The Financial Report - Volume 5, No. 1 January 2016 (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 Judicial Developments

US Exchanges and Self-Regulatory Organizations


Discussion and Analysis

Richard Ketchum, Chairman and CEO of the Financial Industry Regulatory Authority, announced in FINRA’s 11th annual Regulatory and Examination Priorities Letter, published earlier this week, that “firm culture, ethics and conflicts of interest … remain a top priority for FINRA.” Mr. Ketchum elaborates further about the importance of “culture.” He says: “A firm’s culture contributes to, and is also a product of, a firm’s supervision and its approaches to identifying and managing conflicts of interest and the ethical treatment of customers. Given the significant role culture plays in how a firm conducts its business, this year the letter addresses how we will formalize our assessment of firm culture to better understand how culture affects a firm’s compliance and risk management practices.”

All of his references to “culture” made us think about Culture Club, the UK rock band formed in 1981 (that’s 35 years ago!). According to various histories of the band, with Boy George, an Irish cross-dresser, as the lead singer, a black Briton on bass, an Anglo-Saxon on guitar and keyboards, and a Jewish drummer, the group decided to call themselves Culture Club. Certainly that puts an exclamation point on the importance of culture!

The Wall Street Journal, reporting on the Priorities Letter, commented that the “heightened focus on culture is meant to go hand-in-hand with a deeper dive into sales practices at [brokerage] firms, including how firms are managing conflicts of interest that arise from selling certain investment products.” The article states that “another area of firm culture that has raised regulatory eyebrows has been how discipline is meted out among high-producing and low-producing advisers.” FINRA’s scrutiny may cause firms to shy away from giving their registered reps second chances when violations of the firm’s policies and procedures are discovered.

Mr. Ketchum also said that FINRA’s emphasis on culture is closely aligned with supervision, another area of focus for 2016. He urges brokerage firms to review their supervisory, risk management and control systems as part of their overall compliance programs. At the same time, Ketchum insists that FINRA is not going to be overly prescriptive or attempt to hold brokers to a one-size-fits-all standard for what an appropriate culture should look like. He said, “Our goal is not to dictate a specific culture, but rather to understand how each firm’s culture affects compliance and risk management practices.”

In an attempt to provide some objective criteria to evaluate firm culture, the Priorities Letter states that FINRA will focus on five indicators of a firm’s culture: whether control functions are valued within the organization; whether policy or control breaches are tolerated; whether the organization proactively seeks to identify risk and compliance events; whether the supervisors are effective role models of firm culture; and whether sub-cultures (such as at a branch office or trading desk) that may not conform to overall corporate culture are identified and addressed.

With FINRA’s promise to closely examine firm culture, brokerage firms may be well advised to consider adopting as their theme song Culture Club’s 1982 hit, “Do You Really Want to Hurt Me?”

News from the Americas

United States

SEC publishes report on exchange-traded fund trading halt. The Securities and Exchange Commission (SEC) published a report in which it analyzed the factors that could have contributed to a period of market volatility that stopped trading in hundreds of ETFs on August 24th. On December 29th, Bloomberg Business reported on the study, which pointed to the use of “market orders” that execute at the prevailing market price, no matter how far prices rise or fall, thereby contributing to an excess of selling, which helped further push down prices. (12/29/2015) ETFs.


Canadian securities regulators seek comments on a mutual fund risk classification methodology. The CSA published for comment proposed amendments that would require fund managers to use a standardized risk classification methodology (the Proposed Methodology) when determining a risk level for conventional mutual funds and exchange-traded mutual funds (ETFs) in the Fund Facts and in the proposed ETF Facts, respectively. The CSA is welcoming feedback on the Proposed Methodology, which can be found on CSA members’ websites. The 90-day comment period will close on March 9, 2016. (12/10/2015) OSC press release.

US Securities and Exchange Commission Developments

Proposed Rules and Requests for Comment

SEC considers new rules for transfer agents. The SEC requested comments on an advance notice of proposed rulemaking that would impose new requirements for transfer agents and an accompanying concept release that outlines the SEC’s approach to transfer agent regulation and potential areas for additional rulemaking. Comments on both the advance notice of proposed rulemaking and the concept release are due on or before February 29, 2016. (12/22/2015) SEC press release. See also supporting statement of Commissioner Aguilar.

SEC proposes new rules regulating the use of derivatives by registered funds. The SEC published a proposed rule that would place additional limitations on the use of derivatives by mutual funds, ETFs, closed-end funds, and business development companies. The proposed rule would require funds to comply with one of two alternative portfolio limitations that would limit the amount of leverage a fund may obtain through derivatives and to segregate certain assets to mitigate the risks associated with derivatives. Funds that use complex derivatives or engage more frequently in derivatives transactions would be required to establish a derivatives risk management program. Comments on the proposed rule are due on or before March 28, 2016. (12/11/2015) SEC press release. See also a white paper published by the SEC Division of Economic Research and Analysis (DERA) examining the use of derivatives by registered investment companies that was released alongside the proposed rule.

