The Financial Report - Volume 3, No. 8 • April 2014 (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

According to various media sources summarizing the findings of a recently published “Progress Report,” as of April 1, 2014, of the 398 total rulemaking requirements under the Dodd-Frank Act, about 280 of those imposed specific deadlines. Of those 280 deadlines, 152 (54.3 percent) have finalized rules and 128 (45.7 percent) have been missed. An additional 44 do not yet even have proposals from the relevant regulators.

Among regulators, the Commodity Futures Trading Commission seems to have made the most progress on implementing Dodd-Frank, with 50 out of 60 rules finalized, and only 2 that are past the deadline without any proposal. The Securities and Exchange Commission has finalized just 42 out of 95 required rules, with 8 past deadline and without a proposal, while bank regulators as a group have finalized 69 out of 135 required rules and still have to make proposals on 11 rules that are past deadline.

To the extent that financial institutions don’t know the final form of the rules to which they are subject, there is a continued regulatory risk that they have to take into account when making strategic business decisions. Perhaps more importantly, until all of the rules under Dodd-Frank are in place, it is impossible to assess whether those rules may be able to avert the next financial crisis.

We continue to do all that we can to help our clients circumnavigate this inherent regulatory uncertainty. In that regard, on Tuesday we announced that former Commodity Futures Trading Commission Commissioner Bart Chilton has joined DLA Piper as a senior policy advisor in our Washington, DC office.

Commissioner Chilton’s 30-year career in government service includes working in the US Congress and serving in the executive branch during the Clinton, Bush and Obama Administrations. He has extensive experience in the development and debate of major public policy related to the financial services industry, including significant market and regulatory changes impacting the full spectrum of derivatives users.

Commissioner Chilton was nominated and confirmed as a CFTC Commissioner during the Bush and Obama Administrations (2007 and 2009), and he chaired the CFTC’s Energy and Environmental Markets Advisory and Global Markets Advisory committees. His tenure was marked by landmark efforts to assist industry participants with the myriad requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act, which created a complex regime for the regulation of the swaps marketplace.

We are confident that Bart’s addition will enhance the capabilities and visibility of our global financial services regulatory and swaps practices, as well as our access to other key decision-makers with regard to recent rulemaking. In addition to providing his unique insight on Dodd-Frank rulemaking, Bart will assist our cross-border team in navigating difficult issues surrounding equivalency with comparable regulations that are being enacted in other jurisdictions.

Commissioner Chilton is also the author of Ponzimonium: How Scam Artists Are Ripping Off America, a consumer education book published by the CFTC.

News from the Americas

D.C. Circuit strikes down part of Dodd-Frank conflict minerals rule. The D.C. Circuit Court of Appeals has ruled that the reporting requirement under Dodd-Frank, which requires that an issuer describe its products as not “DRC conflict free” in the report it files with the Commission and must post on its website, constitutes compelled speech in violation of the First Amendment. The court upheld other parts of the rule, which requires publicly traded manufacturers to disclose to the SEC and investors whether certain minerals used in their products may have originated from the conflict-ridden Democratic Republic of Congo. (4/14/2014) Reuters. National Assoc. of Manufacturers v. SEC.

Derivative clearinghouses no guarantee against failure. Reuters reported that the default “waterfall” structure of derivative central counterparties (CCPs) have a number of defects in addressing risks emanating from clearing members, as well as from the CCPs themselves, by giving non-defaulting members a false sense of security and raising the possibility that CCPs may find their own interests to be in conflict with those of market participants. (4/10/2014) Clearing Houses.

Canadian Regulators and CFTC enter into MOU. The Alberta Securities Commission, the British Columbia Securities Commission, the Ontario Securities Commission, and the Autorité des marchés financiers have entered into a Memorandum of Understanding with the U.S Commodity Futures Trading Commission aimed at enhancing the cross-border supervision of firms that operate in both countries. (4/3/2014) OSC news release.

