Boletín No. 4 Febrero - Marzo 2005

7/30/2019 Boletn No. 4 Febrero - Marzo 2005

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Industrialized countries fear high costs and eventual lose of

competitive as a consequence of the implementation of the New

Basel Accord.

American institutions join their voices to those who has expressed their

concern regarding the associated costs of the implementation and development

of Basel II, particularly the Pillar 3, regarding the Market Discipline.

The Basel Capital Accord, result of the efforts of 25 years of study of the Basel

Committee, contains prudential regulation regarding the general directives to

be followed by the banks regarding adequate capital level, measuring of

assets, credit quotas and dispersion of risk, but also about the banking groups,

overseas participation, directors liability, internal control mechanisms and

delegation, and, naturally, knowledge of consumers and application of ethic

principles in the development of business14.

On June 26, 2004, the Basel Committee enacted the New Basel Accord, also

known as Basel II, which should be adopted by the countries in the latemonths of 2006. The new accord seeks to progress in the current regulation,

by means of three pillars: (i) minimum capital requirements (Pillar 1); (ii)

supervisory review (Pillar 2) (iii) market discipline (Pillar 3).

As we have expressed in many forums, it seems that the third pillar, market

discipline, is the less diffused and analyzed pillar, regardless of the importance

of its implications.

14 Conference held in Panama City, namedThe Basel Committee and the banking innon-industrialized countries, in the XVI Latin American Congress of Banking Law foFELABAN.


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On this matter we have pointed out:what this pillar is really looking for, is to

sensitize the markets in order to let the banks measure their real risk profile,

starting with the available information and comparing it to their capital, so the

market canhave a preliminary idea of its entities making it compatible with the

accounting regulations15.

But complying with this obligation in real time is not easy or economic; the

market discipline and the disclosure of information in Basel II, requires

important inversions to adequate the banking systems around the world. On

this issue, we anticipated in the Market Discipline Seminar held in Mexico

City:

It is clear to demand a market discipline to the banking institutions with the

expressed scope will make us take into consideration the fact that this matter

has been expensive in both design and structure for the securities markets

worldwide. Indeed, by this idea, -be it more theorical than practical in well-

known cases- that the control over the securitiesmarket is directly made by

its participants and is ostensible by an adequate divulgation, the regulatory

systems have imposed to the entities the obligation of submitting clear,

reliable and periodic informationover their financial statements and operations

they develop. ()

Thus, the banks will have to create a complete, complex and extensive

database, which represents another cost to the commercial banking, not

related to the traditional businesses. It seems that said impact is not

considered by the supervisors.

15 Conference held in Mxico City, named The Market Discipline in Basel II, in theInternational Seminary The New Basel Accord: Challenges and opportunities for theAmericas. July 2004.


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It is interesting to bring into consideration that the Committee, when drafting

Basel II, did not consider that the costs of Pillar 3 were significant, as it is

expressed the Consultative Document of January 2001: The Committee does

not expect that the incremental costs of making such information public to be

high, since banks will be collecting this data for internal purposes and they will

be benefiting from the more risk sensitive capital requirements that result from

the use of bank specific inputs16

Nevertheless, several voices around the globe have started to raise their voices

against this idea, pointing out that not only the implementation costs of Basel

II including Pillar 3- are excessive and impeding on the growing of banks, but

also that the disclosure rules give little benefit because of its extension and

high technical level.

On this scenario, Julie L. Williams, Acting Comptroller of the Currency

Administrator of National Banks OCC- expressed in a conference held in Texas

(US) her concern because of the costs of compliance requirements for banks,

which represent a serious drain on their resources, saying that a regulatory

relief should be a national priority. Williams also suggested that disclosure

requirements are ripe for said regulatory relief. The News Release states:In a

speech before the Independent Community Bankers of America, Ms. Williams

said that bank regulators, academic economists, and bankers all agree that

compliance costs represent a serious burden for all banks, particularly

community banks,and we need to do something about it.17.