SEC gives resource extraction payment disclosure rule another try. The SEC proposed new rules that would require domestic or foreign issuers engaged in the commercial development of oil, natural gas, or minerals that are required to file annual reports with the SEC to disclose payments made to the US or foreign governments. Under the proposed rule, these companies would be required to disclose any payments made related to their commercial development activities or that total more than US$100,000 during the fiscal year. The disclosure requirements would extend to payments made by subsidiaries or other entities controlled by the issuer. Initial comments on the proposed rule are due on or before January 25, 2016, while reply comments responding to issues raised in the initial comment period are due on or before February 16, 2016. (12/11/2015) SEC press release. SEC Commissioner Michael S. Piwowar dissented, criticizing the proposed rule for burdening only public companies with additional disclosure requirements.

SEC proposes format for SBS data submissions. The SEC proposed amendments to Securities Exchange Act rules governing the registration, duties, and core principles of security-based swap data repositories (SDRs). The proposal would require SDRs to make security-based swap (SBS) data available to the SEC in electronic format by using appropriate schemas that will rely on either FpML or FIXML. Comments are due on or before February 22, 2016. (12/11/2015) SEC Release No. 34-76624.


Division of Corporation Finance publishes guidance on securities law amendments in FAST Act. The SEC’s Division of Corporation Finance issued guidance on changes to federal securities laws included in the recently enacted Fixing America’s Surface Transportation (FAST) Act, including an announcement providing a brief overview of the changes, new Compliance and Disclosure Interpretations (C&DIs), and revised versions of the Jumpstart Our Business Startups (JOBS) Act frequently asked questions that address generally applicable questions and the confidential submission process for emerging growth companies to reflect amendments to Section 6(e) of the Securities Act. (12/21/2015) FAST Act C&DIs.

No-Action Relief and Exemptive Orders

SEC grants temporary extension of no-action relief to funds assisting clearing organizations in meeting CDS margin requirements. The SEC Division of Investment Management extended until December 31, 2017, the no-action relief requested by the Chicago Mercantile Exchange, ICE Clear Credit LLC, and LCH.Clearnet Limited and LCH.Clearnet LLC that the Division would not recommend enforcement action against registered investment companies that place and maintain assets in the custody of these entities or their clearing members for the purposes of meeting their margin requirements for certain credit default swaps (CDSs). (12/29/2015)

Division of Trading and Markets issues no-action letter to allow EDGAR filing of annual and supplemental reports by broker-dealers. The SEC’s Division of Trading and Markets issued a no-action letter in which it indicated that it would not recommend enforcement action against a broker-dealer or OTC derivatives dealer who files the required annual and supplemental reports electronically through the EDGAR system in lieu of filing them with the SEC in paper form. (12/21/2015) SEC no-action letter.

WKSI obtains relief from becoming an ineligible issuer after its subsidiary violated best execution requirements. The SEC’s Division of Corporation Finance granted KCG Holdings, Inc.’s request for relief from being considered an “ineligible issuer” under Rule 405 of the Securities Act. KCG requested the relief to retain its well-known seasoned issuer (WKSI) status after the SEC brought an administrative proceeding against KCG’s subsidiary broker-dealer for failing to seek the best execution of certain customer orders. (12/21/2015) SEC no-action letter.

Selected Enforcement Actions

Market maker fails to follow best execution rule in executing customer orders. The SEC instituted settled administrative proceedings against broker-dealer KCG Americas LLC for failing to obtain the best execution of certain customer orders and falsely representing to customers that it handled their orders in keeping with best execution requirements. The SEC alleged that KCG failed to pass on favorable prices to certain customer orders. Without admitting or denying the allegations, KCG agreed to settle the charges by consenting to the entry of cease and desist and censure orders. In addition, KCG agreed to pay disgorgement of US$685,900, prejudgment interest of US$69,297.38, and a civil penalty of US$300,000. (12/21/2015) In the Matter of KCG Americas LLC, SEC Release No. 33-9996.

Investment adviser failed to disclose financial benefit to parent company in bond investment. The SEC charged an investment adviser with fraud in a civil proceeding after it invested client funds in bonds without disclosing to its clients that the sales would benefit a broker-dealer whose parent company partially owned the firm. The SEC alleged that the investment adviser invested over US$43 million of client funds in illiquid bonds issued by a Native American tribal corporation at the suggestion of a broker-dealer affiliated with an entity that also partially owns the adviser. The sales of the bonds generated a private placement fee for the broker-dealer and proceeds from the sales were designated to purchase an annuity provided by the entity’s parent company. The investment adviser failed to disclose these conflicts of interest to its clients and failed to disclose the entity’s ownership interest in its filings with the SEC. The SEC has charged the investment adviser with violations of the antifraud provisions of the Investment Advisers Act of 1940 and related rules as well as violations of Section 207 of the Advisers Act. (12/15/2015) SEC press release.

Public accountants charged with performing deficient audits and falsifying audit documents. The SEC instituted settled administrative proceedings against two accounting firms and five accountants for performing deficient audits of public companies by failing to obtain required engagement quality reviews, falsifying audit documents by backdating quality review documents for the deficient audits, and violating audit independence rules. All of the accountants and firms involved agreed to settle the charges without admitting or denying the allegations. One accountant and his firm agreed to be permanently barred from practicing as accountants for SEC-regulated companies or entities. The remaining respondents agreed to practice suspensions ranging from two to four years. In addition, all respondents agreed to pay penalties and disgorgement totaling over US$100,000 collectively. (12/10/2015) SEC press release.

