The Financial Report - Volume 2, No. 12 • June 20, 2013

by DLA Piper


Discussion and Analysis

News from the Americas

News from Asia and the Pacific

News from Europe

US Securities and Exchange Commission Developments

US Commodity Futures Trading Commission Developments

US Treasury Department Developments

US Judicial Developments

US Exchanges and Self-Regulatory Organizations

Discussion and Analysis

Earlier this week, US Securities and Exchange Commission Chairman Mary Jo White informed the SEC’s Enforcement Division staff that the SEC will begin requiring defendants to admit guilt in order to settle some civil lawsuits. This policy change follows harsh criticism of the SEC by certain federal judges for allowing financial institutions to settle massive securities litigation without admitting or denying any wrongdoing.

In its letter to its enforcement team, the SEC said that it was changing its no-admit, no-deny policy for select cases involving misconduct that harmed large numbers of investors. The letter reportedly said: “While the no admit/deny language is a powerful tool, there may be situations where we determine that a different approach is appropriate.” “There may be certain cases where heightened accountability or acceptance of responsibility through the defendant’s admission of misconduct may be appropriate, even if it does not allow us to achieve a prompt resolution,” the letter continued.

The SEC often settles its cases without a defendant’s admission of guilt. Typically, however, the SEC’s settlements also prohibit a defendant from denying the allegations. Although the policy change may lead to more high-profile, precedent-setting securities trials, it likely will adversely impact the frequency and speed with which the SEC settles certain cases. The majority of SEC matters are resolved through settlement. Large institutional defendants are going to be very reluctant to admit wrongdoing when facing potential criminal liability or potential additional civil liability, such as customer class-action claims.

Many commentators already have suggested that this policy change was not unexpected given Chairman White’s background as a criminal prosecutor. Accordingly, this is tantamount to the new sheriff drawing a line in the sand.

Assuming that the SEC does, in fact, follow this new policy, it will be interesting to see the impact of the change. The SEC, it seems, will have considerably greater difficulty bringing civil proceedings to resolution without going to trial, which, in turn, also could make it more difficult to prosecute parallel criminal actions. At the same time, it is theoretically possible that the policy change will increase the frequency of admissions of guilt, which may, in turn, deter other similar wrongdoing.

More than likely, however, is that it will be difficult to identify when and where this policy change is being applied to specific cases. Will the SEC really have the discipline to reject a massive civil settlement, avoiding the expense and uncertainty of a trial, simply to obtain an admission of guilt by a corporate entity? That likely will depend on just how tough the new sheriff really is.

News from the Americas

US Congressman to introduce tick spread legislation. US Representative Sean Duff is expected to introduce the Tick Size Flexibility Act of 2013, according to MarketWatch. Under the bill, those companies with annual revenues under US$1 billion could select a 5 or 10 cent tick spread for their share prices. (6/17/2013) Tick spreads.

The JOBS Act and investor protection. The investor protection issues raised by the Jumpstart Our Business Startups Act were the subject of US Congressional hearings last week. summarized the witness’ comments. (6/14/2013) Investor protection.

US Congress to hold hearings on money market proposal. According to Financial Advisors Magazine, US Congressman Scott Garrett, who chairs the House Capital Markets Subcommittee, will convene hearings in July on the SEC’s proposed money market rules. (6/14/2013) Hearings.

Canada revises mutual fund prospectus requirements. The Canadian Securities Administrators published amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) and related consequential amendments, which will require delivery of the Fund Facts document for mutual funds, instead of the simplified prospectus, to satisfy the prospectus delivery requirements. The amendments are effective June 13, 2013. Early adoption is being encouraged. (6/13/2013) OSC press release.

OSC to hold panel discussion on a statutory “best interest” duty. The Canadian Securities Administrators announced that the Ontario Securities Commission will host a panel discussion on July 23, 2013, to explore the potential benefits and competing considerations of introducing a statutory fiduciary, or “best interest,” standard for advisers and dealers when they provide advice to retail clients. The OSC panel discussion will build on the CSA’s June 18, 2013 and June 25, 2013 roundtable discussions on the subject. (6/12/2013) OSC press release.

