ITALIAN CHAMBER OF DEPUTIES APPROVES BILL TO

UNCLAS ROME 001043

SIPDIS


DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA
PARIS FOR USOECD
TREAS FOR HULL
STATE PASS CEA
FRANKFURT FOR WALLAR
USDOC 4212/ITA/MAC/OEURA/CPD/DDEFALCO

E.O. 12958: N/A
TAGS: ECON EFIN ELAB PGOV IT KPRP
SUBJECT: ITALIAN CHAMBER OF DEPUTIES APPROVES BILL TO
IMPROVE FINANCIAL MARKETS OVERSIGHT

REF: A) 04 ROME 406; B) 04 ROME 2630

SUMMARY
--------------


1. On March 4, the Chamber of Deputies approved, and sent
to the Senate for consideration, the reform of Italy's
fragmented financial markets oversight system. The
government promised the reform one year ago in the wake of
the Parmalat scandal. The current bill addresses conflict
of interest between banks and companies; requires banks to
provide a prospectus for the bonds they sell; and
strengthens Italy's securities market and company audit
regulator, Consob. The bill makes a half-hearted attempt on
accounting fraud, but not enough to address EU concerns over
a 2001 law weakening accounting fraud sanctions. A separate
bill implementing the EU Market Abuse Directive, already
approved by the Chamber of Deputies, could be approved by
the Senate in April. This bill does not address accounting
fraud. End Summary.

One Year Later - A Step Closer to Reform
--------------


2. On March 4, the Chamber of Deputies approved the reform
of Italy's fragmented financial markets oversight system and
sent the bill to the Senate for consideration. Political
disputes delayed approval of the bill, originally presented
to Parliament in February 2004 by then-Finance Minister
Tremonti. The initial dispute was between Central Bank (CB)
Governor Fazio and Tremonti, who sought to clip the CB's
regulatory powers and limit Fazio's Governor-for-life term.
Fazio came out on top, when Tremonti was forced to resign
over other matters in summer 2004 (Ref B).

Central Bank Powers Intact
--------------


3. The Chamber of Deputies-approved text is largely
consistent with that approved in committee, with the
important exception of leaving untouched the powers of the
Central Bank. The bill is consistent with the government's
position that the term of the CB governor should not be
addressed within the market oversight reform and that the CB
should retain oversight of competition (anti-trust) policy
in the banking sector. The Senate is also expected to leave
the CB authority untouched, when the Senate takes up the
bill.

Securities Market Regulator Strengthened
--------------


4. The bill provides tough oversight on conflict of interest
between banks and companies and requires banks to provide
potential retail investors with a prospectus for bonds the
banks sell. Consob, Italy's securities market regulator,
gains powers in the supervision of auditing firms, while the
financial police (Guardia di Finanza) will work more closely
with Consob. The bill introduces a new category of crime -
"nocumento" - fraud affecting a number of investors greater
than 0.5 percent of Italy's population (about 289,000) or
investment holdings greater than 0.5 percent of GDP (about
USD 7.5 billion). The bill also puts limits on the credit
that banks can extend to major shareholders (75 percent of
the value of the shares the investor owns) and requires that
company boards include an outside member who represents
minority shareholders.

Little New on Accounting Fraud;
EU Still Likely to Act.
--------------


5. The bill raises the maximum sentence for false accounting
from one-and-one-half to two years. However, there is still
no penalty for company directors and board members who
prepare, approve, or disseminate false balance sheets
involving an amount below five percent of the company's pre-
tax profits, despite the opposition's efforts to include
such provisions. (Note: The Berlusconi government passed a


law in 2002, which eased penalties for certain types of
corporate accounting fraud and made it harder to prosecute
such offenses. At that time, PM Berlusconi was facing
criminal charges for false accounting; but the case was
suspended after the law passed. End Note.)


6. The European Court of Justice (ECJ),however, has Italy's
law on corporate fraud in its sights. Specifically, after
the government loosened accounting fraud rules in 2002, the
ECJ reviewed the claim that the law violates EU statutes.
The Advocate General (AG) to the ECJ issued an opinion in
October 2004 that sections of the 2002 law are incompatible
with EU legislation. The ECJ should rule on the case in the
first half of 2005. Historically, in four out of five
cases, ECJ rulings have agreed with the AG opinion. In sum,
the new bill makes a half-hearted attempt on accounting
fraud, but not enough to address EU concerns over the 2002
law. It seems reasonable to assume that EU institutions
would also review any new legal provisions on accounting
fraud, too.

Next Steps
--------------


7. On March 16, the Senate Finance and Industry Committees
jointly took up the market oversight bill passed by the
Chamber of Deputies. Among changes expected in the Senate
are the restoration of pension fund oversight to Covip, the
pension regulator, and the creation of a bond-risk rating
system to inform investors better. Any changes to the bill
means it would then return to the Chamber of Deputies for
reconsideration. Senate Committee Chairmen hope to have
approval by the full Parliament prior to the August recess.

Slow Implementation of EU Market Abuse Law
--------------


8. The Senate has not yet approved a separate bill
transposing the EU directive on market abuse into Italian
law, which was approved by the Chamber of Deputies on
December 2, 2004. The EU deadline for member states to
adopt the EU directive was October 12, 2004. According to
Senate schedules, floor debate on the bill should start
April 5, with possible approval by end-April. The law
strengthens Consob by increasing 1) staff (from 450 to 600),
2) investigative powers (to require magistrates/law
enforcement to cooperate with regulators more),and 3)
sentences, to up to six years for some financial crimes
(except accounting fraud). The bill also gives Consob
access to the Centrale dei Rischi, the Central Bank archive
of confidential accounting documents from financial
institutions. The bill as passed by the Chamber of Deputies
would effectively implement the EU market abuse directive.

Market Oversight Reform, EU Market Abuse Laws a Package
-------------- --------------


9. Taken together, the Security Market Reform bill and the
bill to transform the EU Market Abuse Directive into
national law, if passed and adequately enforced,
substantively improve Italy's securities market oversight.
Provisions in the two laws are mutually reinforcing. For
example, to effectively exercise the new authorities in the
Oversight Reform law, Consob will need the increased
staffing authorized in the EU Market Abuse law. Indeed,
elements of the global reform package originally proposed by
former-Finance Minister Tremonti can be found in each of the
two laws. However, insufficient penalties for corporate
fraud are still a weakness in Italian legislation. EU
pressure on Italy could help close this loophole.

Comment
--------------


10. To be fully effective, Italy's security market oversight
reform should both create a set of coherent laws and
regulations, as well as ensure that regulators have the
authority, independence, skills, and resources to enforce
the rules. The final package of laws will make an important


contribution toward this ideal, but its real impact can only
be measured by the vigor with which regulatory authorities
enforce the law to prevent market abuse and corporate fraud.
End Comment.

Sembler


NNNN
2005ROME01043 - Classification: UNCLASSIFIED