The Financial Report - Volume 3, No. 6 • March 2014 (Global)

by DLA Piper



  • Discussion and Analysis
  • News from the Americas
  • News from Europe
  • Global Regulators
  • US Securities and Exchange Commission Developments
  • US Commodity Futures Trading Commission Developments
  • US Banking Developments
  • US Judicial Developments
  • US Exchanges and Self-Regulatory Organizations

Discussion and Analysis

For the past year or so, we have been discussing various forms of “crowdfunding” on these pages, especially “investment crowdfunding” -- the use of crowdfunding to raise capital for an emerging business or to finance the development of a new, perhaps cutting edge product or technology, with the investor receiving equity in the enterprise or some form of debt security promising an income stream and repayment at some future time. In most cases, investment crowdfunding involves raising capital from numerous, typically small, investors. Because this form of crowdfunding involves the sale of securities, the arrangement is subject to the various securities laws, rules and regulations that apply to any offer and sale of securities.

Although state laws are also implicated in the sale of securities, the primary focus has been on the legislative and rulemaking efforts at the federal level. To that end, the Securities and Exchange Commission recently closed the comment period on its proposed rules to implement the Jumpstart Our Business Startups (JOBS) Act. We and others have noted that the SEC’s rules are overdue. With the comment period on the SEC’s rule proposal having closed in February, everyone is now anticipating what will happen next. Will it be final rules, a revised proposal (extending the notice and comment process and further delaying final rules) or some combination thereof? No one is really certain (although the Internet, as usual, is rife with speculation).

The lengthy process from legislative mandate to formal rule proposal to final rules necessarily results in a slow, methodical procedure, but many have been especially critical of the SEC’s slow pace in this particular area. Some of that, no doubt, is attributable to the fact that in the lightning-paced world of the Internet, those most interested in participating in any new online activity are naturally impatient. But a perusal of the comments available on the SEC website, or a reading of any number of articles, indicates that many simply think the SEC’s is dragging its heels because it is overly concerned with the need to protect investors, or that it is really trying to protect accredited investors and/or traditional financial institutions from competition. Others complain that compliance with the proposed regulations will be too expensive, and that the need for things like audited financials is overstated.

While the sentiment behind some of those comments is perhaps understandable (even if some commenters are remarkably uncircumspect in how they express their views), there is one point that seems to get lost in the shuffle - long before there was an Internet, investors, especially less sophisticated small investors (even those with a lot of money), were falling prey to sharp operators offering “pie in the sky” investment opportunities. In fact, a film about one of these sharpsters - The Wolf of Wall Street - was recently nominated for a number of Oscars. The anonymity and ability to reach broad audiences from remote locations that the Internet provides makes such nefarious activities exponentially easier and quicker to complete. This is, no doubt, the SEC’s biggest concern.

By no means are we advocating waiting quietly and without remark until the SEC finishes its work. Like any busy organization with a lot on its plate, if an issue is not generating noise the SEC is likely to focus on one that is (squeaky wheel getting the grease and all that). But it bears consideration that one of the principal reasons the SEC is being careful with what it ultimately permits, and with what it ultimately requires in terms of registration, licensing, public disclosure and investor protection, is because of an understanding that, while there are a lot of really good people out there looking to use investment crowdfunding for really good things, there also are a lot of really bad people with other ideas. As with every marketplace, this one needs legitimate, focused, well-considered regulations that protect investors, those raising funds, and everyone else participating. It will do no one any good if such rules are not implemented right from the start.

News from the Americas

US Department of Labor proposes retirement fund fee guide. The US Department of Labor published for comment a proposal that would require pension plan service providers to furnish pension plan fiduciaries with a guide to assist them in understanding pension plan fee disclosure documents. Comments should be submitted within 90 days after publication in the Federal Register. (3/11/2014) Department of Labor press release.

Three Canadian provincial regulators adopt trade reporting obligations. The International Swaps and Derivatives Association advised that Canada’s Ontario Securities Commission, the Manitoba Securities Commission and the Autorité des marchés financiers have each published Rule 91-507 requiring “reporting counterparties” to report certain derivatives data to “designated” or “recognized” trade repositories with respect to transactions involving “local counterparties.” In these three jurisdictions, for trades involving a “clearing agency” or a dealer, trade reporting begins on July 2, 2014, and, for trades that do not involve such entities, on September 30, 2014. (3/14/2014) ISDA notice.

OSC adopts new enforcement initiatives. Canada’s Ontario Securities Commission announced that its staff is proceeding with four enforcement initiatives: a new program to facilitate the settlement of appropriate enforcement cases where the respondent does not make formal admissions respecting misconduct (sometimes referred to as no-contest settlements); a new program for explicit no-enforcement action agreements; a clarified process for self-reporting under the staff’s credit for cooperation program; and enhanced public disclosure by the staff of credit granted to persons for cooperation during enforcement investigations. (3/11/2014) OSC press release.