OSC seeks comments on derivatives proposals. The Ontario Securities Commission published for comment “OSC Rule 91-506 Derivatives: Product Determination” and “OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting.” These rules will implement Canada’s G-20 commitment to require all OTC derivative transactions to be reported to trade repositories and will provide the OSC with an essential tool to identify and address systemic risk and market abuse. Comments should be submitted on or before September 6, 2013. (6/6/2013) OSC press release.

News from Asia and the Pacific

ASIC revises proposed trading rules. The Australian Securities & Investments Commission has refined its proposed rules on dark liquidity and high-frequency trading. Rules are expected to be finalized within the next two months. (6/18/2013) ASIC press release.

MAS Insurance Act consultation. The Monetary Authority of Singapore published the comments it received in response to its consultation paper setting out proposed legislative amendments to the Insurance Act. (6/17/2013)

ASIC electronic prospectus guidance. The Australian Securities & Investments Commission released a consultation paper proposing updates to current guidance to help facilitate email and internet distribution of offers of securities. A draft regulatory guide has also been proposed. The consultation paper aims to ensure that ASIC’s guidance reflects current market practices and technological advancements. The proposed updated guidance includes an explanation of ASIC’s view on the way that the internet and other means of electronic distribution can be used in making offers of securities. Comments should be submitted on or before August 12, 2013. (6/17/2013) ASIC press release.

ASIC guidance on registered managed investment schemes. The Australian Securities & Investments Commission released revised regulatory guidance on the ASIC’s views concerning the content requirements of constitutions for registered managed investment schemes. (6/5/2013) ASIC press release.

News from Europe

UK objects to ESMA authority. Bloomberg summarized a letter that the UK sent to EU member countries outlining its objections to the European Securities and Markets Authority’s power under the Markets in Financial Instruments Directive. (6/17/2013) Letter.

Bank of England releases Risk Survey. The Bank of England released the results of the 2013 H1Systemic Risk Survey. The survey is conducted by the Bank of England on a biannual basis to quantify and track market participants’ views of risks to, and their confidence in, the UK financial system. The survey was conducted between April 22 and May 22, 2013. (6/17/2013) Risk Survey webpage.

ESMA guidelines on CRA regulation. The European Securities and Markets Authority published its Guidelines and Recommendations on the Scope of the Credit Rating Agency Regulation. The Guidelines clarify certain aspects of the scope of the regulation for registered CRAs, market participants operating on the perimeter of this sector and national securities markets regulators. (6/14/2013) ESMA notice.

ESMA publishes prospectus data. The European Securities and Markets Authority published a report compiling statistical data on the number of prospectuses approved and passported by National Competent Authorities in the period from January 2012 to December 2012 (with a quarterly disclosure). (6/14/2013) ESMA notice.

EIOPA report. The European Insurance and Occupational Pensions Authority published a report assessing a possible package of measures to facilitate the provision of insurance products with long-term guarantees under the new Solvency II insurance regulatory regime. (6/14/2013) EC press release. Fitch Ratings provided a summary analysis of the report. (6/17/2013) Summary.

European Parliament modifies certain disclosure requirements. The European Parliament adopted directives and revisions to directives concerning disclosures required to be made by certain companies. Financial reporting obligations for limited liability companies (Accounting Directive) is aimed at reducing the administrative burden on small companies. New disclosure requirements for the extractive industry and loggers of primary forests in the Accounting (and Transparency) Directives introduces a new obligation for large extractive and logging companies to report the payments they make to governments. Revised Directive on transparency requirements for listed companies (Transparency Directive) provides new notification thresholds for acquirers when they reach a certain stake in a listed company. (6/12/2013)

ESMA clarifies investment firm pay rules. The European Securities and Markets Authority published Guidelines on remuneration policies and practices that apply to relevant staff of investment firms, credit institutions and fund management companies when providing investment services, and to national securities regulators enforcing those rules. (6/11/2013) ESMA notice.

ESMA guidelines on interoperability arrangements. The European Securities and Markets Authority published Guidelines and recommendations concerning interoperability arrangements. (6/11/2013) ESMA notice.

