must report to the U.S. Securities and Exchange Commission, which includes 90 percent of the world’s international oil and gas companies, including both U.S. and foreign companies. The bill has bi-partisan support and is currently awaiting action in the U.S. Senate Banking Committee. “Hong Kong is now leading the way in holding the extractive industry sector accountable for complying with international best practice standards, providing critical information to investors, and empowering governments and their citizens to account for the use of their natural resources,” said Ms. Lowe. “The U.S. should follow suit with passage of the ESTTA and keep pace with the new priorities for investors and changing international standards.”

The World Bank Group committed more than $72 billion supporting an estimated 875 projects during the fiscal year July 1, 2009 to June 30, 2010—an unprecedented level of Bank Group assistance for developing countries. Assistance was provided in loans, grants, equity investments, and guarantees to help countries and private businesses contending with significantly diminished private capital flows in the wake of the global downturn. Private flows are forecast to recover only modestly from $454 billion in 2009 to $771 billion by 2012, still far below the $1.2 trillion in 2007. Overall, the financing gap of developing countries is projected to be $210 billion in 2010, declining to $180 billion in 2011—down from an estimated $352 billion in 2009.

The toughest restrictions on bankers’ bonuses seen thus far are expected to pass the European Parliament next week. Under the proposed legislation, between 40 and 60 percent of bonuses would have to be deferred for three to five years, and half of upfront bonuses would have to be paid in shares or in other securities linked to bank performance. As a result, the cash portion would be limited to between 20 and 30 percent. The legislation would also force banks to link bonuses more closely to salaries with the aim of reducing the importance of bonus payments in the financial sector. Further, any banks bailed out by taxpayers must rebuild their capital first and repay those funds before focusing on employee pay.

Moody’s has placed Spain’s Aaa local and foreign currency government bond ratings on review for possible downgrade. The decision to initiate the review was prompted by: (1) the deteriorating (short-term and long-term) economic growth prospects; (2) the challenges the government faces in achieving its fiscal targets; and (3) concerns over the impact of rising funding costs over the medium term. If at the conclusion of the review, Spain’s ratings are lowered, it would most likely be by one, or at most two, notches. The rating agency intends to conclude its review within a three-month period. The Spanish government’s Prime-1 short-term rating is not affected by this review. Spain falls under the Eurozone’s Aaa regional ceilings, which are not affected by the review of the Spanish government’s ratings.

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have issued proposals for changes in the standards for fair value measurement and disclosure in U.S. GAAP and International Financial Reporting Standards (IFRS). The updates under discussion are the result of efforts to ensure that fair value will have the same meaning under U.S. GAAP and IFRS, and that their respective fair value measurement and disclosure requirements will be virtually the same, except for minor differences in wording and style. The proposed amendments will apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in shareholders’ equity in the financial statements.

IASB’s draft update Measurement Uncertainty Analysis Disclosure for Fair Value Measurements proposes a three-level fair value hierarchy that categorizes observable and non-observable market data used as inputs for fair value measurements. According to that hierarchy, Level 3 inputs are ‘unobservable inputs’ used for the fair value measurement of assets or liabilities for which market data are not available. In response to the comments it has received on earlier drafts of the standards, the IASB proposes to enhance its original proposal by requiring the measurement uncertainty analysis disclosure to reflect the interdependencies between unobservable inputs used to measure fair value in Level 3. Both this proposal and FASB’s draft Amendments for Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS are open for consultation until September 7, 2010.

In a preliminary statement at the conclusion of Austria’s Article IV Consultation, the International Monetary Fund welcomed steps taken by the authorities to ensure that Austria’s financial system cannot be used for unlawful purposes. Austria has taken action in response to its identification in the International Country Risk Guide (ICRG) process, and has since been removed from the process in view of commitments made by the authorities to further strengthen compliance with the recommendations of the Financial Action Task Force (FATF), of which Austria is a member. Austria’s acceptance of Article 26 of the OECD model tax convention was also welcomed.