Statements and Speeches

Aguilar bids farewell to SEC by noting improvements and ‘unfinished business.’ SEC Commissioner Luis Aguilar issued a departing statement in which he reviewed the improvements to the SEC’s internal structure and processes that occurred during his time on the Commission and highlighted the items of “unfinished business” he hopes the SEC will address in 2016. (12/21/2015) Aguilar statement.

Aguilar urges SEC to balance data requirements with cybersecurity precautions. SEC Commissioner Luis Aguilar issued a statement in which he highlighted the need for the SEC to take steps to reduce potential cybersecurity threats that may result from the SEC’s data gathering efforts. (12/16/2015) Aguilar statement.

Transition planning, stress testing on the agenda for possible 2016 rulemaking initiatives. SEC Division of Investment Management Director David Grim delivered remarks in which he indicated the SEC may propose rules in 2016 that would require investment advisers to devise and maintain transition plans in the event of a major business disruption and that would establish new requirements for stress testing by large investment advisers and investment companies. (12/16/2015) Grim remarks.

White concerned by continuing audit deficiencies and growing audit committee workload. Addressing the 2015 American Institute of Certified Public Accountants (AICPA) National Conference, SEC Chair Mary Jo White expressed apprehension regarding the number of significant deficiencies in auditing found during Public Company Accounting Oversight Board (PCAOB) inspections and the pressure placed upon audit committees by a growing workload. (12/9/2015) White remarks.

Supplemental use of IFRS information by US issuers under SEC consideration. In remarks delivered to the 2015 AICPA National Conference, SEC Chief Accountant James V. Schnurr indicated that the SEC is considering regulatory changes to allow domestic issuers to supplement their financial statements with IFRS-based information. (12/9/2015) Schnurr remarks.

White defends FSOC SIFI designation and transparency in House testimony. In testimony before the US House of Representatives Financial Services Committee, SEC Chair Mary Jo White defended the Financial Stability Oversight Council (FSOC) against charges that its decision-making process in designating systemically important financial institutions (SIFIs) lacks transparency, noting recently adopted changes in the designation process by the FSOC including increased engagement with companies, increased transparency, and an annual review process that allows designated firms to present relevant information to FSOC staff. (12/8/2015) White testimony.

Piwowar praises FAST Act for removing SBS indemnification requirement. SEC Commissioner Michael S. Piwowar applauded the provision of the FAST Act that repealed the Dodd-Frank Act’s security-based swap data repository indemnification requirement, citing the indemnification provision as an example of a Dodd-Frank Act requirement that prevents the SEC from fulfilling its core mission. (12/8/2015) Piwowar statement.

Other Developments

Investor Advisory Committee meeting. The SEC announced a public meeting of the Investor Advisory Committee will be held on Thursday, January 21, 2016. The SEC has invited the public to submit written statements to the Committee, which should be received on or before January 21, 2016. SEC Release No. 33-10000.

SEC publishes two staff reports on NRSROs. The SEC released two staff reports discussing the credit rating agencies registered as nationally recognized statistical rating organizations (NRSROs). The annual examination report summarizes the SEC staff findings from the Dodd-Frank mandated examinations of NRSROs. The annual report required by the 2006 Credit Rating Agency Reform Act examines the state of competition, transparency, and conflicts of interest at NRSROs. (12/28/2015) SEC press release."

Office of the Investor Advocate Report on Activities. The SEC’s Office of the Investor Advocate released its annual report describing the Investor Advocate’s activities and recommendations related to its key policy areas during Fiscal Year 2015. (12/23/2015) SEC Investor Advocate report.

SEC staff recommends changes to accredited investor definition. The SEC published a staff report prepared in connection with the first review of the accredited investor definition. The SEC has requested public comments on the report, which examines the history of the accredited investor definition, considers comments on the definition received from a variety of sources, and provides staff recommendations for potential updates and modifications to the definition. (12/18/2015) SEC press release.

Companies may test file Regulation Crowdfunding form. The SEC will offer test filings of Regulation Crowdfunding Form C until February 29, 2016. Form C, which contains required disclosures in connection with a crowdfunding offering, may be accessed on the SEC’s EDGAR filing website by companies with a Central Index Key (CIK) and a CIK Confirmation Code (CCC). (12/18/2015) SEC press release.

US Commodity Futures Trading Commission Developments

Staff Advisory

CFTC staff advisory reminds swap dealers and major swap participants of their reporting obligations. The US Commodity Futures Trading Commission’s (CFTC) Division of Swap Dealer and Intermediary Oversight (DSIO) issued a staff advisory to remind swap dealers and major swap participants of their swap data reporting obligations under the Commission Regulations 23.204 and 23.205. The regulations require swap dealers and major swap participants to report all information and data in the time and manner specified in Parts 43 and 45 of the CFTC’s regulations. The advisory also discusses common examples of issues and failures that the DSIO has observed with respect to swap data reporting, and provides guidance to assist in addressing these issues and failures. (12/17/2015) CFTC press release.

Final Rules

CFTC amends regulation on records of commodity interest and related cash or forward transactions. The CFTC issued a final rule that will, among other things, clarify that all records, except for records of oral and written communications leading to the execution of a commodity interest transaction and related cash or forward transactions, have to be kept in a form and manner that allows for identification of a particular transaction. (12/24/2015) CFTC Rule."