ESMA comparison of Prospectus Directive liability regimes. The European Securities and Markets Authority published a report comparing the liability regimes in Member States in relation to the Prospectus Directive. The report contains an overview of the different arrangements and frameworks in place in European Economic Area States. The report does not address how the regimes, or sanctions, are applied. (6/10/2013) ESMA notice.

ESMA Risk Dashboard. The European Securities and Markets Authority reviewed the overall level of systemic risk in EU securities through the end of 2012 and the continuing sources of market uncertainty. (6/10/2013) ESMA notice.

Bank of England discusses CCPs. The Bank of England published a quarterly bulletin discussing central counterparties, their financial market infrastructure role and the Bank of England’s supervision of them. (6/10/2013) ECB bulletin.

ECB consults on systemically important payment systems. The European Central Bank published for public consultation a draft of its regulation on oversight requirements for systemically important payment systems. The draft regulation aims to implement in the euro area the “Principles for financial market infrastructures,” introduced in April 2012 by the Committee on Payment and Settlement Systems (CPSS) of the Bank for International Settlements and the Technical Committee of the International Organization of Securities Commissions (IOSCO). The draft regulation covers both large-value and retail payment systems of systemic importance, whether operated by Eurosystem national central banks or private entities, and defines the criteria for qualifying a payment system as systemically important. Comments should be submitted on or before August 9, 2013. (6/7/2013) ECB press release.

Dagong Europe approved as credit rating agency. The European Securities and Markets Authority has approved the registration of Dagong Europe Credit Rating Srl (Dagong Europe), based in Italy, as a credit rating agency under Article 16 of the CRA Regulation. The registration was effective June 13, 2013. (6/7/2013) ESMA notice.

FCA Quarterly Consultation Paper. The UK’s Financial Conduct Authority published its Quarterly Consultation Paper in which it discusses miscellaneous amendments to the FCA Handbook. (6/6/2013) FCA press release.

ESMA EMIR guidance. The European Securities and Markets Authority published updated guidance in the form of questions and answers concerning the European Market Infrastructure Regulation on over-the-counter derivatives, central counterparties and trade repositories. (6/6/2013) ESMA notice.

ESMA CCP guidelines and recommendations. The European Securities and Markets Authority published Guidelines and Recommendations on draft regulatory technical standards on colleges for central counterparties. (6/6/2013) ESMA notice.

Principles for benchmark-setting processes. The European Securities and Markets Authority and the European Banking Authority have published their final report setting out their Principles for Benchmark-Setting Processes in the EU. (6/6/2013) ESMA notice; EBA press release.

EBA publishes near-final draft standards on own funds. The European Banking Authority published near-final draft Regulatory Technical Standards on own funds, which cover, among other things, areas such as Common Equity Tier 1, additional Tier 1, deductions from CET1 and from own funds in general and transitional provisions on grandfathering. Once formally adopted by the European Commission, these RTS will be part of the Single Rulebook aimed at enhancing regulatory harmonization in Europe and at strengthening the quality of capital. (6/5/2013) EBA press release.

US Securities and Exchange Commission Developments

Selected Enforcement Actions

SEC issues second whistleblower award. The SEC awarded three whistleblowers a total of 15 percent of the money that the agency ultimately collects from its enforcement action against sham hedge fund Locust Offshore Management LLC and its CEO Andrey C. Hicks, who defrauded investors of US$2.7 million. To date, the SEC has not collected any amounts on these judgments, so no immediate payments will be made to the whistleblowers. (6/12/2013) In the Matter of the Claim for Award in Connection with SEC v. Audrey C. Hicks, SEC Release No. 34-69749. Corporate Counsel discussed the implications of the whistleblower awards, noting that the SEC’s action reemphasizes the importance of robust internal reporting programs. (6/18/2013) Implications.