The latest version of the U.S. financial reform bill entitled the Dodd-Frank Act, which many hoped would be signed into law before the July 4 recess of Congress, suffered a setback when confronted by lawmakers opposed to a $17.9 billion bank tax to offset costs associated with the legislation. The fee would have been imposed on banks with more than $50 billion in assets and hedge funds with more than $10 billion in assets. The tax was subsequently removed from the legislation in an effort to gain enough votes of Republican Senators needed to pass the Act. A new measure was agreed by lawmakers to meet the increased institutional and regulatory costs associated with the financial reform legislation by using savings, estimated at $11 billion, from early closure of the $700 billion Troubled Asset Relief Program (TARP), and by increasing revenue raised by the Federal Deposit Insurance Corporation (FDIC). The FDIC would increase its reserve ratio from 1.15 percent to 1.35 percent, or $1.35 for every $100 in deposits. Banks with less than $10 billion in assets will not pay for the increase. The reconstituted Act did pass the House of Representatives on June 30 with a vote of 237-192, while the Senate delayed its final vote until after the July 4 recess ending July 12. Both the House and the Senate must approve the Act before it is signed into law by the President.

During the Financial Action Task Force (FATF) Plenary Meeting June 23-25, the FATF welcomed the Eurasian Group (EAG), the Intergovernmental Action Group against Money-Laundering in West Africa (GIABA) and the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) as associate members of the FATF, recognizing their efforts in the implementation of the FATF Standards in their respective regions. Associate membership gives these FATF-style regional bodies (FSRBs) a greater decision-making role within the FATF. All eight FSRBs have now attained Associate Membership status, reinforcing the FATF’s global network.
At the Plenary Meeting, the FATF also discussed and adopted the mutual evaluation reports assessing compliance of Saudi Arabia, India, and Brazil, against the international standards for combating money laundering and terrorist financing—the 40+9 Recommendations. Saudi Arabia is a member of the Middle East and North Africa Financial Action Task Force (MENAFATF) and of the Gulf Cooperation Council (GCC), which is a member of the FATF. Brazil, a FATF member state, was assessed jointly by the FATF and the South American FSRB, GAFISUD. India has held observer status of the FATF since November 2006 and was assessed as an observer country in the context of their request for FATF Membership. As of the Plenary Meeting, India became the 36th member of the FATF, which recognized India’s efforts and commitment to bring its AML/CFT system into line with FATF Recommendations. The Executive Summaries of the three mutual evaluation reports are available on the FATF website, while the full reports will be made available within a few weeks.
In other developments, the governments of Angola, Ecuador, Ethiopia, Pakistan, and Turkmenistan have recently made high-level written commitments to implement action plans to address specific AML/CFT deficiencies.

The FSB has issued two documents in reporting to the G20 at the Toronto Summit: (i) an interim report on reducing the moral hazard posed by systemically important financial institutions, and (ii) an overview of progress in the implementation of G20 recommendations for strengthening financial stability. The G20 has assigned the FSB with a new task, in consultation with the IMF, to assess bank supervisory capacity, and to report to the Meeting of Finance Ministers and Central Bank Governors in October 2010 on recommendations to strengthen oversight and supervision, specifically relating to the mandate, capacity, and resourcing of supervisors and specific powers which should be adopted to proactively identify and address risks, including early intervention. The FSB’s thematic and country peer reviews continue. The first thematic peer review on compensation, although ongoing, was completed in March 2010; financial institution and disclosure practices and mortgage underwriting standards will be reviewed later this year. For country peer reviews, a review of Mexico will be completed in July, while reviews of Italy and Spain will follow later in the year. In his covering letter to the G20 Leaders Summit, FSB Chairman Mario Draghi states that it is essential to strengthen the operational capacity of the FSB.