News from Asia and the Pacific

Hong Kong waives license fees for two years. Hong Kong’s Securities and Futures Commission announced that the payment of annual licensing fees will be waived for another two-year period. This initiative, effective from April 1, 2014, will benefit more than 39,000 intermediaries, including licensed corporations, registered institutions and responsible officers and representatives. The fees payable in connection with new license applications and transfers will not be affected. (3/17/2014) SFC press release.

ASIC information sheet on audit quality. The Australian Securities & Investments Commission released information to help directors and audit committees develop robust standards. “Information Sheet 196 Audit quality: The role of directors and audit committees” discusses audit quality, responsibilities of the auditor, roles of directors and audit committees, responsibilities of directors for auditor independence, the appointment of auditors, setting audit fees and promoting audit quality. (3/17/2014) ASIC press release.

Singapore proposes regulations for unlisted margined derivatives. The Monetary Authority of Singapore published draft regulations for the offer of unlisted margined derivatives, such as contracts for differences and leveraged foreign exchange products, to retail investors. Comments should be submitted by April 14, 2014. (3/14/2014)

Singapore to regulate virtual currency intermediaries. The Monetary Authority of Singapore announced that it will regulate virtual currency intermediaries in Singapore to address potential money laundering and terrorist financing risks. (3/13/2014) MAS press release.

Japan and US regulators sign cooperation agreement. Japan’s Financial Services Agency and the US CFTC signed a memorandum of cooperation for the exchange of information in the supervision and oversight of regulated entities that operate on a cross-border basis in both Japan and the US. FSA press release.

ASIC discussion paper on managed investment schemes. The Australian Securities & Investments Commission’s Corporations and Markets Advisory Committee released a discussion paper on managed investment schemes. The paper deals primarily with the establishment and ongoing operation of such schemes and raises a broad range of governance, disclosure and regulatory issues. (3/6/2014) ASIC press release.

News from Europe

UK regulators sign cooperation agreement. The Financial Conduct Authority and the Bank of England, including the Prudential Regulation Authority, signed a Memorandum of Understanding setting out how they cooperate with one another in relation to the supervision of markets and market infrastructure, which includes financial market infrastructures. (3/17/2014) FCA press release.

Bank of England Annual Report. The Bank of England published its annual report concerning its supervision of financial market infrastructures. The report also summarizes the areas on which it expects to focus over the coming year. (3/17/2014) Bank of England press release.

Bonus concerns. Bloomberg summarized European Parliament members’ concerns over proposed rules regulating the remuneration offered by EU financial firms. Some member countries believe that the proposed rules contain too many loopholes. (3/17/2014) Bonus concerns.

UK proposes tougher executive clawback provisions. The Bank of England opened a consultation on proposals to require all firms authorized by the Prudential Regulation Authority to amend employment contracts to ensure that bonus awards which have been vested can be clawed back from individuals where necessary. The proposed rules would come into force on January 1, 2015, and clawbacks could be applied to awards made before that date but which vest after that date (subject to a six year time limit). Comments should be submitted by May 13, 2014. (3/13/2014) Bank of England press release.

EC adopts single rulebook standards. The European Commission adopted Regulatory Technical Standards (RTS) to implement provisions of the Capital Requirements Regulation and Directive (CRR/CRD). The nine RTS define the ways in which competent authorities and market participants must handle disclosures linked to securitization instruments, measure potential losses from derivative positions and counterparty failure, and specify the types of instruments that can be used for paying bonuses. (3/13/2014) EC press release.

ESAs open consultation on supervisory practices for financial conglomerates. The Joint Committee of the three European Supervisory Authorities (the European Securities and Markets Authority, European Banking Authority and European Insurance and Occupational Pensions Authority) launched a consultation on draft guidelines on the convergence of practices aimed at ensuring consistency of supervisory coordination arrangements for financial conglomerates. Comments should be submitted by June 12, 2014. (3/12/2014) Joint press release.

ESMA reports on securities market conditions. The European Securities and Markets Authority published “Trends, Risks and Vulnerabilities No. 1, 2014,” and its “Risk Dashboard for 4Q 2013.” The reports look at the performance of EU securities markets, assessing both trends and risks in order to develop a comprehensive picture of systemic and macro-prudential risks in the EU. (3/12/2014) ESMA notice.

European Parliament adopts Omnibus II. The European Parliament adopted the “Omnibus II” Directive, which completes the “Solvency II” Directive and finalizes the new framework for insurance regulation and supervision in the EU. (3/7/2014) Omnibus II webpage.

