The Financial Report - Volume 3, No. 5 • March 2014 (Global)

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 Banking Agency Developments

US Judicial Developments

US Exchanges and Self-Regulatory Organizations

Discussion and Analysis

Last week, the Financial Industry Regulatory Authority issued one of its most important rule proposals in some time. Regulatory Notice 14-09 solicits comments on a proposed new regulatory structure for firms that limit their activities to advising companies and private equity funds on capital raising and corporate restructuring. (See DLA Piper Financial Services Alert).

Many firms limit their business activities to corporate advisory services, but this nevertheless can fall within the broad definition of broker-dealer activity. Such firms advise companies on mergers and acquisitions, assist in raising capital in private placements to institutional investors and/or help assess strategic and financial options. The SEC and FINRA (and, from time to time, the courts) have taken the position that such firms must register as broker-dealers because they are involved in key points in the distribution of securities. This is especially true when such firms receive transaction-based compensation for their services. Realizing that such firms do not engage in most of the activities typically associated with broker-dealers, FINRA is now proposing a bespoke set of rules for what they refer to as “limited corporate financing brokers” (LCFBs). While LCFBs would be subject to FINRA bylaws and those core rules that FINRA believes rightly apply to all firms, they otherwise would be subject only to rules tailored to the LCFB business.

A firm would not qualify as an LCFB if it carries or maintains customer accounts, holds or handles customer funds or securities, accepts customer orders for the purchase or sale of securities, exercises investment discretion on behalf of any customer, or engages in proprietary trading or market-making.

Many industry commentators have noted that the issuance of the proposed rules should be construed as a clear statement that firms currently engaging in activities that would qualify for LCFB treatment are likely required to be registered as broker-dealers currently. Therefore, even firms believing that they may fall within the proposed limited regulatory regime, if and when adopted, need to consider whether they currently are complying with all applicable broker-dealer regulatory requirements.

FINRA has requested comments by April 28, 2014. If you have any questions regarding the proposal, or if you would like assistance in preparing and submitting comments to FINRA, please feel free to contact us.

News from the Americas

CSA proposed prospectus amendments. The Canadian Securities Administrators published for comment proposed amendments relating to the accredited investor prospectus exemption and the minimum amount investment prospectus exemption in “National Instrument 45-106 Prospectus and Registration Exemptions.” Comments should be submitted by May 28, 2014. (2/27/2014) CSA press release.

CSA guidance on cost disclosure, performance reporting and client statements. The Canadian Securities Administrators published frequently asked questions and answers regarding “Amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103)” and “Companion Policy 31-103CP Registration Requirements, Exemptions and Ongoing Registrant Obligations,” implementing phase 2 of the client relationship model, which became effective on July 15, 2013. (2/27/2014) CSA press release.

News from Asia and the Pacific

ASIC updates guidance on the use of the internet for selling securities. The Australian Securities & Investments Commission issued updated guidance to facilitate and encourage the use of the internet and other interactive media for making offers of securities. The updated guidance includes an explanation of ASIC’s view on the way that the internet and other electronic means can be used to make offers of securities, a “good practice guide” and continuation of relief for the use of personalized or Australian financial services licensee created application forms. (3/3/2014) ASIC press release.

Hong Kong proposes rules for alternative liquidity pools. The Hong Kong Securities and Futures Commission opened a consultation concerning the future regulation of alternative liquidity pools (ALPs), which are also known as alternative trading systems and “dark pools.” The SFC proposes to enhance and standardize the regulatory obligations imposed on Hong Kong licensed corporations that operate ALPs, by including within the Code of Conduct comprehensive requirements governing their operation. Consequently, the SFC will cease its current practice of imposing conditions on the licenses of ALP operators on a case-by-case basis. Comments should be submitted by April 25, 2014. (2/27/204) SFC press release.

UK and Singapore establish financial dialogue. The UK and Singapore have agreed to establish a UK-Singapore Financial Dialogue, which will focus on deepening financial and economic cooperation between the two countries. Ministers from both countries also agreed to support the establishment of a new, private sector forum to boost the development of the offshore Renminbi market. The forum will be led by the private sector and focus on increasing cooperation between the UK and Singapore markets. (2/25/2014) MAS press release.

News from Europe

EU adopts variable remuneration rules. The European Commission adopted Regulatory Technical Standards on criteria to identify categories of staff whose professional activities have a material impact on a financial institution’s risk profile. These “risk takers” will be subject to EU rules on variable remuneration (including bonuses). (3/4/2014) EU press release. Bloomberg summarized the standards, noting their more controversial provisions. (3/4/2014) Summary.

UK FCA reviews retail sales incentives. The UK Financial Conduct Authority published the results of its most recent review of sales incentives used by retail financial services firms. The FCA found significant improvements at many firms of all sizes but identified a number of areas common across the industry where further work was needed. (3/4/2014) FCA press release.

