Even though I wasn't a mod (let alone an admin) when the fakes rule was established, I'll see if I can interpret it as best as I personally understand it...
What north is doing is basically artwork. While most of them are inspired by the caps posted here and elsewhere, and although there are some "enhancements" added to the subjects, it still basically qualifies as an original piece. The illustrations have the subjects in tighter and more revealing attire, but nothing gratuitous or explicit. As tdubya alluded to, Photoshopping a newswoman's head onto a lingerie model or porn star would qualify as a fake. As also noted, north has been doing this for quite a while, so you could say that his work has been "grandfathered in" from before any rules about fakes were established.
Of course, this is just my general opinion, which could differ from the board founders.
In a nutshell, putting an enhanced Robin Meade in a outfit that doesn't cross boundaries via artwork of one's own creation (like north's avatar) would be acceptable.
'Shopping Robin's head on Eva Angelina's body is
not acceptable.
(Well, it would be acceptable in my PM inbox...

)