OSC report on virtual currency. The Ontario Securities Commission published a report on the investment risks of virtual currency such as Bitcoin. (4/4/2014)

News from Asia and the Pacific

MAS publishes monetary policy statement. The Monetary Authority of Singapore issued a policy statement reviewing current monetary policy and the 2014 economic outlook for Singapore. (4/14/2014)

Joint securities program between SFC and CSRC. The China Securities Regulatory Commission and the Securities and Futures Commission have approved, in principle, the development of a pilot program, Shanghai-Hong Kong Stock Connect, for establishing mutual stock market access between Mainland China and Hong Kong. (4/10/2014) SFC press release.

Turf war. China’s top two banking regulators — the China Banking Regulatory Commission and the People’s Bank of China — are reportedly engaged in a bitter turf war that is affecting their ability to enact reforms and tackle the systemic risks showing up in China’s financial sector. Two reforms affected by the dispute are (1) a long-delayed plan to introduce deposit insurance and (2) the liberalization of interest rates. Several high-profile defaults in recent weeks have drawn attention to the conflict. (4/9/2014) Rivals.

News from Europe

European Parliament passes laws to shut down troubled banks. Reuters reported that the European Parliament passed new laws to make sure that taxpayers no longer foot the bills to bail out banks. Countries will be obligated to guarantee the first 100,000 euros in any savings account. It still does not address what happens if a very large bank fails. However, the ECB will have the authority to shut failing banks. (4/15/2014) Banking reform.

EU to reign in high-frequency trading. The Telegraph reported that Michel Barnier, the EU financial services commissioner, is promising strict curbs on high-frequency trading. (4/14/2014) Slow-walking HFT.

Annuities sales predicted to plunge. The Guardian reports that PriceWaterhouseCoopers expects sales of annuities to collapse by 75%, from about £12bn to £3bn. PwC found that budget reforms allowing retiring workers to have greater flexibility in how they handle their pension savings will open up an “advice black hole.” (4/13/2014) Annuities.

ECB’s Draghi warns on exchange rates. Adding to the debate on additional stimulus, Bloomberg reports that the ECB head warned that the almost 6 percent gain against the dollar in the past year is further jeopardizing price stability by cheapening imports and hurting exporters. (4/14/2014) Draghi ECB.

Schaeuble sees no signs of deflation. Reuters reports that the German Finance Minister Wolfgang Schaeuble sees no sign of a deflationary spiral in the Eurozone, although he did echo Draghi’s warning about the negative effects of exchange rates on the European economy. (4/14/2014) Deflation.

Global Regulators

Basel Committee issues final standard to control banks’ large exposures. The Basel Committee on Banking Supervision published a final standard for measuring and controlling large exposures. It will take effect from 1 January 2019. The large exposure standard sets the overall limit to 25% of a bank’s Tier 1 capital. The definition and the reporting thresholds are now 10% of the eligible capital base instead of the 5% initially proposed. A tighter limit will apply to exposures between banks that have been designated as global systemically important banks (G-SIBs). This limit has been set at 15% of Tier 1 capital. (4/15/2014) BIS Press Release.

Financial Conduct Authority details new mortgage rules. The FCA is introducing new rules for mortgage lenders and advisers in the UK. The rules, scheduled to go into effect on April 26, are designed to ensure that people only get a mortgage they can afford, and to prevent a recurrence of certain lending practices. Every borrower will now have to prove that they can afford the repayments, both now and in the future. (4/14/2014) FCA Mortgages.

FCA concerned about premium calls to consumers. The Authority is concerned that customers are being charged high rates to contact financial services firms and will consult with industry, consumer organizations and consumers to ensure that customer calls are more affordable. (4/14/2014) FCA Premium Calls.

The European Securities and Markets Authority. The Authority launched a consultation on draft Regulatory Technical Standards outlining the framework of the European Market Infrastructure Regulation (EMIR). The standards cover the risk management procedures for counterparties in non-centrally cleared OTC derivatives, the criteria concerning intragroup exemptions and the definitions of practical and legal impediments. The consultation runs until 14 July 2014. (4/14/2014) EMIR.