ECB methodology for asset quality review. The European Central Bank published its manual on the methodology for Phase 2 of the asset quality review. (3/11/2014) ECB press release.

UK FCA studies general insurance add-ons. On March 20th, the UK Financial Conduct Authority released the provisional findings of its market study into general insurance add-on products. (3/11/2014) FCA press release.

UK FCA proposes changes to regulatory reporting. The UK Financial Conduct Authority has proposed changes to the data it collects from certain regulated firms through the Retail Mediation Activities Return (RMAR) and annual questionnaire for Authorized Professional Firms (APFs). The proposal seeks comment on the data provided by investment advice firms through Sections K and L of the RMAR; introduces changes to how data is collected; retires Section L of the RMAR, which relates to consultancy charging; and revises the reporting requirement and brings the annual questionnaire completed by APFs into GABRIEL as a new form. Comments on questions 6, 7, 8, 11 and 12 should be submitted by April 7, 2014. Comments on questions 1, 2, 3, 4, 5, 9, 10 and 13 should be submitted by June 6, 2014. (3/7/2014) FCA press release.

EBA consults on data waiver permissions. The European Banking Authority launched a consultation on draft Regulatory Technical Standards on the conditions according to which competent authorities may grant institutions permission to use relevant data covering shorter time series when estimating risk parameters. Comments should be submitted by June 7, 2014. (3/7/2014) EBA press release.

UK crowdfunding rules. The UK’s Financial Conduct Authority published new final rules for crowdfunding firms operating loan-based crowdfunding platforms (including peer-to-peer lending platforms) and updated its rules for firms operating investment-based crowdfunding platforms. The new rules are effective April 1, 2014. (3/6/2014) FCA press release.

UK FCA proposes minor Handbook changes. The UK Financial Conduct Authority proposed minor changes to the Handbook impacting AIFMs, UCITS managers and certain AIF depositaries. Comments on Chapter 5 should be submitted by April 4, 2013. Comments on all other chapters should be submitted by May 6, 2014. (3/6/2014) FCA press release.

EBA report on the leverage ratio. The European Banking Authority published a policy analysis and a quantitative assessment of the impact that would derive from aligning the current Capital Requirements Regulation definitions of the leverage ratio’s exposure measure to the revised standard published by the Basel Committee on Banking Supervision (Basel III). (3/5/2014) EBA press release.

Global Regulators

Risk weight for European Stability Mechanism. The Basel Committee announced that supervisors may allow banks to apply a 0% risk weight to claims on the European Stability Mechanism (ESM) and European Financial Stability Facility (EFSF). Claims on the ESM and EFSF will therefore also be included as Level 1 High Quality Liquid Assets in accordance with paragraph 50 (c) in “Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools.” (3/18/2014) BIS press release.

IOSCO comparison study of securities standards. The International Organization of Securities Commissions published a consultation report entitled “A Comparison and Analysis of Prudential Standards in the Securities Sector,” which undertakes a high level comparative analysis of the key prudential/capital frameworks for securities firms. The report highlights similarities, differences and gaps among the different frameworks. (3/10/2014) IOSCO press release.

Basel Committee monitoring results. The Basel Committee published the results of its Basel III monitoring exercise. The study is based on the rigorous reporting processes set up by the Committee to periodically review the implications of the Basel III standards for financial markets. (3/6/2014) BIS press release.

US Securities and Exchange Commission Developments

New Final Rules

EDGAR Manual updated. The SEC published revisions to the Electronic Data Gathering, Analysis, and Retrieval System Filer Manual and related rules. The revisions introduce new submission form types MA, MA-A, MA/A, MA-I, MA-I/A, and MA-W to support Registration of Municipal Advisors; updates to submission form types 8-K, 8-K/A, 10-K, 10-K/A, 10-KT, 10-KT/A, 10-D, 10-D/A, POS AM, 424B1, 424B2, 424B3, 424B4, 424B5, 424B7, and 424B8; and minor updates to Form 13F validations. (3/4/2014) SEC Release No. 33-9554.

Proposed Rules

Rules for “covered clearing agencies” proposed. The SEC published a proposal for the oversight of clearing agencies that are deemed to be systemically important or that are involved in complex transactions, such as security-based swaps. These “covered clearing agencies” would be subject to additional requirements concerning financial risk management, operations, governance, and disclosures. Comments should be submitted within 60 days after publication in the Federal Register, which is expected shortly. (3/12/2014) SEC press release.

Staff Guidance

Well-known seasoned issuers. The Division of Corporation Finance released revisions to its statement regarding well-known seasoned issuer waivers. (3/12/2014) Revised statement.

