Discussion and Analysis
No doubt about it. The machines have taken over.
Wednesday’s issue of The Wall Street Journal reports that automakers are focusing their efforts on developing self-driving automobiles. The article concludes: “Among other things needed for a safe, fully autonomous car are faster computers and data networks, and robust answers to the challenge of how to alert a driver to respond in a situation the autopilots cannot handle.”
Just one day earlier, on Tuesday, The Wall Street Journal reported that on Monday of this week, the US Commodity Futures Trading Commission released a draft report on the technological evolution of US derivatives trading. In the release, which runs about 140 pages, the CFTC is requesting feedback on a number of regulatory proposals designed to curb the risks of automated derivatives trading.
Can there be any doubt at all that our ability to create new tools, whether for driving or trading, far outpaces our ability to determine how best to control our creations? In the draft report, “Concept Release on Risk Controls and System Safeguards for Automated Trading Environments,” the CFTC states that it remains committed “to the safety and soundness of the US derivatives markets in a time of rapid technological change.”
“The operational centers of modern markets now reside in a combination of automated trading systems (’ATSs’) and electronic trading platforms that can execute repetitive tasks at speeds orders of magnitude greater than any human equivalent,” the release states. “Traditional risk controls and safeguards that relied on human judgment and speeds, and which were appropriate to manual and/or floor-based trading environments, must be reevaluated in light of new market structures.”
Law360, in its web-based report of September 9 on the concept release, notes that “automated trading has given a range of benefits to derivatives market participants, including an expanded range of potential trading strategies, and their adoption by the industry has been rapid, with more than 90 percent of trading volume in US futures markets being executed electronically last year, up from about 40 percent in 2010, the report claims.”
The CFTC acknowledges, however, that automated trading systems present unique challenges for ensuring that they are operating properly, given their speed, interconnectivity and reliance on algorithms for certain high-frequency trading strategies. There is a general belief that automated trading failures contributed to the May 2010 “flash crash,” the problems experienced by Knight Capital Group Inc. in August 2012, and the three-hour disruption experienced by the Nasdaq stock market just last month.
The CFTC recognizes in the release that it must “ensure that its regulatory framework and industry practices are fully adapted to the automated technologies of modern derivatives markets.” Accordingly, in the concept release, the CFTC is asking for extensive public feedback on any necessary rulemaking or guidance, and has posed more than 120 questions for public comment, including questions about how far risk-control measures should go, who should be responsible for their implementation, and how the CFTC should review and monitor automated trading transactions.
Most would agree that it is foolhardy to curtail technological progress in the name of regulation, but shouldn’t greater attention be given to the consequences of such new technologies before such technologies become pervasive? If a self-driven car gets into an accident, who is responsible? The owner of the car? The manufacturer of the car? The developer of the automatic driving system which controls the vehicle? Perhaps these questions should be addressed before 90 percent of the cars on the road are being driven by a computer instead of a live human being.
It will be fascinating to see the response to the CFTC’s request for feedback. It will be even more interesting to see how the CFTC proposes to regulate such already-pervasive systems. We will be watching ... unless a machine comes along that can do that for us.
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News from the Americas
Reversed thinking on reverse mergers. Compliance Week summarized the results of a study that compared China-based reverse mergers in the US with similar US-based reverse mergers. The study found that the China-based mergers outperformed their US-based counterparts. (9/10/2013) Reverse thinking.
Reserve fund shareholder suit is settled. Bruce R. Bent and his son, Bruce R. Bent II, and others have settled a shareholder lawsuit stemming from the Reserve Primary Fund’s “breaking the buck,” Bloomberg reported. The US$54.9 million settlement was filed after the money market fund’s net asset value fell below US$1.00 five years ago. (9/9/2013) Settlement.
Canada’s OSC issues point of sale guidance. Canada’s Ontario Securities Commission issued guidance on the implementation of Stage 2 of the Point of Sale disclosure initiative for mutual funds, which came into effect on September 1, 2013. (9/6/2013) OSC press release.
Canada’s OSC reports on exempt market review. Canada’s Ontario Securities Commission published “OSC Notice 45-712 Progress Report on Review of Prospectus Exemptions to Facilitate Capital Raising,” which sets out the next steps in the OSC’s exempt market review and consideration of four prospectus exemptions. The OSC will consider capital raising prospectus exemptions for crowdfunding; family, friends and business associates; offering memoranda; and existing rights. (8/28/2013) OSC press release.
US agencies propose risk retention rules. The SEC, Federal Reserve Board, Department of Housing and Urban Development, FDIC, Federal Housing Finance Agency, and OCC have proposed new risk retention rules for asset-backed securitizations. Under this new proposal, compliance with the risk retention requirements would be based on the fair value of securities issued in a securitization transaction and would use the Consumer Financial Protection Bureau’s definition of “qualified mortgage” to define a “qualified residential mortgage” exempt from the risk retention rules. Comments should be submitted by October 30, 2013. (8/28/2013) SEC press release.