Final rule on records of commodity interest and related cash or forward transactions is approved. The CFTC unanimously approved a final rule to amend Commission Regulation 1.35(a) relating to the recordkeeping obligations for particular market participants. The amendments reduce regulatory burdens on affected market participants by excluding certain types of those participants from parts of the rule’s written and oral recordkeeping requirements. In addition, the final rule clarifies the requirements governing the form and manner in which records must be kept. Lastly, the final rule reorganizes the rule text to provide affected market participants with greater clarity as to their recordkeeping obligations under the rule. (12/18/2015) CFTC press release. CFTC fact sheet. Massad statement. Giancarlo statement.

CFTC approves final rule on margin requirements for uncleared swaps for swap dealers and major swap participants. The CFTC announced that it has approved the Final Rule on Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants. The new regulation addresses margin requirements for uncleared swaps entered into by swap dealers (SDs) or major swap participants (MSPs) who are not subject to regulation by the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Farm Credit Administration or the Federal Housing Finance Agency. (12/16/2015) CFTC Press Release. Final Rule Fact Sheet. Massad Statement. Bowen Dissenting Statement. Giancarlo Statement.

Proposed Rules

CFTC approves a proposed rule that provides an alternative to fingerprinting for foreign naturals. The CFTC announced that it approved a proposed rule that would add an alternative for foreign natural persons to the requirement to provide fingerprints when applying for CFTC registration. The proposal would allow a foreign natural person’s registered firm to complete a criminal history background check in lieu of submitting fingerprints. The CFTC is seeking comments on the proposal. The comment period ends 30 days after the proposal’s publication in the Federal Register. (1/4/2016) CFTC press release.

CFTC requests comment on minimum testing frequency and independent contractor testing requirements. The CFTC issued an Advance Notice of Proposed Rulemaking requesting public comment on whether the minimum testing frequency and independent contractor testing requirements should be applied, through a future Notice of Proposed Rulemaking, to covered swap execution facilities (to be defined). Comments must be received on or before February 22, 2016. (12/23/2015)

CFTC proposes enhanced requirements for a derivatives clearing organization’s testing of its system safeguards. The CFTC proposed enhanced requirements for a derivatives clearing organization’s testing of its system safeguards, as well as additional amendments to reorder and renumber certain paragraphs within the regulations and make other minor changes to improve the clarity of the rule text. Comments must be received by February 22, 2016. The CFTC also noted that it is amending its system safeguards rules for designated contract markets, swap execution facilities, and swap data repositories, by enhancing and clarifying existing provisions relating to system safeguards risk analysis and oversight and cybersecurity testing, and adding new provisions concerning certain aspects of cybersecurity testing. (12/23/2015)

CFTC proposes safeguards to enhance regulatory regime for Regulation AT. The CFTC proposed a series of risk controls, transparency measures, and other safeguards to enhance the regulatory regime for automated trading on US designated contract markets (DCMs) (Regulation AT). The CFTC’s proposals build on efforts by numerous entities in recent years to promote best practices and regulatory standards for automated trading, including standards and best practices for algorithmic trading systems (ATSs), electronic trade matching engines, and new connectivity methods that characterize modern financial markets. Comments must be received on or before March 16, 2016. (12/17/2015) CFTC proposal.

CFTC approves proposed enhanced rules on cybersecurity for derivatives clearing organizations, trading platforms, and swap data repositories. The CFTC voted unanimously to approved two proposals for amendments to existing regulations addressing cybersecurity testing and safeguards for the automated systems used by critical infrastructures that the CFTC regulates. The proposals will be open for public comment during a 60-day comment period after publication in the Federal Register. The proposals, which will be published in separate Federal Register Notices, identify five types of cybersecurity testing as essential to a sound system safeguards program: vulnerability testing, penetration testing, controls testing, security incident response plan testing, and enterprise technology risk assessments. The proposals would require all derivatives clearing organizations, designated contract markets, swap execution facilities, and swap data repositories to conduct each of the five types of cybersecurity testing, as frequently as indicated by appropriate risk analysis. The proposals would also specify minimum testing frequency requirements for all derivatives clearing organizations and swap data repositories and specified designated contract markets, and require them to have specific tests performed by independent contractors. (12/16/2015) CFTC press release. Massad statement. Giancarlo statement. Bowen statement.

No-Action Relief

DMO provides no-action relief from audit trail requirements in CFTC Regulations that are related to post-trade allocation. The Division of Market Oversight (DMO) provided time-limited no-action relief for swap execution facilities (SEFs) from requirements to capture post-trade allocation information in their audit trail data, as required under CFTC Regulations. The DMO’s no-action relief expires on November 15, 2017 and is subject to certain conditions. (12/22/2015) CFTC press release.

CFTC issues extension of no-action relief from certain recordkeeping requirements under Commission regulations. The CFTC Division of Swap Dealer and Intermediary Oversight and DMO issued a no-action letter extending the relief in CFTC Staff Letter No. 14-147, which expired on December 31, 2015. Letter 14-147 provides that commodity trading advisors that are registered with the CFTC and are members of designated contract markets or of swap execution facilities are not required to record oral communications. Letter 14-147 also provides that market participants covered by the rule will not be required to link records of oral and written communications that lead to the execution of a transaction with any particular transaction. This no-action relief is effective immediately and will expire on the effective date of any CFTC action with respect to the CFTC’s proposal to amend Regulation 1.35(a). (12/8/2015) CFTC press release.


