ITALY,S PARLIAMENT PASSES "SARBANES-OXLEY".

UNCLAS SECTION 01 OF 04 ROME 000384

SIPDIS

SENSITIVE

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

E.O. 12958: N/A
TAGS: ECON EFIN ELAB PGOV IT KPRP
SUBJECT: ITALY,S PARLIAMENT PASSES "SARBANES-OXLEY".

REF: A. 05 ROME 3195


B. 05 ROME 1043

C. 04 ROME 406


1. SUMMARY. On December 23 Italy's Senate passed the
financial market oversight reform bill, two years after the
massive Parmalat fraud scandal and just following the
resignation of Bank of Italy (BOI) Governor Fazio. The bill
leaves in place the five regulatory authorities: antitrust,
central bank, securities market, insurance, and pension
funds. The bill gives Italy's securities market regulator
(CONSOB) the authorizty to raid firms suspected of securities
violations, and to impound evidence. It also cuts the BOI
Governor's term from a life-time appointment to six years,
renewable once, and shifts the BOI's banking competition
oversight to CONSOB and Italy's antitrust authority. The
European Central Bank (ECB) has approved the reform.


2. Summary continued. The new law requires the affected
regulatory agencies to write and implement a total of 35 new
decrees and regulations in a period ranging from six to 18
months; CONSOB is responsible for 19. The new law integrates
a law passed in April 2005 implementing the EU market abuse
directive, strengthening the powers, and increasing the
staffing of CONSOB. The bill also redefines a new category
of crime called "Nocumento" or mega-fraud, which damages more
than 0.1 percent of Italy's population (roughly 575,000
people) or, investment holdings investment holdings totaling
1.4 billion euro. Measures have already been taken to delay
implementation of the new bill and some analysts believe that
deputies passed the bill so they could campaign as
anti-corruption reformers in the upcoming elections.
Shifting authority among the five key regulators, the crush
of implementing regulation, and the inevitable election-year
slow down in administrative activity means it will be many
months before the new law takes effect. END SUMMARY.

Two years of Political Disputes Wrap Up
--------------


3. On December 23 Italy's Parliament approved the last
reform law of Italy's fragmented financial markets oversight
system; capping the official, tough, and outrageously delayed
GOI response to the 2003 Parmalat scandal. A watered down
version of the original bill presented to Parliament by
Finance Minister Giulio Tremonti in February 2004, the final
package approved lacks the more aggressive steps proposed by
Tremonti to protect private savings from corporate
mismanagement, and to establish a single, consolidated
financial regulatory authority to supervise banking and
equity markets to pension and insurance plans, similar to the
United Kingdom's Financial Services Agency. Tremonti's
initial proposal appeared to have bipartisan support, but
divisions between the government and the opposition quickly
developed. The bill ran into trouble since Tremonti planned
to clip the BOI's regulatory powers and impose a fixed term
limit for the governor. Former BOI's Governor Fazio at the
time had allies both within and outside the government
coalition and as a result, the reform bill stalled.

Bank of Italy's New Role
--------------


4. The return of Tremonti as Finance Minister last fall
(reftel A),following the resignation of Domenico Siniscalco,
and the accusations of manipulation of bank mergers leveled
against ex-Bank of Italy governor Fazio finally provided the
necessary impetus to pass the market reform bill. Notably
the bill sets a once renewable, six-year term for the new BOI
Governor, and gives the antitrust authority more oversight
over banking competition. The bill introduces more
transparency and consensus in BOI's decision-making
processes; before the reform authority at the BOI was held
exclusively by the governor, who was able to make all
decisions without transparency or a justification. The BOI
is also now required to report on its activities to
Parliament every six months.


