The Financial Report - Volume 2, No. 19. October 2013 (Global)

by DLA Piper




Discussion and Analysis

News from the Americas

News from Asia and the Pacific

News from Europe

Global Regulators

US Securities and Exchange Commission Developments

US Commodity Futures Trading Commission Developments

US Banking Agency Developments

US Exchanges and Self-Regulatory Organizations

Discussion and Analysis

Most of us have seen those top-rated TV commercials for a wireless provider featuring a conservatively dressed man sitting at a little table with several children and asking them, “Is it better to be fast or slow?” The kids, of course, invariably choose the correct answer, albeit with their own adorable spin. The unseen voiceover announcer then proclaims, “It’s not complicated.”

SEC Commissioner Mary Jo White recently has espoused her “broken window” philosophy regarding enforcement. Just as broken windows in a neighborhood, left unfixed, can trigger urban decay, White believes that even minor securities infractions, left unchecked, can lead to more pervasive securities fraud. At the same time, the SEC recently has, again, come under intensive scrutiny for its handling of certain noteworthy enforcement matters. So, if the SEC genuinely is intent on prosecuting alleged securities law violators, big and small, why is confidence among users of the marketplace lagging? Americans love our heroes. Americans also like to see the once high and mighty brought down by their own foibles. And it may seem contradictory, but Americans also love our underdogs, those that succeed against all odds. Above all, however, Americans seek fairness and rationality.

It has been widely reported that J.P. Morgan is in deep discussions with the Justice Department to pay as much as US$13 billion to settle a range of legal matters relating primarily to transactions in mortgage-related securities. Supposedly, these penalties relate to its own conduct during the years before the financial crisis. Nonetheless, there is a perception that J.P. Morgan is now being punished for rescuing Bear Stearns and Washington Mutual in 2008 at the insistence of US regulators. There is little doubt that a settlement of this magnitude will cause other bank executives to think long and hard about assisting the government by acquiring other failing financial companies in the future. It is an issue of perception. Although Americans presumably want to see the punishment of Wall Street “fat-cats,” the perceived unfairness of this large settlement has the potential to undermine rather than restore confidence in the financial markets.

Mark Cuban, the billionaire owner of the NBA’s Dallas Mavericks, last week was cleared of civil insider trading charges brought by the SEC in connection with his 2004 sale of stock in Mr. Cuban, also one of the panelists on the hit reality TV show Shark Tank, has blasted the SEC for pursuing the case against him and has purportedly said that he wants to embarrass the agency. There is no doubt that the brash Mr. Cuban has his detractors in addition to his fans and supporters. Whether one agrees with him or not, one has to question the prudence of the SEC pursuing a case against him for over nine years when the SEC’s prime witness,’s CEO, declined to come to Dallas for the trial.

If the federal government wishes to restore confidence in the financial marketplace, those agencies charged with enforcing applicable rules must do so prudently rationally and fairly. Otherwise, their efforts, however well intended, will erode the confidence of the very investors they are trying to protect. It’s not complicated.

News from the Americas

CLO risk retention rules. The possible effect of new risk retention rules for collateralized loan obligations, which already have been adopted in Europe and which have been proposed for adoption in the US, were discussed by Fitch Ratings. (10/21/2013) Risk retention.

CSA proposes amendments to Auditor Oversight rule. The Canadian Securities Administrators published for comment proposed amendments to NI 52-108 “Auditor Oversight,” which would give regulators greater insight into situations where the Canadian Public Accountability Board has imposed significant remedial actions on an audit firm. Comments should be submitted by January 15, 2014. (10/17/2013) CSA press release.

CSA propose changes to disclosure requirements for oil and gas activities. The Canadian Securities Administrators requested comment on proposed amendments to National Instrument 51-101 “Standards of Disclosure for Oil and Gas Activities” and related forms, which are designed to improve and clarify the disclosure of oil and gas reporting issuers. Comments should be submitted by January 17, 2014. (10/17/2013) CSA press release.