DCR and DMO write letter to ISDA on straight through processing and affirmation of SEF cleared swaps. The CFTC’s Division of Clearing and Risk (DCR) and DMO wrote a letter to Steven Kennedy, the Global Head of Public Policy at the International Swaps and Derivatives Association, Inc. (ISDA) in response to a letter that the ISDA sent to the DCR and DMO in which it requested that the CFTC accept the ISDA’s proposed compliance with the requirement that derivatives clearing organizations (DCOs), SEFs and designated contract markets (SCMs) develop rules and procedures so that DCOs can accept or reject trades for clearing as quickly after execution as would be technologically practicable if fully automated systems were used (AQATP). The DCR and DMO wrote that it believes that the CFTC intended for the AQATP standard to take into account the need to refine and reduce errors in order to facilitate prompt and efficient transaction processing. (12/21/2015) Letter.

Requests for Comment

CFTC issues request for comment on draft technical specifications for certain swap data elements. The CFTC’s DMO and Office of Data and Technology staff issued a request for comment on the draft technical specifications for certain prioritized swap data elements and associated questions. The request for comment seeks public input on 80 enumerated questions addressing 120 data elements for several swap data reporting topics including counterparty-related elements, price, clearing, product, periodic reporting, orders, package transactions, options, additional fixed payments, notional amount, events, rates and foreign exchange. The comment period will be open for 60 days after publication on the CFTC’s website. Comments should be submitted on or before February 22, 2016. (12/22/2015) Massad statement.

Other Developments

CFTC and SFC sign a Memorandum of Understanding enhancing the supervision of cross-border regulated entities. The CFTC announced that Chairman Timothy Massad has signed a Memorandum of Understanding (MOU) with Hong Kong Securities and Futures Commission (SFC) CEO Ashley Alder regarding cooperation and the exchange of information in the supervision and oversight of regulated entities that operate on a cross-border basis in the US and in Hong Kong. Through the MOU, the CFTC and the SFC articulated their readiness to cooperate in the interest of fulfilling their respective regulatory mandates. The range of the MOU includes markets and organized trading platforms, central counterparties, and intermediaries, dealers, and other market participants. (12/22/2015)

US Banking Developments

Federal Reserve

FRB releases guidance to its examiners and banking institutions consolidating capital planning expectations for large financial institutions. The Federal Reserve Board (FRB) released guidance to its examiners and banking institutions that consolidates the capital planning expectations for all large financial institutions and explains the differences in those expectations based on firm size and complexity. (12/21/2015) FRB press release.

FRB seeks comment on a proposed policy statement that details the framework it would follow in setting the Countercyclical Capital Buffer. The FRB announced that it is seeking public comment on a proposed policy statement detailing the framework that it would follow in setting the Countercyclical Capital Buffer. Comments on the proposed policy statement must be received by February 19, 2016. Appendix A.

US Judicial Developments

Entry of SEC’s asset freeze order was not a violation of the Bankruptcy Code’s automatic stay provision. A district court temporarily froze assets found to be ill-gotten gains from a securities fraud scheme that was perpetrated by the defendants. The Second Circuit affirmed, determining that entry of the asset freeze order obtained by the SEC as to nine Relief Defendants did not constitute impermissible “enforcement of a money judgment” and therefore did not violate the automatic stay provision of the Bankruptcy Code. The panel, however, remanded solely on the issue of whether sufficient evidence supports imposition of the order against the remaining seven Relief Defendants. (12/18/2015) Miller.

US Exchanges and Self-Regulatory Organizations

FINRA will focus on supervision, liquidity, and firm culture in 2016. The Financial Industry Regulatory Authority (FINRA) announced the regulatory and enforcement issues it will focus on during 2016 in its 2016 Regulatory and Examination Priorities letter. Areas highlighted in the letter include supervision; risk management and controls; liquidity; firm culture; and conflicts of interest and ethics. (1/5/2016) FINRA press release.

FINRA report on Securities Helpline identifies best practices for firms to assist seniors in avoiding scams. FINRA released a year-end report on the FINRA Securities Helpline for that highlights examples of fraudulent schemes identified through calls to the Helpline and provides a set of effective practices for protecting seniors that firms should consider implementing. (12/30/2015) FINRA press release.

New MSRB rules on municipal advisor conduct will take effect in June. The Municipal Securities Rulemaking Board (MSRB) advised municipal advisors that, beginning in June 2016, they will be subject to new rules governing their professional conduct when advising state and local governments on municipal finance products and transactions. The MSRB will host an educational webinar on April 28, 2016, to assist municipal advisors in preparing for the implementation of the new rules. (12/24/2015) MSRB press release.

NYSE provides new email addresses for communicating with NYSE Regulation. The New York Stock Exchange, LLC (NYSE) published an Information Memo that provides updated email addresses for communicating with NYSE Regulation, which may be used beginning on January 4, 2016. (12/22/2015) NYSE Information Memo 15-31.