Canada consults on proxy voting infrastructure. The Canadian Securities Administrators published for comment “Consultation Paper 54-401 Review of the Proxy Voting Infrastructure.” The Consultation Paper identifies a number of areas for discussion that the CSA has determined may impact the accuracy of the infrastructure. Issues include whether the current infrastructure adequately supports accurate and reliable vote counting and whether a vote confirmation system should be introduced. Comments should be submitted by November 13, 2013. (8/15/2013) CSA press release.
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News from Asia and the Pacific
ASIC report on hedge funds. The Australian Securities & Investments Commission released a report which found that hedge funds do not currently pose a systemic risk to the Australian financial system. (9/10/2013) ASIC press release.
Hong Kong regulators release OTC derivatives proposal. The Hong Kong Monetary Authority and the Securities and Futures Commission jointly published their conclusions on a joint supplemental consultation regarding the proposed scope of activities to be regulated under the new over-the-counter derivatives regime, and regulatory oversight of systemically important participants. (9/6/2013) SFC press release.
Futures trading in China. Xinhua reported that China has reopened trading in treasury bond futures. (9/6/2013) Reopening.
Securitizations in China. Fitch Ratings discussed several measures released by China’s State Council and the implications those measures have for China’s securitizations market. (9/6/2013) Securitizations.
Hong Kong guidance on collective investment schemes. Hong Kong’s Securities and Futures Commission outlined the provisions in the Securities and Futures Ordinance governing the offering and sale of collective investment schemes. (8/27/2013) SFC press release.
ASIC report on emerging market issuers. The Australian Securities & Investments Commission released a report on the issues that retail investors should consider before investing in emerging market issuers. (8/27/2013) ASIC press release.
ASIC guidance on derivatives rules. The Australian Securities & Investments Commission released regulatory guidance on the market integrity rules for the Australian Securities Exchange Limited derivatives market (ASX 24). Regulatory Guide 250 Guidance on ASIC market integrity rules for risk management and other requirements: ASX 24 market provides guidance on the obligations of participants in the ASX 24 market on risk management for house accounts, supervisory policies and procedures, and minimum presence requirements for foreign market participants. (8/21/2013) ASIC press release.
ASIC report on hybrid securities. The Australian Securities & Investments Commission published a report on the sale of hybrid securities. As a result of the report, ASIC will be focusing on possible misleading conduct in the sale of hybrids, including inappropriate labeling of hybrids and unwarranted comparison of hybrids to different, less risky products. (8/20/2013) ASIC press release.
ASIC proposes new financial adviser training procedure. The Australian Securities & Investments Commission released a consultation paper proposing a replacement process to the ASIC Training Register, which sets forth the training courses for financial product advisers. Under the proposal, courses will no longer need to be listed on the ASIC Training Register. Instead, it is proposed that authorized assessors will assess training courses to determine if they meet ASIC training standards. Comments should be submitted by September 30, 2013. (8/19/2013) ASIC press release.
Singapore consults on liquidity coverage ratio. The Monetary Authority of Singapore published a consultation paper concerning the local implementation of the proposed Basel III liquidity coverage ratio. Comments should be submitted by September 16, 2013. (8/16/2013)
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News from Europe
European Parliament adopts new market abuse directive. The European Parliament formally endorsed the political agreement on a Regulation on insider dealing and market manipulation. The Regulation updates and strengthens the existing framework to ensure market integrity and investor protection provided by the Market Abuse Directive. The scope of EU rules will be extended to include all financial instruments that are traded on organized platforms and over the counter, and will be adapted to new technology. The manipulation of benchmarks such as LIBOR will be explicitly prohibited, market abuse occurring across both commodity and related derivative markets will be prohibited, and cooperation between financial and commodity regulators will be reinforced. Supervisors will have access to the information they need to detect and sanction market abuse. Moreover, sanctions currently available to supervisors will be strengthened and harmonized. Possible criminal sanctions are the subject of a separate but complementary proposal. (9/10/2013) EC press release.
Financial transaction tax. BBC News reported that a non-binding legal opinion issued by the European Union’s lawyers has concluded that a proposed financial transaction tax to be adopted by 11 EU countries is illegal. (9/10/2013) FTT.
UK peer review. The Financial Stability Board published its peer review of the United Kingdom. (9/10/2013)
ECB modifies loan-level reporting for some ABS. The European Central Bank announced enhanced loan-level reporting requirements for residential mortgage-backed securities and asset-backed securities backed by loans to small and medium-sized enterprises that are used as collateral in Eurosystem monetary policy operations and are unable to satisfy the timeline announced on November 27, 2012. (9/9/2013) ECB press release.