CSA announces delay in transition to new service provider for operation of document registration and retrieval systems. The Canadian Securities Administrators announced that the date on which the hosting, operation and maintenance of the System for Electronic Document Analysis and Retrieval, the System for Electronic Disclosure by Insiders and the National Registration Database, will switch to a new service provider, CGI Information Systems and Management Consultants Inc., has been delayed until December 2, 2013. (10/7/2013) CSA press release.

News from Asia and the Pacific

Singapore and China agree to promote Renminbi use. The Monetary Authority of Singapore announced that Singapore and China have agreed on new initiatives to strengthen cooperation on financial sector development and regulation. The agreement will promote the international use of the Renminbi through Singapore. (10/22/2013) MAS press release.

Singapore conducts money laundering and terrorist financing risk assessment. Singapore’s Ministry of Finance, the Monetary Authority of Singapore and Ministry of Home Affairs announced a comprehensive assessment of money laundering and terrorist financing risks in the country. (10/21/2013) Joint press release.

ASIC warns consumers of forex trading risks. The Australia Securities & Investments Commission urges consumers to be aware of the risks of foreign exchange trading before engaging in such activities. The warning follows the appointment of liquidators for a Sydney-based company involved in foreign exchange. (10/18/2013) ASIC press release.

ASIC reporting relief for managed funds and ETFs. The Australia Securities & Investments Commission released Report 373, “Response to submissions on CP 196,” which finalizes its approach to relief for periodic statements and facilitating quotation of exchange traded funds on the AQUA market. (10/17/2013) ASIC press release.

ASIC reports on corporate insolvencies. The Australia Securities & Investments Commission published an annual overview of corporate insolvencies based on statutory reports lodged by external administrators for the 2012-13 financial year. (10/17/2013) ASIC press release.

Singapore proposes prospectus enhancements. The Monetary Authority of Singapore released a consultation paper on proposed enhancements to the current rules relating to prospectus disclosures for offers of securities. The proposals aim to improve the readability of prospectuses and facilitate better understanding by investors of key information presented in prospectuses, and make prospectuses more accessible to retail investors. Comments should be submitted by November 14, 2013. (10/14/2013) MAS press release.

ASIC consults on financial reporting by stapled entities. The Australian Securities & Investments Commission released a consultation paper on financial reporting by stapled securities issuers. A stapled security is one issued by an entity whose securities are required to be traded together with the securities of another entity. ASIC proposes to issue a class order so stapled entities can present combined financial statements covering all of the entities whose securities are stapled. Comments should be submitted by November 30, 2013. (10/11/2013) ASIC press release.

Hong Kong and Mongolia sign MoU. The Hong Kong Securities and Futures Commission announced it has entered into a Memorandum of Understanding with the Financial Regulatory Commission of Mongolia. The MoU establishes a framework for mutual assistance and facilitates the exchange of information between the two regulators. (10/11/2013) SFC press release.

News from Europe

Hedge funds and regulations. The Financial Times summarized recent hedge fund regulations in Europe and the US and how the new rules affect the industry. (10/22/2013) Implications.

ESMA updates LEI guidance. The European Securities and Markets Authority updated its Question and Answers on the European Markets Infrastructure Regulation. The Q&A clarifies the use of Legal Entity Identifiers for the purpose of trade reporting to trade repositories. (10/22/2013) ESMA notice.

EBA to holds seminar on stress testing. The European Banking Authority will host a workshop on stress testing on December 5, 2013. The one-day seminar will bring together high-level speakers from commercial banks and regulatory and supervisory authorities to discuss recent issues regarding stress testing in banks, stress tests as a risk management tool, and stress testing from a regulatory perspective. (10/21/2013) EBA press release.

EBA final technical standards. The European Banking Authority released final technical standards on supervisory reporting on Non-Performing Exposures and Forbearance. The EBA also issued recommendations on asset quality reviews aimed at supporting existing and/or planned reviews across the EU. (10/21/2013) EBA press release.

UK PRA consults on Solvency II guidelines. The UK Prudential Regulation Authority set forth its proposed expectations of firms regarding the European Insurance and Occupational Pensions Authority Solvency II guidelines. The proposal addresses implementation and interpretation. Comments should be submitted by November 15, 2013. (10/21/2013) PRA press release.