NYSE announces new examination requirement for proprietary traders. NYSE announced that, as of January 4, 2016, individuals engaged in proprietary trading on NYSE and NYSE MKT LLC will be required to pass the Securities Trader Qualification Examination (Series 57 Exam). (12/18/2015) NYSE Information Memo 15-12."

Brokerage firm failed to detect fraudulent scheme targeting senior citizens. FINRA announced sanctions against Fidelity Brokerage Services LLC for supervisory failures after it failed to detect a fraudulent scheme that resulted in the theft of more than US$1 million from several elderly customers. FINRA found that a former employee of another brokerage firm posed as a Fidelity broker and encouraged former customers to establish accounts at Fidelity, including several joint accounts that listed her as a joint owner and enabled her to convert assets to her own personal benefit. Fidelity failed to detect or pursue several indicators of the fraudulent scheme, including common identifiers linking the account to the fake broker, the pattern of money movement in the accounts, and telephone calls received by Fidelity’s customer-service call center related to the fraudulent scheme. Without admitting or denying the charges, Fidelity agreed to pay a US$500,000 fine and US$530,000 in restitution to settle the charges. (12/18/2015) FINRA press release.

FINRA’s Dispute Resolution Task Force issues recommendations. FINRA published the final report and recommendations of its Dispute Resolution Task Force, which was formed to recommend strategies to enhance the transparency, impartiality and efficiency of FINRA’s dispute resolution forum. (12/16/2015) FINRA press release.

FINRA study concludes corporate bond liquidity is healthy, but recognizes new risks. New research published by FINRA indicates liquidity in the US corporate-bond market is healthy based on data showing a record level of new bond issuances, growing transaction volumes, and rising trade numbers, but potential new risks are emerging related to changes in market structure. (12/10/2015) FINRA press release.

New forex reporting requirements begin in January. The National Futures Association (NFA) notified forex dealer members (FDMs) that, as of January 5, 2016, the NFA will require FDMs to include additional information in the daily Forex Financial Report and, as of January 31, 2016, NFA will require FDMs to include additional information in the supplementary section of the monthly 1-FR-FCM (or FOCUS II) filing. (12/9/2015) NFA Notice I-15-29.

NYSE drops reporting obligations regarding Futures Commission Merchants. The NYSE informed its members and member organizations that they are no longer obligated to update FINRA, NYSE or NYSE MKT LLC with a list of Futures Commission Merchants they use to execute agency and proprietary index futures. (12/8/2015) (12/8/2015) NYSE Information Memo 2015-9.

FINRA’s new clearing only, non-regulatory trade submission coming in February. FINRA provided notice of new rule amendments, effective February 1, 2016, introducing a new category of trade submissions that firms can use to submit to clearing those OTC transactions in equity securities that have not been previously reported through a FINRA facility. The new clearing only, non-regulatory reports can only be used by firms that have satisfied their regulatory reporting obligations through other submissions to FINRA. (12/8/2015) FINRA Regulatory Notice 15-51.

News from Asia and the Pacific


201 institutional investors have signed up to Principles for Responsible Institutional Investors. The Council of Experts Concerning the Japanese Version of the Stewardship Code, which published the Principles for Institutional Investors in 2014, requested that the Financial Services Agency (FSA) publish and periodically update the list of institutional investors who announced their acceptance of the Code. On September 11, 2015, the FSA published the updated version of that list. The FSA plans to update the list on a quarterly basis, with the next update scheduled for early March 2016. Those who newly intend to accept the Code should notify the FSA by the end of February. (12/11/2015) Stewardship Code.


ASIC consults on ‘sunsetting’ class orders: financial reporting relief for certain small proprietary companies and registered foreign companies. ASIC announced that it has released a consultation paper (CP 248) proposing to remake two class orders that are due to expire on April 1, 2017. The class orders affect financial reporting by small proprietary companies controlled by a foreign company and by registered foreign companies. Submissions on CP 248 are due on February 29, 2016. (12/22/2015)

ASIC releases draft guidance on review and remediation programs and proposed changes to recordkeeping requirements for advice licensees. ASIC announced that it has released a consultation paper (CP 247) proposing guidance on review and remediation programs conducted by Australian financial services (AFS) licensees that provide personal advice. The consultation paper also proposes clarifications to the record-keeping requirements for AFS licensees relating to the best interests duty. The draft guidance sets out how an effective review and remediation program should be designed and operated and how such a program operates alongside other key consumer compensation obligations, namely the internal and external dispute resolution obligations. (12/16/2015)

ASIC consults on addressing ‘sunsetting’ securitization class order. ASIC announced that it has released a consultation paper (CP 246) proposing to maintain relief that ASIC has previously provided from the requirement to obtain an Australian financial services license for certain entities. This relief is due to expire (sunset) on April 1, 2016. ASIC found that the class order is operating effectively and efficiently, and continues to form a necessary and useful part of the legislative framework. However, ASIC proposed to omit the condition that currently requires an AFS licensee to enter into an irrevocable deed poll agreeing to be liable for the securitization entity’s acts or omissions. Submissions on CP 246 are due on 29 January 2016. (12/16/2015)

ASIC remakes instruments on takeovers and schemes of arrangement. Following public consultation, ASIC has remade six legislative instruments that facilitate takeovers and schemes of arrangements. The relief applies to certain domestic and foreign takeover bids, accelerated rights issues, investor directed portfolio services (IDPS), share buy-backs and downstream acquisitions.