UK PRA occasional consultation paper. The UK Prudential Regulation Authority proposed miscellaneous and minor amendments to its rules and guidance. The proposal concerns financial conglomerates’ capital adequacy, proposed amendment to the supervisory statement on the internal capital adequacy assessment process and the supervisory review and evaluation process, Shari’ah-compliant liquid assets and risk management of asset encumbrance. Comments should be submitted by April 15, 2014. (3/4/2014) PRA press release.

UK to consider tougher claw back rules. The Telegraph reported that the UK Prudential Regulation Authority will soon launch a consultation on new, stiffer compensation claw back rules for bank executives. (3/4/2014) Claw backs.

UK FCA reviews platform rules. As the April 6, 2014 deadline approaches for implementing the UK Financial Conduct Authority’s new rules for platforms, the FCA published a thematic review of how firms are preparing to meet that deadline. (3/3/2014) FCA press release.

Singular uncertainty. Bloomberg discussed the uncertainty surrounding provisions of the EU’s Single Resolution Mechanism. The banking industry, EU member states and the European Parliament cannot agree on how much banks should be required to contribute to the pool meant to support the orderly resolution of a failed bank. (3/2/2014) Uncertainty.

EBA draft technical standards for margin periods. The European Banking Authority launched a consultation on draft Regulatory Technical Standards aimed at specifying the minimum margin periods of risk that institutions acting as clearing members may use for the calculation of their capital requirements for exposures to clients. Comments should be submitted by May 9, 2014. EBA press release. (2/28/2014).

EBA publishes consumer trends report. The European Banking Authority published its annual report on consumer protection and financial innovation trends. The report identifies the consumer issues that may arise, or have arisen, and describes the approaches the EBA will be taking in 2014 to address those issues. EBA press release. (2/28/2014)

FCA consumer credit consultation. The UK Financial Conduct Authority opened a consultation on proposed amendments to the FCA Handbook that would prohibit or restrict European Economic Area authorized payment institutions and electronic money institutions from undertaking certain consumer credit business in the UK. Comments should be submitted by March 14, 2014. FCA press release. (2/28/2014)

FCA commodity markets update. The UK Financial Conduct Authority published a commodity markets update to explain how the FCA will respond to changes in the commodity derivative markets. Update. (2/27/2014)

Firm disclosure of non-financial information. The European Parliament and the European Council have reached agreement on an amendment to existing accounting legislation to improve the transparency of certain large companies on social, environmental and diversity matters. Under the agreement, companies will need to disclose information on their policies, risks and results regarding environmental matters, social and employee-related issues, respect for human rights, anti-corruption and bribery issues and diversity on boards of directors. (2/26/2014) EC press release.

ESMA report on credit rating agencies. The European Securities and Markets Authority published its 2013 annual report on credit rating agencies in the European Union. The report also outlines ESMA’s supervisory work plan for this year. (2/21/2014) ESMA notice.

European Parliament committee approves anti-money laundering rules. The European Parliament’s Economic and Monetary Affairs Committee approved new draft anti-money laundering rules previously approved by the Economic Affairs and the Justice and Home Affairs committees. Under the anti-money laundering directive, information on the ultimate beneficial owners of different legal arrangements, including companies, foundations and trusts would be listed and made publicly available. (2/20/2014) Econ Committee press release.

Euribor benchmark-setting improves. The European Securities and Markets Authority and the European Banking Authority published the results of their joint review of the Euribor-EBF. The review found that Euribor-EBF has made significant progress in implementing the ESMA-EBA recommendations for improved transparency of the benchmark-setting process, enhanced governance of the benchmark, and improved quality of the resulting index. (2/20/2014) ESMA notice.

EBA final draft standards on variable remuneration. The European Banking Authority published final draft Regulatory Technical Standards on classes of instruments that can be used for the purposes of variable remuneration. (2/19/2014) EBA press release.

US Securities and Exchange Commission Developments

Proposed Rules

Comment period reopened for asset-backed securities proposal. The SEC reopened the comment period for its proposed disclosure rule for asset-backed securities. The Commission seeks comment on the Division of Corporation Finance’s suggestion concerning the dissemination of potentially sensitive asset-level data. Comments should be submitted by March 28, 2014. (2/25/2014) SEC Release No. 33-9552.


Investment companies. The Division of Investment Management issued guidance on how Securities Exchange Act Rule 14a4-4, the unbundling of proxy materials, applies to investment companies. (2/24/2014) Guidance.