5. Under the new law the BOI governor is appointed by
Italy's President, on the recommendation of the Prime
Minister and the Finance Minister, who must first consult the
BOI,s Superior Council, made up of thirteen members chosen
by the BOI branches located capital of Italy's thirteen
largest regions for five years. For this reason is currently
made up of people chosen in the Fazio era. This new
procedure was used for the appointment of the bank's new
Governor, Mario Draghi. Previously the bank's Superior
Council exercised significantly more discretion in selecting
the new governor. Even within the restricted BOI board made
up four members (the governor, the director general and two
deputy directors general) that run the bank, Draghi is
surrounded by people of the Fazio era. Any possible step
toward the modernization of the BOI will pass through the
expected retirement of the current DG and the appointment of
a new DG coming from outside the bank.


6. BOI's capital, now controlled by the same private banks
BOI regulates, will be transferred to public institutions by

2009. The total value of BOI owned by private banks is in
dispute. The transfer of ownership to an as yet undefined
&public institutions8 may lead to greater political
influence over BOI's operations; however given that further
details will be fleshed out in a new regulation it is
difficult to speculate how this will unfold.


7. The BOI will retain its oversight of banking system
stability, and will continue to investigate potential
conflicts of interest cases between banks and non-banking
companies. It will decide on a case by case basis the
allowable level of indebtedness by a bank's controlling
shareholders. The final version of the law eliminated a key
provision to limit credit given by a bank to any one of its
shareholders to three fourths of the value of the individual
shareholders shares. This measure had been designed to
discourage businesses from becoming bank shareholders to
receive preferential, non-market-based credit.


8. General oversight for the banking industry, specifically
monitoring anti-trust behavior and other non-competitive
behavior, has been transferred from the Bank of Italy to the
antitrust authority, under the direction of Antonio
Catricala. One of the first consequences of the law was the
announcement of an investigation by the antitrust authority
on costs associated with checking accounts and ATM services.

Securities Market/Corporate Governance Authority Wins
-------------- --------------


9. The new bill will strengthen the position of Italy's
securities market and corporate governance authority, CONSOB,
headed by Lamberto Cardia. CONSOB now has oversight of: 1)
bond placement and circulation for bonds issued abroad by
Italian companies or their foreign subsidiaries; 2)
transparency in capital transactions, and 3) conflict of
interest by senior management. For example, to issue bonds
abroad, firms will now need to submit information to CONSOB.
A firm's board of directors will be bound by CONSOB rules of
conduct for stock capital transactions, and senior executives
will be required to report any conflict of interest.


10. CONSOB will assume oversight of Italian companies and
credit institutions operating with offshore financial
institutions in tax havens. It will develop criteria by
which Italian firms, listed on Milan's stock market, and
financial institutions may retain authority over off-shore
institutions. CONSOB will also regulate stock options and
public company accounting oversight.


11. CONSOB's authority had already been strengthened by a
bill signed into law in April 2005, which integrates an
existing EU directive on market abuse into Italian law. The
2005 bill increases CONSOB's staff, from 450 employees to 600
employees, gives CONSOB greater investigative powers, and
stiffens penalties for financial crimes to a maximum six
years in prison. The bill also gives CONSOB access to the
Centrale dei Rischi, the Central Bank archive of confidential
accounting documents from financial institutions.

Of Note: Law Tidbits
--------------


12. The market reform law requires minority shareholder
representation on a firm's board of directors. The bill
confirms, but does not significantly change the powers of
COVIP, Italy's supervisory body for pension funds, and for
ISVAP, the supervisory body for private insurance, and
creates a ministerial advisory commission on savings. This
commission will consist of a President and two members, to be
named by the Prime Minister based upon recommendations by the
Ministers of Finance and Public Administration. COMMENT:
The exact work this commission will is unclear, as its
mandate appears to duplicate activities of other market
oversight institutions. END COMMENT.