The European Banking Authority seeks guidance on high earner remuneration. The EBA is seeking consultations on its revised Guidelines on the data collection exercise for high earners and on its Guidelines on the remuneration benchmarking exercise. The updates to the Guidelines follow changes in reporting requirements as laid down in the Capital Requirements Directive and Regulation. (4/7/2104) EBA Remuneration.

IOSCO expresses concern on the impact of SEF rule on Asia Pacific Derivatives Markets. The Commission expressed its concerns to the CFTC regarding the impact of the core principals and other requirements for Swap Execution Facilities on Asia Pacific OTC derivatives markets, observing that a number of non-US platforms have difficulty ascertaining which clients qualify as US persons, and that some have refrained from providing services to US participants. (4/9/2014) Asia Swaps.

FSB publishes semi-annual progress reports on OTC derivatives market reforms. The Financial Stability Board report finds that substantial progress has been made toward meeting G20 commitments, through international policy development, jurisdictions’ adoption of legislation and regulation, and expansion in the use of market infrastructure. (4/8/2014) FSB OTC.

US Securities and Exchange Commission Developments

Policy Change

Corporation Finance changes procedures for confidential treatment applications. The Division of Corporation Finance announced a change to its procedures relating to granted applications for confidential treatment. While the Division will continue to provide oral and written comments on certain applications, where it grants an application without providing comments, the Division will no longer directly notify the applicant. The Division will continue to post the orders through EDGAR but it now will be incumbent upon the applicant to review the EDGAR website to determine if the application has been granted. The Division will continue to advise applicants in writing when it intends to deny the application. (4/9/2014) Policy Change.

Selected Enforcement Actions

Ponzi scheme allegedly included false online account updates. The SEC announced civil and criminal charges against an individual and two entities, alleging a Ponzi scheme that attracted more than US$12.8 million of investment in a fictitious credit union. The SEC alleged that false information was posted to the investors’ online accounts to give the appearance of substantial returns. In reality, investor money was misappropriated to pay for personal expenses and to make Ponzi-scheme distributions to earlier investors. (4/11/2014) SEC Release LR-22972.

Ponzi scheme in virtual concierge machines alleged. The SEC filed a civil action to halt an alleged Ponzi scheme involving the sale of investments in Virtual Concierge machines, ATM-like machines that provide advertising and services. The SEC alleges that the defendants raised more than US$40 million by guaranteeing exorbitant returns, but in fact operated a Ponzi scheme and misappropriated several million dollars for themselves. The investments were promoted through YouTube videos. (4/7/2014) SEC Release LR-22969.

SEC charges purported investment adviser. The SEC instituted administrative proceedings against the adviser to “a self-described hedge fund.” The SEC alleged that the adviser misappropriated most of the US$200,000 she received from investors in the fund losing the monies she did invest in risky options trading. The adviser also allegedly sold US$50,000 worth of subscriptions to an investment advice website, where she misrepresented her background in the industry and falsely claimed that she had an 800% annual return in her own brokerage account, when in fact she lost all the money invested in that account. The case is pending before an administrative law judge. (4/8/2014) SEC Release 33-9574.

Other Developments

NASAA speeches by SEC Commissioners address state regulation. SEC Commissioners Kara Stein and Luis Aguilar, in speeches before the North American Securities Administrators Association (NASAA) annual meeting, talked about the importance of partnership with state regulators, especially in the context of proposed Regulation A+. (4/8/2014) Speeches.

Private equity and hedge funds groups formed by SEC. Reuters reported that the SEC is forming a group of examiners to specifically look at how private equity and hedge funds value their assets. (4/7/2014) Private Funds.

Staff Announcements. The SEC has named David Gottesman as Deputy Chief Litigation Counsel. (4/15/2014)

US Commodity Futures Trading Commission Developments

Customers of MF Global will be reimbursed. Following an order from the CFTC, collapsed brokerage firm MF Global has begun to reimburse the US$1.2 billion of customer funds lost when the company went bankrupt in 2011. The payouts are expected to be sent out by the end of the week. The CFTC consent order also imposed a US$100 million civil monetary penalty against MF Global, which will be paid after its customers and creditors have been fully reimbursed. (4/3/2014) CFTC news release.