Selected Enforcement Actions

Penny stock sanctions. The SEC barred two registered representatives from the securities industry for their participation in an unregistered penny stock scheme and also barred their senior manager from association with any broker or dealer with a right to reapply in a non-proprietary, non-supervisory capacity after two years. The Commission reduced the amount of disgorgement imposed by the administrative law judge but increased the civil penalties. (2/27/2014) In the Matter of Ronald S. Bloomfield, SEC Release No. 33-9553.

SEC alleges private equity manager misallocated assets. The SEC instituted contested administrative proceedings against an Arizona-based private equity fund manager and his investment advisory firm for misallocating their expenses to the funds they manage. The Enforcement Division alleges that Scott A. Brittenham and Clean Energy Capital LLC (CEC) improperly paid more than US$3 million of the firm’s expenses by using assets from 19 private equity funds, and loaned money to the funds at unfavorable interest rates and unilaterally changed how they calculated investor returns in order to benefit themselves. (2/25/2014) SEC press release.

Junior claims he doesn’t recognize his father’s name. The SEC announced the filing of an emergency action against an investment banker charged with insider trading for nearly US$1 million in illicit profits. The SEC alleges that Frank Hixon Jr. regularly logged into the brokerage account of the mother of his child. He executed trades based on confidential information that he obtained on the job, sometimes within minutes of learning it. Illegal trades also were made in his father’s brokerage account. When his firm confronted him about the trading, Hixon Jr. pretended not to recognize the names of his father or his child’s mother. Hixon Jr. was subsequently fired. Related criminal charges have also been filed against Hixon Jr. (2/21/2014) SEC press release.

The producers. The SEC charged three California residents with defrauding investors in a purported multi-million dollar movie project that would supposedly star well-known actors and generate large investment returns. High-pressure salespeople persuaded more than 60 investors to invest a total of US$1.8 million in the movie first titled Marcel and later changed to The Smuggler. The defendants allegedly spent most of the money among themselves, and the investor funds that remain aren’t enough to produce a public service announcement. Related criminal charges have also been filed against the individuals. (2/20/2014) SEC press release.

Other Developments

2014 fiscal year fee rate. The SEC will not make a mid-year adjustment to the Section 31 fee rate for fiscal year 2014. The Section 31 fee rate will remain at US$17.40 per million through March 17, 2014, and as previously announced, change to US$22.10 per million starting March 18, 2014. This rate will remain in place until September 30, 2014, or 60 days after the enactment of a regular 2015 fiscal year appropriation, whichever is later. The Section 31 assessment on round turn transactions in security futures will remain at US$0.0042 per transaction. (2/28/2014) SEC press release.

Exchange-traded notes. According to Bloomberg, the SEC is preparing to issue guidance on exchange-traded notes. (2/28/2014) ETNs.

Crowdfunding. The comments submitted to the SEC in response to its proposed crowdfunding rules were summarized by the Wall Street Journal. (2/27/2014) Comments.

SEC speaks. At this year’s “SEC Speaks” conference, SEC Chair Mary Jo White discussed the SEC’s priorities, which include expanded stress tests by the Division of Investment Management, the development of new analytical tools by the Office of Risk Assessment and Surveillance and the implementation of a pilot program to test tick sizes. Commissioner Kara Stein addressed the important role played by gatekeepers and said she would like to see the adoption of clear guidelines concerning when a “bad actor” waiver request will be granted. Commissioner Luis Aguilar enumerated the growing cyber-threats faced by registrants, the capital markets and investors. (2/21/2014)

OCIE focus. In 2014, the focus of the SEC’s Office of Compliance Inspections and Examinations will be aimed at investment advisers who have been registered with the SEC for at least three years but have never been examined. OCIE will focus on these advisors’ compliance programs, filings and disclosure, marketing, portfolio management, and client custody practices. (2/20/2014) SEC press release.

Investor bulletin. The SEC published an investor bulletin discussing how fees and expenses affect an investment portfolio. (2/2014) Investor bulletin.

US Commodity Futures Trading Commission Developments


Form TO guidance. The Division of Market Oversight reissued its guidance regarding the Trade Option Form filing process and the circumstances that trigger the filing requirement. (2/28/2014) CFTC press release.

Staff advisory. The Division of Swap Dealer and Intermediary Oversight issued an advisory outlining best practices for compliance with CFTC regulations concerning security safeguards for customers. (2/26/2014) CFTC press release.

Duplicative reporting. The Division of Clearing and Risk issued guidance to ASX Clear (Futures) Pty Limited (ASXCLF) regarding compliance with the condition to the no-action relief granted by the Division on February 6, 2014, that ASXCLF comply with the reporting obligations applicable to registered derivatives clearing organizations under the CFTC’s Part 45 regulations. (2/18/2014) CFTC Letter No. 14-17.