16 Basel Committee on Banking Supervision. Consultative Document. Pillar 3 (MarketDiscipline). Supporting Document to the New Base Capital Accord. January 2001. Pag.117 Acting Comptroller Williams tells Bankers regulatory Burden Relief Should be aNational Priority. 2005-29. News Release.


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In the light of the above, Financial Institutions and Consumer Credit

Subcommittee Chairman Spencer Bachus (AL) and Subcommittee on Domestic

and International Monetary Policy Ranking Member Carolyn Maloney (NY)

unveiled legislation designed to ensure that U.S. financial services firms will

not be affected by the costs related to the implementation of Basel II, or

potentially affected by competitive disadvantaged.

The main objective of the proposed legislation is the creation of a Committee

of Financial Policy, responsible to unify the United States position and

reporting to the American Congress on the impact of Basel II on the domestic

and global financial systems18.

Supreme Court of the United States will rule on the legality of the P2P

software

The study of proofs, commenced on March 29, 2005, were brought by the big

entertainment companies, which intended to stop free sharing of music and

films protected by copyright.

Entertainment companies are presently facing with the widespread problem of

music and film copyright infringement, because of the peerto-peer P2P-

software. In essence, this software globally connects the users without having

to use intermediaries, and allowing the sharing of all media files. Thus, Metro

Goldwyn Mayer Studios MGM-, and another entertainment companies, filed an

appeal to the United States Supreme Court, in a case started against the

software companies Kazaa, Grokster and StreamCast, the last two, developersof the P2P software called Morpheus19.

18http://financialservices.house.gov

19 The case has been known as MGM v. Grokster for short, although it wasseveral entertainment companies against the defendants.
http://financialservices.house.gov/http://financialservices.house.gov/http://financialservices.house.gov/http://financialservices.house.gov/


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The claim demanded restitution from the illegal file-sharers for the companies

losses, emphasizing in its argumentation that among other evidence, CD sales

had dropped in the countries where broadband internet service is increasing.

According to the IFPI, a recording industry umbrella group, worldwide records

sale decreased dramatically in the last 5 years to 2003, in a percentage of

22% -a reduction of over USD 6 billion-. Only in 2004, the sales of records fell

by 1.3%, though that decline does not look significant when revenue from

legal downloads is added in20.

The suit suggest that P2P software will affect the development of technology

and innovation, while Grokster and StreamCast argue that they cannot be

liable for the misuse of the software for the costumers, which was not design

for breaking the copyright legislation, but to promote free exchange of

information.

The process was initially heard by the US Ninth Circuit Court of Appeal, which

upheld the lower courts ruling against the appellants, MGM21.

20 Grokster and StreamCast face the Music Tomado de www.economist.com/agenda/21MPAA Revives P-to-P Lawsuitwww.pcword.com
http://www.economist.com/agenda/http://www.pcword.com/http://www.pcword.com/http://www.pcword.com/http://www.economist.com/agenda/


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Background of the case

It is not the first time that this kind of claims are filed against systems and

software, that permits free sharing of music and other files. The first important

legal battle was won by the record firms on 2001 against the famous Napster,

but in that moment the problem was way simpler: Napster offered access to

the consumers of thousands of songs contained in a sole server; but now there

is not a central network of servers in which the files are stored, not even an

intermediary, the P2P software let their users to exchange files without

restrictions, but the information is located in their own PCs, thanks to the

called:supernodes.

In fact, even determining the location to this type of company is not an easy

task. Wired magazine pointed out the difficulties in starting a suit against

Kazaa, a company with more than 60 million users, according to recent

estimations22. Three months after the suit was filed, Amsterdam-based

Kazaa.com was reborn with a decentralized structure, transferring the control

of the software code to Blastoise, a company with operations off the coast of

Britain, on a remote island renowned as a tax haven, and in Estonia, a

notorious safe harbor for intellectual property pirates23.

The ownership of the Kazaa interface was transferred to Sharman Networks, a

business created in Vanuatu, a South Pacific island nation also known as tax

haven. Sharman Networks had no employees, and its investors and board of

members are kept in secret. The company runs its servers in Denmark. Finally,

the Kazaa.com domain, was registered to an Australian firm called LEFInteractive for the French revolutionary slogan libert, galit, fraternit. The

scenario to start legal actions was evidently complicated.