(12/15/2015) ASIC press release.

ASIC implements clearing regime in Australia for OTC derivatives. ASIC has released rules implementing Australia’s mandatory central clearing regime for over-the-counter (OTC) derivatives of financial institutions - the ASIC Derivative Transaction Rules (Clearing) 2015 and explanatory statement. (12/14/2015) ASIC press release.

Hong Kong

SFC authorizes first batch of funds under Mainland-Hong Kong Mutual Recognition of Funds initiative. The Securities and Futures Commission (SFC) granted authorization for the first batch of four Mainland funds under the Mainland-Hong Kong Mutual Recognition of Funds (MRF) initiative for public offering in Hong Kong. The SFC also welcomed the approval by the China Securities Regulatory Commission (CSRC) of the first batch of three Hong Kong funds for public offering on the Mainland market. (12/18/2015) SFC press release.

News from Europe

ESMA reports findings of review of regulators’ compliance with market maker exemption under Short-Selling Regulation. The European Securities and Markets Authority (ESMA) released the results of a review it conducted of five national competent authorities (NCAs) regarding their application of the exemption for market making activities under the Short-Selling Regulation. The review found that some authorities are applying the exemption on a per firm basis rather than on an instrument by instrument basis as required by ESMA Guidelines and are relying on trading venues to monitor market makers’ compliance with trading venue rules and procedures. (1/5/2016) ESMA press release.

SRM for the Banking Union in the EU is now fully operational. The European Commission announced that the Single Resolution Mechanism, which implements the EU-wide Bank Recovery and Resolution Directive in the Euro area, became fully operation on January 1, 2016. (12/31/2015) EC press release.

ESMA consults on MiFIR guidelines for transaction reporting, reference data, recordkeeping, and clock synchronization. ESMA published a consultation paper that seeks comments on proposed guidance under the Markets in Financial Instruments Regulation regarding transaction reporting, reference data, order recordkeeping, and clock synchronization. Comments are due on or before March 23, 2016. (12/23/2015) ESMA press release.

ESMA peer review of NCAs’ Market Abuse Directive supervisory practices. ESMA released the results of its second Market Abuse Directive peer review, which examined the supervisory practices of seven NCAs related to specific areas found to have shortcomings in ESMA’s previous peer review, including the monitoring of market abuse investigation capabilities, the monitoring of compliance with provisions related to insider lists, and the ability to deal with rumors. (12/22/2015) ESMA press release.

ESMA publishes guidelines on cross-selling practices under MiFID II. ESMA issued guidelines on cross-selling practices under the Markets in Financial Instruments Directive II. The guidelines, which will become effective on January 3, 2017, seek to improve disclosures in the cross-selling of different financial products, to address conflicts of interest arising from remuneration models, and to improve client understanding of whether products offered in a package can be purchased individually. (12/22/2015) ESMA press release.

EBA publishes final guidelines and Opinion on sound remuneration policies. The European Banking Authority (EBA) released its final guidelines on sound remuneration policies, which establish the process for implementing the sound remuneration policies in the EU and identifying the categories of staff at financial institutions subject to the specific remuneration provisions of the Capital Requirements Directive (CRD). Alongside the final guidelines, the EBA also published its Opinion on proportionality, in which it recommended exemptions from the CRD remuneration principles for small and non-complex institutions and for staff that receives only a small amount of variable remuneration. (12/21/2015) EBA press release.

PRA seeks comments on changes to Pillar 2 data items and reporting instructions. The Prudential Regulation Authority (PRA) published a consultation paper that proposes changes to Pillar 2 data items and reporting instructions. Comments are due on or before January 18, 2016. (12/21/2015) PRA press release.


EBA consults on guidelines for stress testing. The EBA requested comment on draft guidelines that establish expectations for stress testing programs at financial institutions, provide guidance to institutions on designing and conducting stress tests, and provide guidance to supervisory authorities in assessing stress test programs. Comments are due on or before March 18, 2016. (12/18/2015) EBA press release.

EBA releases Opinion on MDA trigger, calculation, and transparency. The EBA published an Opinion on the trigger, calculation and transparency of the Maximum Distributable Amount (MDA) in which it explained that the MDA should be calculated taking into account both minimum (Pillar 1) and additional (Pillar 2) capital requirements in addition to the combined buffer requirement. The Opinion seeks to support the consistent application of CRD distribution restrictions, to provide greater certainty for banks in their capital planning, and to introduce greater transparency in Pillar 2 outcomes for banks. (12/18/2015) EBA press release.

EBA recommends extending STS prudential treatment to SME synthetic securitizations. The EBA released a report outlining the findings of its analysis and market practice assessment of the securitization market. Based on the findings in the report, the EBA recommended that the capital requirements for simple, standardized and transparent (STS) securitizations should be extended to banks that originate and retain certain small and medium-sized enterprise (SME) balance sheet synthetic securitization positions. (12/18/2015) EBA press release.

EBA publishes final draft RTS on detailed records of financial contracts. The EBA released final draft Regulatory Technical Standards that establish the minimum set of information on financial contracts that should be contained in detailed records and the circumstances under which requirements to maintain detailed records should be imposed. (12/17/2015) EBA press release.