Regulatory Relief

Southwest Power Pool. The Divisions of Clearing and Risk, Market Oversight, and Swap Dealer and Intermediary Oversight issued time-limited no-action relief to Southwest Power Pool. The letter provides relief to Southwest Power Pool, its members and those market participants who meet the appropriate persons requirement under the Regional Transmission Organization and Independent System Operator order and permits this market and these market participants to continue to operate while the CFTC considers Southwest Power Pool’s petition. (2/20/2014) CFTC press release. DMO and DCR also issued an advisory which provides clarity to certain market participants regarding certain statements made in the Final Order in Response to a Petition from Certain Independent system Operators and Regional Transmission Organizations to Exempt Specified Transactions Authorized by a Tariff or Protocol Approved by the Federal Energy Regulatory Commission or the Public Utility Commission of Texas from Certain Provisions of the Commodity Exchange Act Pursuant to the Authority Provided in the Act. (2/25/2014) Advisory.

CPO relief. The Division of Swap Dealer and Intermediary Oversight provided a commodity pool operator with relief from the requirement in Regulations 4.7(b)(3) and 4.22(d)(1) that the financial statements in the pool’s annual report be audited. (2/19/2014) CFTC Letter No. 14-19.

US Banking Agency Developments

Physical commodity activities by banks. The date by which comments may be submitted in response to the Federal Reserve Board’s proposed rulemaking regarding physical commodity activities conducted by financial holding companies has been extended to April 16, 2014. (2/27/2014) Federal Reserve Board press release.

Foreign and large bank standards. The Federal Reserve Board has approved enhanced prudential standards for large US bank holding companies and foreign banking organizations. The new rules address liquidity, risk management, and capital and require a foreign banking organization with a significant US presence to establish an intermediate holding company for its US subsidiaries. (2/18/2014) Federal Reserve Board press release. Reuters reported that the new rules have been criticized by SEC Commissioner Daniel Gallagher, who says that the regulations infringe upon the Commission’s authority to oversee broker-dealers. (3/3/2014) Infringement.

SIFI resolution. The deadline for submitting comments to the FDIC on its proposal for the Single Point of Entry strategy for the resolution of systemically important financial institutions has been extended to March 20, 2014. (2/18/2014) FDIC press release.

US Judicial Developments

US Supreme Court addresses SLUSA preclusion. State law fraud claims against the third parties who allegedly assisted R. Allen Stanford’s Ponzi scheme can proceed, the US Supreme Court ruled. Service providers to Stanford sought dismissal of the suits by arguing that the Securities Litigation Uniform Standards Act (SLUSA) precluded the claims of Stanford’s victims. But the Court concluded that SLUSA did not apply here. (2/26/2014) Chadbourne & Parke LLP v. Troice.

SEC rebuts general partnership presumption. The US Court of Appeals for the Tenth Circuit has reinstated a SEC enforcement action against the promoters of an oil and gas general partnership venture. The district court had dismissed the suit because it found that the joint venture interests were not securities. The Tenth Circuit, however, found that the SEC raised a fact issue concerning whether the investors were relying on defendants’ efforts. It further found that the complaint raised a fact issue as to whether the investors actually had the type of control reserved under the agreements to obtain access to information necessary to protect, manage, and control their investments at the time they purchased their interests. It therefore reversed the dismissal of the SEC’s suit. (2/24/2014) SEC v. Shields.

US Exchanges and Self-Regulatory Organizations

FINRA proposes “Limited Corporate Financing Brokers.” The Financial Industry Regulatory Authority proposed rules for “limited corporate financing brokers,” a firm that engages in limited activities centered on advising companies and private equity funds on capital raising and corporate restructuring. Comments should be submitted by April 28, 2014. (2/26/2014) FINRA Regulatory Notice 14-09. See our Client Alert concerning this proposal.

Block trades. NYSE Regulation reminded members that block-sized agency crosses under Rule 72(d) can only be effected when in possession of an order to buy and an order to sell an equivalent amount of the same security, and both orders are for 10,000 shares or a quantity of stock having a market value of US$200,000 or more, whichever is less. (2/25/2014) NYSE Information Memo 14-6.

Credit derivative definitions. The International Swaps and Derivatives Association has published the 2014 ISDA Credit Derivatives Definitions. (2/21/2014) ISDA press release.

FINRA BrokerCheck proposals approved. The SEC has approved Financial Industry Regulatory Authority rule changes related to FINRA Rule 8312 (FINRA BrokerCheck Disclosure). (2/20/2014) FINRA Regulatory Notice 14-08.

MSRB proposes best execution requirement. The Municipal Securities Rulemaking Board has proposed explicitly requiring municipal securities dealers to seek the most favorable price possible when executing transactions for retail investors. Comments should be submitted by March 21, 2014. (2/19/2014) MSRB 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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