The world's largest economies hinted today that they will consider increasing Official Development Assistance to poor countries as a way to help them meet the Millennium Develop-ment Goals. The Task Force on Financial Transparency and Economic Development calls on the G20 nations to institute financial transparency measures which will result in additional resources that can be used to meet those development targets. In the Toronto Summit communiqué the G20 countries pledged their commitment "to meeting the Millennium Development Goals by 2015" and noted that they will reinforce their efforts "including through the use of Official Development Assistance." Raymond Baker, the head of the Task Force, said that the G20 can help reduce tax evasion and corruption in poor nations by encouraging transparency measures such as country-by-country reporting for multinationals and tax information exchanges between governments. Indeed, up to $1 trillion in illicit money is drained from developing countries each year according to research by Global Financial Integrity, a Washington, DC-based research and advocacy group. Current levels of Official Development Assistance, at $100 billion annually, pale by comparison. "Given the ratio of aid inflows to illicit outflows it is highly unlikely the MDG targets will be met without significant new resources of revenue," Baker noted.

At the conclusion of the biannual meeting of leaders of the G20 countries held in Toronto, a wide-ranging G20 Toronto Summit Declaration was issued, broadly affirming past positions while addressing differences regarding fiscal policy and sovereign debt, and difficulties in establishing more robust international financial regulation. Many countries, including the U.S., have been critical of the German-led European austerity drive. Details on fiscal consolidation in advanced countries were relegated to Annex I of the Declaration, stating: “There is a risk that synchronized fiscal adjustment across several major economies could adversely impact the recovery. There is also a risk that the failure to implement consolidation where necessary would undermine confidence and hamper growth. Reflecting this balance, advanced economies have committed to fiscal plans that will at least halve deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016.” On financial regulation, the leaders endorsed a long phase-in for new Basel III bank capital and liquidity rules, allowing different speeds for different countries at the risk of encouraging regulatory arbitrage; the previous target of achieving the new capital standards by the end of 2012 has been downgraded to an “aim.”

A conference committee of lawmakers from both the House and the Senate agreed on a final version of the Financial Reform Bill entitled the Dodd-Frank Act of 2010. The Act is expected to have enough support to pass a final vote and become law in the coming week. Final hours of negotiations centered on a provision known as the Volcker rule, named after former Federal Reserve Chairman Paul Volcker. Subject to certain exceptions, the agreed rule prohibits any banking entity from engaging in proprietary trading, or sponsoring or investing in a hedge fund or private equity fund. It also requires systemically important nonbank financial companies to carry additional capital and comply with certain other quantitative limits on such activities, although it does not expressly prohibit them. The amount of additional capital is to be determined by U.S. and international regulators in the coming months. The Act also includes a provision, authored by Sen. Blanche Lincoln, which would limit the ability of federally insured banks to trade derivatives. However, the agreement made would allow banks to retain most of their derivatives units, including interest rate swaps, foreign exchange instruments, and investment-grade credit default swaps. Also included in the Act is language that enables the Securities and Exchange Commission (SEC) to write a regulation requiring broker-dealers to act in the best interests of their clients and to reveal any conflicts of interest when providing investment advice to retail clients. If passed, the law will give the SEC the authority to impose the same fiduciary standard that applies to investment advisers.
The conference committee also agreed to withdraw a Senate proposal made last week to impose a 5% ownership threshold for shareholders to nominate directors to the board of companies. The proxy access provisions in the Act are now expected to affirm the authority of the SEC to adopt a proxy access rule without limiting the SEC’s discretion to set standards and thresholds. The adoption of the proposed amendment would have been a setback for investors and for corporate governance reforms. A 5% threshold would have made the proxy access provisions in the Act largely irrelevant for most long-term institutional investors, such as pensions, whose involvement in the nomination process of directors proxy access reform is intended to facilitate.

European Union lawmakers postponed a vote on new rules to regulate hedge funds and private equity funds until September at the earliest. A vote of the full European Parliament had been scheduled for next month, but negotiations between parliamen-tarians, EU member states, and the European Commission aimed at producing a single agreed text have stalled. Disagreement centers on the issue of how to handle funds and managers based outside the EU, and a passport or license for foreign hedge funds to do business throughout Europe. Lawmakers want to block the entry of foreign funds that fail to qualify for a license because they do not meet European Union standards on transparency, bonu-ses, and the use of debt. But the UK, home to nearly all European hedge funds, wants to give funds that fail the European Union passport test a second chance by letting them apply for a license to operate in individual countries. Criticism also has come from the U.S., which has warned that the measures could be discriminatory.