Facebook friend allegedly tipped insider information. The SEC announced that it has obtained an emergency court order freezing the assets of a trader in Bangkok, Thailand, who made more than $3 million in profits by trading in advance of last week’s announcement that Smithfield Foods had agreed to a multi-billion dollar acquisition by China-based Shuanghui International Holdings. The SEC alleges that Badin Rungruangnavarat purchased thousands of out-of-the-money Smithfield call options and single-stock futures contracts in an account at Interactive Brokers LLC. Rungruangnavarat allegedly made these purchases based on material, nonpublic information about the potential acquisition. (6/6/2013) SEC press release.

Other Developments

Consolidated Audit Trail. Reuters discussed the difficulties that regulators and exchanges are encountering as they try to build a consolidated audit trail system capable of monitoring the equities market. Creating such a system became a priority after the 2010 “flash crash,” when it took regulators several months to obtain the information needed to analyze the causes of that unprecedented market volatility. (6/17/2013) CAT.

Money market proposal and state law. According to Fitch Ratings, states may need to amend their laws if the SEC’s proposed money market rules become final. (6/13/2013) State impact.

Investor alert. An investor alert warning of emailed “pump-and-dump” schemes has been jointly issued by the SEC and the Financial Industry Regulatory Authority. (6/12/2013) SEC press release.

SEC and CFTC investor alert on binary options. A joint Investor Alert warning of fraudulent promotional schemes involving binary options and binary options trading platforms has been issued by the SEC and CFTC. The alert notes that much of the binary options market operates through Internet-based trading platforms that may not comply with US laws. (6/6/2013) SEC press release; CFTC press release.

Division of Risk renamed. The SEC has changed the name of its Division of Risk, Strategy, and Financial Innovation to the “Division of Economic and Risk Analysis.” (6/6/2013) SEC press release.

US Commodity Futures Trading Commission Developments

Regulatory Orders and Guidance

Meaning of “executing firm” clarified. The CFTC posted the Division of Clearing and Risk’s April 29, 2013 interpretive letter clarifying the term “executing firm.” The interpretation provides that the term, as used in Regulation 1.73(a)(2)(iv), refers to introducing brokers or futures commission merchants that execute orders for customers. Moreover, an FCM that provides to an executing firm sponsored access to a market is not obligated under Regulation 1.73(a)(2)(iv), by virtue of providing such access, to conduct order screening of the executing firm’s customers. (6/12/2013)

Legal Entity Identifiers. The CFTC issued an Amended Order expanding the list of Legal Entity Identifiers that can be used by registered entities and swap counterparties to comply with the agency’s swap data reporting regulations. (6/10/2013) CFTC press release.

Category 2 mandatory clearing. Commodity pools, private funds, and persons predominantly engaged in activities that are in the business of banking, or in activities that are financial in nature, were required to begin clearing certain credit default swaps and interest rate swaps executed on or after June 10, 2013. (6/10/2013) CFTC press release.

Clearing exemption for inter-affiliated entities. The CFTC’s Division of Clearing and Risk advised that the effective date of the final rule adopting the “Clearing Exemption for Swaps Between Certain Affiliated Entities” has been automatically extended to June 18, 2013.(6/7/2013) CFTC Advisory; CFTC press release.

Regulatory Relief

SEF temporary no-action relief. The CFTC’s Division of Market Oversight provided temporary no-action relief to entities that have been operating pre-Dodd Frank trading platforms. Under this no-action letter, a swap trading facility that wishes to avoid an interruption in operations on October 2, 2013, must as of that date be granted either temporary registration status as a SEF or be granted full registration status as either a Designated Contract Market or a SEF. (6/17/2013) CFTC press release.

No-action relief for small banks. The CFTC’s Division of Clearing and Risk issued a time-limited, no-action letter granting relief to banks, savings associations, farm credit system institutions, and credit unions having assets of less than US$10 billion, which are issuers of securities, from the board approval requirements of Section 2(j) of the Commodity Exchange Act and Commission Regulation 50.50. (6/10/2013) CFTC Letter No. 13-26.

End-user no-action letter. The CFTC’s Division of Clearing and Risk issued a letter stating that it will not recommend enforcement action against Corporación Andina de Fomento for failing to comply with the clearing requirement of Section 2(h)(1) of the Commodity Exchange Act. (6/10/2013) CFTC Letter No. 13-25.