ESMA publishes credit rating statistical data. The European Securities and Markets Authority published the most recent set of semi-annual statistical data on the performance of credit ratings, including transition matrices and default rates. This latest dataset includes ratings assigned to covered bonds as a new separate category. (10/21/2013) ESMA notice.

ESMA publishes signed AIFMD cooperation agreements. The European Securities and Markets Authority published a table showing the status of Memoranda of Understanding signed by EU national supervisors. ESMA negotiated the template MoUs regarding the Alternative Investment Fund Directive (AIFMD) with non-EU regulators around the globe. The AIFMD MoUs allow the exchange of information between EU and non-EU supervisors, thus enabling non-EU fund managers to market alternative funds within the European Union. The AIFMD covers hedge funds, private equity and real estate funds. (10/18/2013) ESMA notice.

ESMA consults on rules for trade repository fines. The European Securities and Markets Authority has launched a consultation on the Technical Advice that it must provide to the European Commission on the procedural rules for imposing fines and periodic penalty payments on Trade Repositories. Comments should be submitted by November 15, 2013. (10/18/2013) ESMA notice.

UK Competition Commission adopts new rules. summarized recent decisions made by the UK Competition Commission. The Competition Commission finalized audit rules requiring firms to seek new auditor bids every ten years. The rules also prohibit loan agreements from requiring the use of only the largest accounting firms. (10/17/2013) Competition Commission rules.

UK regulator discusses international banking. Bloomberg summarized the remarks of Andrew Bailey, UK Deputy Governor for Prudential Regulation and CEO of the Prudential Regulation Authority. Bailey discussed the regulation of international banks saying that UK branches of foreign banks will not be allowed to operate within the UK without first submitting and receiving approval of a resolution plan. (10/17/2013) Bailey remarks.

Insurance company capital requirements. According to Reuters, EU regulators are close to resolving differences concerning how much capital insurance companies must hold. (10/17/2013) Capital.

UK FCA data on customer complaints. The UK Financial Conduct Authority published data on customer complaints and redress for the first six months of 2013. (10/16/2013) FCA press release.

UK forex investigation. The UK Financial Conduct Authority has confirmed it is investigating the foreign exchange market. (10/16/2013) FCA press release.

Single supervisory mechanism approved. The EC adopted regulations creating a single supervisory mechanism for the oversight of banks and other credit institutions. The single supervisory mechanism will be composed of the European Central Bank and the supervisory authorities of the member states. (10/15/2013) EC press release.

UK FCA enforcement policy. The UK Financial Conduct Authority published a new policy statement concerning its new enforcement announcement policy. Previously, the FCA could only publish information about enforcement proceedings once it had decided to take action. Under the new policy, the FCA will make enforcement information public through a warning notice statement that will usually name the firm under investigation and, in certain circumstances, name an individual. (10/15/2013) FCA press release.

ECB survey on credit terms and conditions. The European Central Bank reported the results of the September 2013 qualitative survey on credit terms and conditions in euro-denominated securities financing and over-the-counter derivatives markets. The survey did not find a significant change in price terms over the three-month reference period ending in August 2013. Despite high volatility in credit markets early in the summer, the shares of respondents indicating deteriorated liquidity and market functioning over the past three months were rather negligible for all types of euro-denominated collateral included in the survey. Around one-fifth of banks reported an improvement in liquidity and market functioning for euro-denominated government bonds and equities. (10/14/2013) ECB press release.

UK consults on CRDIV for investment firms. The UK’s Financial Conduct Authority published a consultation paper on proposed changes to the FCA handbook arising from the transposition of the EU’s Capital Requirements Directive IV on reporting, remuneration policies and the interaction between CRD IV and the Alternative Investment Fund Managers Directive/Undertakings for Collective Investment in Transferrable Securities. Comments should be submitted by November 10, 2013. (10/10/2013) FCA press release.

Unit-linked funds. The UK’s Financial Conduct Authority reported on its thematic review of the governance of unit-linked funds. (10/10/2013) FCA press release.