CFTC’s Dodd-Frank power would be limited by House bill. The House Agriculture Committee introduced a bill during the week of April 7th that would require the CFTC to probe the costs of enforcing its Dodd-Frank Act regulations and conduct an up-to-date study of the current state of high-speed trading. The legislation would also impose limits on the CFTC’s power to enforce rules on overseas derivatives trading and on manufacturers using swaps to hedge business risks. (4/9/2014) Bill.

Senate panel approves Massad to head CFTC. US Senate panel approved Timothy Massad as the Commission’s next chairman this week. Massad is a lawyer who helped oversee the Treasury Department’s bank bailout program in 2008 and 2009. (4/8/2014) Massad.

US Banking Agency Developments

Joint Agency Developments

New rules on enhanced supplementary leverage ratios. The Federal Reserve Board, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency have jointly adopted a final rule to strengthen leverage ratio standards for the largest U.S. banks. The rule, which becomes effective January 1, 2018, applies to US top-tier bank holding companies with more than US$700 billion in consolidated total assets or more than US$10 trillion in assets under custody and in their insured subsidiaries. The same agencies also issued a Notice of Proposed Rulemaking to modify the calculation of the supplementary leverage ratio that would be consistent with recent changes agreed to by the Basel Committee. (4/8/2014) OCC News Release. Final Rule. Proposed Rule on Leverage Ratio Denominator.

Banking Agency Developments

Addressing online risks. In an apparent response to recently exposed internet security risks, the FDIC issued a statement urging financial institutions to utilize the following organizations, as well as others, to identify and help mitigate potential cyber-related risks.
United States Computer Emergency Readiness Team
US Secret Service Electronic Crimes Task Force
FBI InfraGard

FOMC meeting. The minutes of the recent Federal Open Market Committee (FOMC) meeting were released. Minutes of March 18-19 Meeting. As noted by The New York Times, the minutes indicate that some committee members worried that their decision to replace a specific focus on an unemployment target with a longer list of less specific objectives might be misunderstood. (4/9/2014)

Alvarez testifies before House Committee on Financial Services. Scott Alvarez, the Federal Reserve’s General Counsel, testified on recent rulemakings and other Fed actions. (4/8/2014) Testimony.

Fed grants Volcker Rule deadline extension. The Federal Reserve Board announced two additional one-year extensions on compliance with section 619 of the Dodd-Frank Act (commonly referred to as The Volcker Rule). Banks will now have until July 21, 2017, to divest collateralized loan obligations that are deemed by the Rule to be too risky. Treasury Press Release. (4/7/2014) See also Reuters.

US$2 Billion expected from Ally IPO. The Treasury Department announced that 95 million shares of common stock in Ally Financial Inc. were available at US$25 per share. The sale is expected to net the Treasury US$2.375 Billion. The percentage of the company held by taxpayers will fall to 17 percent. (4/9/2014) Ally IPO.

OCC testimony on community banks. The OCC’s Chief Counsel, Amy Friend, testified before the House Financial Services Committee on efforts to minimize the regulatory burden on community banks. (4/8/2014) OCC News Release. Written Statement.

US Exchanges and Self-Regulatory Organizations

FINRA security classification approved. FINRA proposed to classify depositary shares, when not listed on an equity facility of a national securities exchange, as OTC Equity Securities under FINRA Rule 6420(f). (4/10/2014). SEC Release 34-71927.

FINRA proposes fee schedule change. FINRA has proposed a rule change to adopt FINRA Rule 4553 (Fees for ATS Data) to establish a fee for professional access to the data in order to recover the costs associated with collecting, formatting, and disseminating the data. (4/9/2014) SEC Release 34-71919.

FINRA requests comments on rules. FINRA is asking for comments on several communications about public rules to assess their effectiveness and efficiency. (4/8/2014) FINRA Regulatory Notice 14-14. FINRA is also conducting a retrospective review of the gifts and gratuities and non-cash compensation rules to assess their effectiveness and efficiency. (4/8/2014) FINRA Regulatory Notice 14-15.


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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