No-action relief for cooperatives. The CFTC’s Division of Clearing and Risk issued a time-limited no-action letter granting relief from required clearing under Section 2(h)(1)(A) of the Commodity Exchange Act and Part 50 of the CFTC’s regulations for certain swaps entered into by qualifying cooperatives. (6/7/2013) CFTC Letter No. 13-24.

Other Developments

Commissioner proposes compromise. CFTC Commissioner Bart Chilton suggested ways in which a compromise might be reached concerning the application of the CFTC’s cross-border swaps guidance. (6/13/2013) Compromise.

US Treasury Department Developments

Federal Insurance Office reports. In accordance with the Dodd-Frank Act, the Treasury Department’s Federal Insurance Office issued its first Annual Report on the Insurance Industry. The Report reviews the financial performance and condition of the principal industry sectors, including insurer insolvencies, risk management, portfolio investment activities, legal and regulatory developments and current and emerging trends. (6/12/2013) Treasury Department press release.

OCC grants banks swap transaction extension. The OCC extended the transition period under Section 716(f) of the Dodd-Frank Act for seven national banks. Section 716 prohibits the provision of certain types of federal assistance, including discount window lending and deposit insurance, to swaps entities. (6/11/2013) OCC notice. The action effectively gives the seven banks two years to divest themselves of their swaps trading activities. (6/12/2013) See, e.g., Bloomberg.

FDIC orderly liquidation determination rules. The FDIC published the final rule establishing the criteria for determining if a company is predominantly engaged in “activities that are financial in nature or incidental thereto” and therefore subject to the FDIC’s orderly liquidation authority. The final rule is effective July 10, 2013. (6/10/2013)

US Judicial Developments

SEC bar order vacated. The US Court of Appeals for the DC Circuit vacated an SEC order that affirmed the Financial Industry Regulatory Authority’s decision to bar the petitioner from the securities industry. FINRA found that the petitioner, the former regional director of Penn Mutual, violated NASD Conduct Rule 2110 by intentionally falsifying receipts, submitting a fraudulent expense report, and accepting reimbursement to which he was not entitled. The Court found that the SEC abused its discretion when it affirmed the bar without addressing mitigating factors presented by the petitioner. (6/11/2013) Saad v. SEC.

US Exchanges and Self-Regulatory Organizations

NYSE quarterly expiration day. NYSE Regulation reminded members that Friday, June 21, 2013, will be a quarterly Expiration Day for stock and index options and futures products whose settlement pricing is based upon New York Stock Exchange and NYSE MKT opening or closing prices on that day. The Information Memorandum reminds members of certain NYSE and NYSE MKT rules and policies regarding opening imbalance publications, entry and cancellation of market-on-close/limit-on-close and closing offset orders, publication of on-the-close imbalances, and printing the closing transaction. (6/17/2013) NYSE Information Memo 13-12.

ISDA client cleared OTC derivatives addendum. The International Swaps and Derivatives Association and the Futures and Options Association launched the ISDA/FOA Client Cleared OTC Derivatives Addendum. The Addendum is a template for use by cleared swaps market participants to document the relationship between a clearing member and its client for purposes of clearing over-the-counter derivatives transactions across central counterparties that use the principal-to-principal client clearing model. The Addendum supplements the ISDA Master Agreement and the FOA futures and options agreement. (6/11/2013) ISDA press release.

FINRA investor alert. The Financial Industry Regulatory Authority issued an investor alert concerning the unique characteristics of alternative funds. (6/11/2013) FINRA press release.

NYSE Retail Liquidity Program amendments. The New York Stock Exchange and NYSE MKT announced several amendments to their respective Rules 107C, which govern each Exchange’s Retail Liquidity Program. (6/6/2013) NYSE Information Memo 13-11.

FINRA to update the Series 4, 9 and 10 qualification examinations. The Financial Industry Regulatory Authority will conduct job analysis surveys to guide updates to the Series 4, 9 and 10 qualification examinations. FINRA will use the information garnered from the surveys of currently registered individuals to update the related qualification examinations. (6/5/2013) FINRA Information Notice.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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