UKLA Knowledge Base updates. The UK Financial Conduct Authority announced that the UKLA Knowledge Base has been updated. The UKLA is the repository of non-handbook technical commentary that has the status of formal FCA guidance. It consists of a series of short technical and procedural notes relating to aspects of the Prospectus Rules, Listing Rules and Disclosure and Transparency Rules. The updates include 1 new note and 2 amended notes in the Knowledge Base regarding zero coupon notes, supplementary prospectus and final terms. (10/8/2013) FCA press release.

UK FCA guidance for self-invested personal pension operators. The UK Financial Conduct Authority published finalized guidance for self-invested personal pensions operators. The guidance relates to the Conduct of Business sourcebook, the Supervision manual and the Client Asset sourcebook. The final guidance is substantively equivalent to that contained in the proposed guidance. (10/8/2013) FCA press release.

UK FCA confirms definition of “platform service.” The UK Financial Conduct Authority confirmed its definition of “platform service” as an online administration service with a single point of contact to the investment market for consumers or their advisers. (10/8/2013) FCA press release.

Financial conglomerates listed. The Joint Committee of European financial regulators published the latest version of the list of financial conglomerates. (10/8/2013) ESMA notice.

Revised deadlines for EBA technical standards. The European Banking Authority published revised deadlines for various technical standards following the finalization of the Capital Requirements Directive IV and of the Capital Requirements Regulation. (10/7/2013) EBA press release.

Global Regulators

IOSCO hedge fund survey. The International Organization of Securities Commissions reported on the Second IOSCO Hedge Fund Survey, which describes global efforts by relevant regulators to understand the hedge fund industry and its salient features. The IOSCO survey gathers data from hedge fund managers and advisers about the markets in which they operate, their trading activities, leverage, funding and counterparty information. The report explains the results of the second IOSCO survey and provides an overview of the hedge fund industry as of September 2012. (10/21/2013) IOSCO press release.

IOSCO publishes risk outlook. The International Organization of Securities Commissions published the IOSCO Securities Markets Risk Outlook for 2013-2014. The report highlights important trends, vulnerabilities and risks in securities markets that may be of concern from a systemic perspective. (10/15/2013) IOSCO press release.

Disclosure standards for CCPs proposed. The Committee on Payment and Settlement Systems and the International Organization of Securities Commissions published for comment a consultative document on the Public quantitative disclosure standards for central counterparties. Comments should be submitted by December 13, 2013. (10/15/2013) Joint press release.

Revised RCAP methodology. The Basel Committee on Banking Supervision published an updated methodology for its jurisdiction-specific Regulatory Consistency Assessment Program. (10/15/2013). BIS press release.

Update on the adoption of the Basel Committee’s capital standards. The Bank for International Settlements provided an updated progress report on member country implementation of the Basel regulatory framework. (10/9/2013) BIS press release.

US Securities and Exchange Commission Developments


Guidance for foreign broker-dealers. The Division of Trading and Markets updated its frequently asked questions and answers webpage regarding Rule 15a-6 and foreign broker-dealers. Issues discussed by the update include minimum net capital requirements, nominee accounts, confirmations, and introducing brokers. The updated webpage may be viewed here. (10/15/2013)

Exemptive Orders

Broker-dealer financial responsibility rules. The SEC issued an order temporarily exempting broker-dealers until March 3, 2014 from the requirements of certain new amendments to the broker-dealer financial responsibility rules, SEC Release No. 34-70072. (10/18/2013) SEC Release No. 34-70701.

Other Developments

Chairman White discusses compliance. Mary Jo White, Chairman of the SEC, addressed the National Society of Compliance Professionals where she noted that an effective compliance program must be an organization-wide effort. To that end, the agency is reaching out to senior officers and directors to evaluate the standing, authority and resources given to their compliance personnel. (10/22/2013) White speech.

Examination letter. Bloomberg summarized an SEC examination letter to the Options Clearing Corporation, which expressed “serious concern” for the OCC’s compliance and risk controls. (10/22/2013) Examination letter.

Chairman White speaks at Managed Funds Association conference. SEC Chairman Mary Jo White discussed proposed amendments to Regulation D that would require hedge funds to provide information about offerings conducted under Rule 506, including those that use general solicitation and advertising. The agency will move expeditiously toward adoption of the rule. White also defended the agency’s inspection of private fund advisers. (10/18/2013) White speech.