22 The Race to kill Kazaa.www.wired.com/wired/archive/11.02/kazaa_pr.html23www.wired.com/wired/archive/11.02/kazaa_pr.html
http://www.wired.com/wired/archive/11.02/http://www.wired.com/wired/archive/11.02/http://www.wired.com/wired/archive/11.02/http://www.wired.com/wired/archive/11.02/http://www.wired.com/wired/archive/11.02/http://www.wired.com/wired/archive/11.02/


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Precedents against the plaintiffs

The lawyers of the plaintiffs have a difficult task: trying to convince the

Supreme Court to modify its decision in the 1984 in the Sony Betamax case, in

which Disney and Universal asked to ban the video recorders, claiming that the

machines would allow a considerable infringement of copyright protected

2424

films . In that moment, the Supreme Court decided that Sony was not liable

because the video recorders had uses substantially different than infringement,

such as the recording of TV programs for later viewing.

Using the same argumentation, the defendants will try to demonstrate the

multiple uses of the P2P technology, such as sharing non-protected copyright

files and internet-routed phone calls; arguing that, as a matter of fact, P2P

software could make the internet more robust and secure25.

New regulation in self-financing commercial systems in Colombia

Colombian Companies Superintendence regulated the relations between

financing administrators and fiduciary companies and had modified the legal

provisions regarding agencies and branch offices, and minimum capitals.

In past days, the Superintendence of Companies regulated the self-financing

commercial system by means of the Resolution 330-000528 on February 22,

2005. The new regulation abrogates the Resolution 11746 of 1988.

24Online Sharing at Risk in Lawsuit Grokster Case has wide implications for InternetServices. International Herald Tribune. www.crm.ittoolbox.com/common25 Forget Groksterwww.alternet.org/module
http://www.crm.ittoolbox.com/commonhttp://www.crm.ittoolbox.com/commonhttp://www.alternet.org/modulehttp://www.alternet.org/modulehttp://www.alternet.org/modulehttp://www.crm.ittoolbox.com/common


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The self-financing companies provide the public with goods and services by the

conformation of special funds, in exchange of the payment of periodic, or even

exceptional, quotas.

The new Resolution establishes that the companies who manage self-financing

plans must be constituted as a Colombian corporation, with an exclusive and

sole object, which should be limited to the administration of plans, formation of

groups, realization of assemblies, and awarding of goods or services, by means

of standard-form contracts offered to subscribers.

The relation of the Self-financing Companies with Fiduciaries in this scheme is

critical: the law requires that the resources for the conformation of the groups

should be administered by the latter. In consequence, the companies who

manage self-financing plans should celebrate contracts with fiduciary

companies. Additionally, the fiduciary companies will be responsible for

collecting the quotas that should pay the subscribers.

The companies who manage self-financing plans must have a minimum capital

of 6,000 monthly legal minimum salaries in force, and its passives towards the

public will not be able to exceed in 25 times the value of its patrimony.

The Superintendence of Companies must authorize, as before, the opening or

closing of branch offices and agencies of the companies who manage self-

financing plans.

The resolution offers those who are actually developing these activities a limitof a year to adapt themselves to the new regulatory dispositions.


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This resolution contains important modifications, and demands quick

adjustments for the companies of the sector, for this reason we will continue

studying the process of established regulations and statutes.

Participating in this issue

Sergio Rodrguez Azuero, Julio Csar Quintero, Camilo Gantiva Hidalgo

[email protected]

www.rodriguezazuero.com

This bulletin was made by the Editorial Board of Rodrguez-Azuero Asociados S.A. for

an informative and academic value; therefore its content does not constitute legal

advice. The publication of this bulletin is only authorized quoting the source.
mailto:[email protected]:[email protected]://www.rodriguezazuero.com/http://www.rodriguezazuero.com/http://www.rodriguezazuero.com/mailto:[email protected]

Boletín No. 4 Febrero - Marzo 2005

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