13. The bill is also designed to reduce the power of Italy's
banking foundations. In 2004, Italian banking foundations
disbursed 1.2 billion euro, while in the period 1993/2004
they disbursed 7.3 billion euro. The total assets of Italian
banking foundations or foundation of banking origin were
equal to 41 billion euro at end-2004. Despite the banking
reforms of the 90s, Italy's banking foundations remain
powerful, wealthy, and private institutions, with members
historically appointed by regional and local government
authorities. For example, Fondazione Monti Paschi di Siena
(MPS) owns 66% of MPS Bank, Italy's fifth largest bank, worth
6.7 billion euro at current market valuation. Regardless of
a foundations share in a bank, the new bill limits a
foundation,s voting to only 30 percent, reducing its control
over board decisions, and indirectly encouraging the
foundation diversify its investments, thus making the capital
available to other parts of the economy.


14. The bill will allow financial market oversight
authorities to request assistance from the Guardia di Finanza
(GdF),Italy's financial police to conduct investigations.
Although the regulatory authorities can currently request GdF
assistance through a court order, this bill establishes new,
direct links between the institutions and the GdF.

New Penalties for Financial Crimes
--------------


15. The bill provides weaker-than- anticipated regulation of
fraudulent accounting practices. For example, the maximum
prison sentence for falsifying corporate financial statements
increased from one and half years to just two years. The
political opposition had introduced a regulation increasing
prison time to five years for fraudulent accounting
practices; however the final version was considerably watered
down. The new bill follows existing law in that no penalties
apply to company directors and/or board members who prepare
or disseminate fraudulent balance sheets when the
discrepancies fall below five percent of a company's pre-tax
profit.


16. The bill, creates (see reftel B and C) a new category
of crime called "Nocumento8. Nocumento is defined as
fraudulent accounting that adversely affects more than 0.1
percent of Italy's population (roughly 575,000 people)or
investment holdings totaling 1.4 billion euro. This crime is
punishable by a two-to-six year prison term.


Two Steps Forward, One Step Back
--------------


17. The new market reform bill was meant to be implemented
January 12, 2006. However, a decree law postponing the
implementation of some parts of the bill is now before
Parliament, triggering a sixty day delay of the law's
implementation. The decree, if approved, will: 1) postpone
for an additional twelve months the enforcement of CONSOB's
new regulatory powers, and 2) create a four-month transition
period for the reform in the bond and insurance sectors. In
addition the banking foundations have begun lobbying to
postpone for twelve months the reduction in their maximum
voting powers to 30 percent.

What Do the Changes Mean?
--------------


18. There still remain five market oversight authorities )
the Antitrust Authority, the BOI, CONSOB, ISVAP, and COVIP,
with a new, ill-defined ministerial level advisory committee
on savings. The BOI remains overstaffed, with 8,000
employees, while CONSOB and the antitrust authority have
significantly increased power, yet remain relatively
understaffed.

Former Top Regulator Not Sanguine
--------------


19. Guido Rossi, university professor, jurist, and former
president of CONSOB, has told the press that the new
financial market oversight reform bill is one of the worst
laws passed in the last thirty years. He said it was rushed
through as part of a strategy to force former BOI Governor
Antonio Fazio to resign. In addition, Rossi asserts, the
bill was watered down under pressure by center-right party
members in Parliament, perhaps in an effort to preserve the
2002 law that dismissed fraudulent accounting charges against
Prime Minister Berlusconi for his dealing with SME, a former
state-owned Italian food company. As a result of the 2002
law, judges suspended that criminal case against Berlusconi.

Oversight Authority Still Fractured/Overlapping
-------------- --


20. While the new law may improve corporate governance in
Italy, it leaves intact a fragmented regulatory structure
with overlapping roles and confusing bureaucracy. Critics
note the law was passed during at a time when of politicians
facing re-election are anxious to show tough action against
financial criminals.

As Always, Devil in the Detail -- Implementing Regs
-------------- --------------


21. The bill requires several regulations to be first
drafted and then implemented by the different regulatory
authorities. So, the verdict remains out as to whether the
law will achieve its original, long-awaited goal of
overhauling and strengthening Italy's securities market and
corporate governance oversight.
SPOGLI