Chairman White discusses disclosure obligations. SEC Chairman Mary Jo White discussed current SEC disclosure requirements, suggesting that investors may be experiencing information overload. (10/15/2013) White speech.

Market data website launched. The SEC has launched a website that will allow users to access the market metrics gleaned from the agency’s Market Information Data and Analytics System. The website may be accessed at: (10/9/2013) SEC press release.

Enforcement policy. SEC Chairman Mary Jo White outlined her enforcement policy. Under her leadership, the Commission will pursue all violations of the securities laws, including those that do not require intent. The actions of gatekeepers, like investment company boards and auditors, will also be an enforcement focus. (10/9/2013) White remarks.

US Commodity Futures Trading Commission Developments

Requests for Comment

Comment sought on swaps certification submission. The CFTC requested comment on a certification from Javelin SEF, LLC to implement available-to-trade determinations for certain interest rate swap contracts. The Division of Market Oversight, under delegated authority from the CFTC, has stayed Javelin’s submission to provide the agency with additional time to analyze the submission in light of the novel or complex issues related to Javelin’s initial available-to-trade determinations. Comments should be submitted by November 19, 2013. (10/18/2013) CFTC press release.

Regulatory Relief

Registration relief for SEFs. The CFTC’s Division of Market Oversight issued individual no-action letters providing time-limited relief for GTX SEF LLC and LatAm SEF, LLC for failure to register as a swap execution facility. (10/17/2013)

Swap transactions by non-US persons. The CFTC’s Division of Swap Dealer and Intermediary Oversight provided relief from the de minimis calculation for certain non-US persons who are not guaranteed or conduit affiliates of US persons provided that certain conditions are met. (10/17/2013) CFTC press release.

US Banking Agency Developments

Capital Rules. The Federal Reserve Board and the OCC jointly published a final rule to replace their existing risk-based and leverage capital rules. The new rule is consistent with the interim rule published by the FDIC. Under the rule, a new regulatory capital framework incorporating the requirements of the Basel framework is established. The rule applies to all national banks and federal savings associations. The rule is generally effective for advanced approaches banks on January 1, 2014, and for all other banks on January 1, 2015. (10/11/2013) OCC Bulletin.

US Exchanges and Self-Regulatory Organizations

Firm Element Advisory update. The Financial Industry Regulatory Authority announced the release of the Fall 2013 Firm Element Advisory by the Securities Industry/Regulatory Council on Continuing Education. (10/18/2013) FINRA Regulatory Notice 13-33.

FINRA issues conflicts of interest report. The Financial Industry Regulatory Authority issued a report on conflicts of interest in the broker-dealer industry. (10/14/2013) Report.

Business continuity plans. Amended business continuity and disaster recovery requirements have been published by the National Futures Association. The new rule requires an FCM and an FDM to provide contact information for all key management personnel, as well as the address and telephone number of its disaster recovery site. FCMs and FDMs are required to submit this information by November 30, 2013. (10/11/2013) NFA Notice to Members I-13-31.

Account Control Agreement. The ISDA 2013 Account Control Agreement has been published by the International Swaps and Derivatives Association. The agreement is a three-way contract between the custodian and two over-the-counter derivatives counterparties. (10/11/2013) ISDA press release.

ISDA protocol. The International Swaps and Derivatives Association published the ISDA 2013 Discontinued Rates Maturities Protocol. (10/11/20130 ISDA press release.

FINRA minor rule violation plan amendments. The SEC has approved the Financial Industry Regulatory Authority’s amendment of FINRA Rule 9217 to include additional rules for the disposition of matters in accordance with FINRA’s Minor Rule Violation Plan. The amendment was effective September 26, 2013. (10/9/2013) FINRA Regulatory Notice 13-32.

Guide to assisting victims of fraud. The Financial Industry Regulatory Authority and the National Center for Victims of Crime published a guide on addressing financial crime, including investment fraud, identity theft, mortgage and lending fraud, and mass-marketing scams. (10/9/2013) FINRA press release.

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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