Municipal securities enforcement initiative. The SEC’s Division of Enforcement has initiated a program to encourage municipal securities issuers and underwriters to self-report certain securities violations. Under the initiative, the Enforcement Division will recommend standardized, favorable settlement terms to those municipal issuers and underwriters who self-report inaccuracies regarding their prior compliance with continuing disclosure obligations. Those wishing to use this program must complete and submit the appropriate documents by September 10, 2014. (3/10/2014) SEC press release.

Broker-dealer financial responsibility. The Division of Trading and Markets issued guidance concerning the SEC’s amendments to the broker-dealer financial responsibility rules. (3/6/2014) Staff guidance.

Selected Enforcement Actions

Audit committee chair among those charged with accounting fraud. The SEC filed partially settled accounting fraud charges against an animal feed company and its top executives for repeatedly reporting fake revenues from their China operations in order to meet financial targets and prop up the stock price. The SEC alleged that four executives in China orchestrated the scheme at AgFeed Industries Inc., which was based in China and publicly traded in the US before merging with a US company. The SEC also charged a company executive and a company director in the US with scheming to avoid or delay disclosure of the accounting fraud once they learned about it in 2011 while engaged in efforts to raise capital for expansion and acquisitions. (3/11/2014) SEC press release.

Unsocial network. The SEC announced that it has obtained an emergency court order to stop a fraudulent pyramid scheme by companies masquerading as legitimate international investment firms. The SEC alleges that Fleet Mutual Wealth Limited and MWF Financial have been exploiting investors through website and social media accounts on Facebook and Twitter, falsely promising returns of 2 to 3 percent per week for investors who open accounts with the firm. (3/5/2014) SEC press release.

Other Developments

Regional compliance outreach programs. The SEC and the Financial Industry Regulatory Authority announced the opening of registration for the regional compliance outreach programs for broker-dealers that will take place in Denver, Los Angeles, Chicago, Miami, Philadelphia, and New York, beginning April 30, 2014. The programs will provide professionals at broker-dealers with a forum for discussions with regulators about risk management, regulatory issues, and compliance practices. (3/18/2014) SEC press release.

ICI speakers discuss market risk. Investment News summarized remarks made at the Investment Company Institute’s annual meeting. Investment News quoted Norm Champ, Director of the SEC’s Division of Investment Management, as saying that the SEC is “undertaking an initiative to develop a recommendation that would modernize and streamline the information that funds are reporting to the commission to give us more timely and useful information about fund operations and portfolio holdings.” ICI President Paul Schott Stevens said that the SEC’s efforts to improve its market risk monitoring may help forestall intervention by the Financial Stability Oversight Commission. (3/17/2014) Remarks.

Commissioner Piwowar discusses cross-border issues. SEC Commissioner Michael Piwowar explained his thinking regarding international financial regulatory issues, paying particular attention to cross-border derivatives transactions. (3/6/2014) Piwowar speech.

US Commodity Futures Trading Commission Developments

Regulatory Relief

Registration relief. Time-limited no-action relief previously granted to Eurex Clearing AG by the Division of Clearing and Risk has been extended. (3/10/2014) CFTC press release.

Affiliated counterparties relief. The Divisions of Clearing and Risk and Market Oversight have extended to December 31, 2014, time-limited no-action relief previously granted to certain affiliated counterparties. (3/6/2014) CFTC press release.

Other Developments

Amendments to swap reporting rules to be proposed. According to Reuters, the CFTC plans to publish new trade reporting rules for swaps. (3/13/2014) Swaps reporting.

Make available-to-trade determination. Bloomberg SEF LLC’s self-certification of available-to-trade determinations for certain interest rate swap and credit default swap contracts have been self-certified. (3/10/2014) CFTC press release.

Agencies implement information sharing agreement. The CFTC and the Federal Energy Regulatory Commission made the first inter-agency transmission of market data under their recently adopted Memorandum of Understanding. (3/5/2014) CFTC press release.

End-users roundtable. On April 3, 2014, the CFTC will host a roundtable discussion on issues concerning end-users. Three panel discussions will be held to address the reporting obligations of commodity end-users; the regulatory treatment of forward contracts with embedded volumetric optionality; and the de minimis threshold for swap dealing to government-owned electric utilities. (3/5/2014) CFTC press release.

US Banking Agency Developments

Guidance on stress tests for mid-sized firms. The federal banking regulators (FDIC, Federal Reserve Board and OCC) described their supervisory expectations for stress tests conducted by financial companies with total consolidated assets between US$10 billion and US$50 billion. The stress tests for these firms must by conducted by March 31, 2014. (3/5/2014) Joint press release.

US Exchanges and Self-Regulatory Organizations

NYSE Euronext rules permit electronic closings. NYSE Regulation has advised New York Stock Exchange and NYSE Market members that new rule amendments permit designated market makers to use algorithms to close securities electronically. (3/10/2014) NYSE Regulation Information Memo 14-7.


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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