FCA issues final rules applying accountability framework to UK branches of overseas banks. The FCA published a policy statement containing the final rules for the new accountability framework for individuals working in UK branches of overseas banks (incoming branches). The final rules, which will become effective on March 7, 2016, include changes to clarify the territorial scope of the Certification Regime (CR) and Conduct Rules in an effort to prevent the rules from applying to those based overseas who do not engage in activities clearly linked to an incoming branch. (12/16/2015) FCA press release.

FCA consults on UK implementation of MiFID. The FCA requested comment on its first consultation paper regarding the implementation of the new MiFID, which makes proposals related to the FCA’s regulation of the secondary trading of financial instruments. Comments are due on or before March 8, 2016. (12/15/2015) FCA press release.

EBA report on a sound prudential regime for investment firms. The EBA released a report that presents findings and recommendations in response to the European Commission’s request for advice on the suitability of certain aspects of the prudential regime for investment firms. The report found a lack of risk sensitivity in the CRD regime for investment firms and recommended creating a new category of investment firms to distinguish between systemic firms subject to CRD requirements and non-systemic firms, among other things. (12/14/2015) EBA press release.

ESMA Open Hearing on validation and review of CRA methodologies. ESMA will hold an Open hearing on January 25, 2016, to discuss issues raised in its November 2015 Discussion Paper on the Validation and Review of Credit Rating Agencies’ methodologies. Attendees must register for the hearing on or before January 18, 2016. (12/11/2015) ESMA press release.

Global Regulators

ISDA OTC Derivatives Compliance Calendar. The International Swaps and Derivatives Association (ISDA) has released an updated version of its OTC Derivatives Compliance Calendar. (1/4/2016)

IOSCO report on use of external credit ratings by large market intermediaries. The International Organization of Securities Commissions (IOSCO) released a final report entitled Sound Practices at Large Intermediaries Relating to the Assessment of Creditworthiness and the Use of External Credit Ratings. The report recommends 12 sound practices that regulators should consider in the oversight of market intermediaries to address the possible over-reliance of market participants on credit ratings. (12/22/2015) IOSCO press release.

IOSCO reports on business continuity plans for trading venues and intermediaries. The IOSCO published two reports that focus on business continuity plans for trading venues and intermediaries. The first report, Mechanisms for Trading Venues to Effectively Manage Electronic Trading Risks and Plans for Business Continuity, highlights the methods Trading Venues use to manage the risks associated with electronic trading and the role of business continuity plans in preparing for and managing disruptions. The second report, Market Intermediary Business Continuity and Recovery Planning, outlines standards and sound practices for regulators to use in their oversight of market intermediaries. (12/22/2015) IOSCO press release.

IOSCO releases results of survey responses on crowdfunding. IOSCO published a report detailing the results of its 2015 survey of IOSCO members regarding crowdfunding, which examined current or proposed regulatory regimes for investment-based crowdfunding. IOSCO also issued a statement on the regulation of crowdfunding in which it emphasized the major risks crowdfunding poses to investors and encouraged regulators to take into consideration the possible cross-border implications of crowdfunding. (12/21/2015) IOSCO press release.

Basel Committee consults on proposed guidance for the regulation of institutions serving the financially underserved. The Basel Committee on Banking Supervision requested comment on proposed guidance on the application of its Core principles for effective banking supervision to the supervision of financial institutions that serve the financially unserved or underserved. Comments are due on or before March 31, 2016. (12/21/2015) BIS press release.

Basel Committee guidance for credit risk and accounting for expected credit losses. The Basel Committee published guidance that explains the supervisory expectations for banks related to sound credit risk practices associated with implementing and applying an expected credit loss (ECL) accounting framework. (12/18/2015) BIS press release.

IOSCO-CPMI joint consultation on a harmonized global UPI. IOSCO and the Committee on Payments and Market Infrastructures (CPMI) published a joint consultative report that proposes the implementation of a harmonized global Unique Product Identifier (UPI) to identify over-the-counter derivatives products that must be reported to trade repositories. Comments are due on or before February 24, 2016. (12/17/2015) Joint press release.

IOSCO-CPMI Level 2 assessment of PFMI implementation in Australia. IOSCO and CPMI released a report on their Level 2 assessment of Australia’s implementation of the Principles for financial market infrastructures (PFMI). The report assessed the degree to which Australia’s legal, regulatory and oversight frameworks for systemically important payment systems, central securities depositories, securities settlement systems, central counterparties, and trade repositories are consistent with PFMI. (12/17/2015) Joint press release.

ISDA member firms agree to single-name CDS clearing. ISDA, the Managed Funds Association, and the Securities Industry and Financial Markets Association’s Asset Management Group announced that 25 of their collective members will begin clearing their single-name credit default swap trades through central counterparties. (12/16/2015) ISDA press release.

Basel Committee progress report on adoption of risk data aggregation principles by G-SIBs. The Basel Committee published a progress report on the adoption of its Principles for effective risk data aggregation and risk reporting by banks. The report measures the progress of global systemically important banks (G-SIBs) in implementing the Principles and makes recommendations to promote their adoption, which G-SIBs must implement completely by 2016. (12/16/2015) BIS 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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