European regulators report on financial system risks. The Joint Committee of the European Supervisory Authorities published its second bi-annual report on risks and vulnerabilities in the European Union’s financial system. (9/5/2013) EBA press release.
UK FCA issues Quarterly Consultation Paper No. 2. The UK’s Financial Conduct Authority published Quarterly Consultation Paper No. 2, which makes proposals regarding qualification requirements in the Trading and Competence sourcebook, the reporting of suspicious transactions, the Prospectus Rules and the adoption of certain European Union proposals, among other things. (9/6/2013) FCA press release.
Forex and interest rate derivatives survey results. The Bank of England summarized the UK results of the triennial survey of turnover in the markets for foreign exchange (spot, forwards, foreign exchange swaps, currency swaps and options) and over-the-counter interest rate derivatives. (9/5/2013) Bank of England press release.
EC shadow banking developments. The European Commission adopted a communication on shadow banking and proposed new rules for money market funds (MMFs). The communication summarizes the EC’s work concerning shadow banking and discusses possible further action in that area, the first of which is the proposal of new rules for money market funds. (9/4/2013) EC press release.
ESMA assessment of OTC derivatives regulation equivalency. The European Securities and Markets Authority published its assessment of the equivalency of the over-the-counter derivatives regulatory regimes of Australia, Hong Kong, Japan, Singapore, Switzerland and the US. The third-country rules were compared with EMIR requirements for central clearing, reporting, central counterparties, trade repositories and non-financial counterparties, as well as risk mitigation techniques for un-cleared trades. (9/3/2013) ESMA notice.
EBA consultation on identifying risk by geographical location. The European Banking Authority launched a consultation on draft Regulatory Technical Standards (RTS) setting out criteria for identifying the geographical location of all relevant credit exposures, namely credit risk, trading book and securitization exposures. The RTS will be part of the Single Rulebook aimed at enhancing regulatory harmonization in the banking sector in the European Union. Comments should be submitted by November 1, 2013. (9/2/2013) EBA press release.
UK consults on new listing rules. The UK’s Financial Conduct Authority issued a consultation paper on proposed changes to listing rules to be made in response to the Department for Business, Innovation and Skills October 1, 2013 implementation of new Directors’ Remuneration Reporting Regulations and Narrative Reporting Regulations. Comments should be submitted by October 9, 2013. (8/28/2013) FCA press release.
UK FCA responds to feedback on regulated information. The UK’s Financial Conduct Authority provided its feedback on three consultations affecting primary information providers (PIPs). In response to comments it received on its consultations, the FCA intends to make minor changes to the proposed rules regarding business continuity requirements, publication of fees and certain notification requirements. The FCA is also conducting an additional consultation on the definition of a “Regulatory Information Service.” Comments should be submitted by October 27, 2013. (8/28/2013) FCA press release.
Bank of England publishes financial stability paper. The Bank of England published a paper entitled “The Fractal Market Hypothesis and its implications for the stability of financial markets.” The paper examines why and how fractal properties might arise, and considers their implications for understanding the causes of financial (in)stability. It offers a quantitative model of investor behavior and price formation that seeks to account for fractal properties of market prices. (8/23/2013) Bank of England notice.
UK guidance to market operators. The UK’s Financial Conduct Authority provided guidance to market operators (recognized investment exchanges and MTF operators) on how it expects them to meet their responsibilities for ensuring their members comply with their rules on an ongoing basis. (8/20/2013) FCA notice.
UK guidance on CREST regulated activity. The UK’s Financial Conduct Authority issued guidance on the availability of the group exclusion for the CREST regulated activity in article 45 of the Financial Services and Markets Act 2000 Order 2001/544 when investments are held by a nominee company. (8/20/2013)
UK regulation under the OFT and FCA. The UK’s Financial Conduct Authority launched a website which provides a general explanation of which firms will be subject to FCA regulation under the Financial Services and Markets Act and which will be supervised by the Office of Fair Trading. (8/15/2013) FCA consumer credit website.
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FSB reports to the G20. The Financial Stability Board published four documents delivered to G20 Leaders for the St Petersburg Summit: (1) a letter from the FSB Chairman Mark Carney, taking stock of the financial reforms since the global financial crisis and the major outstanding issues that call for additional attention; (2) a narrative progress report, summarizing the framework of financial reforms that the FSB is coordinating; (3) a more detailed and comprehensive overview report on progress in the implementation of the financial reforms; and (4) a status report prepared by the FSB Secretariat, in consultation with FSB members, that assesses the current state of progress made in global policy development and implementation of financial regulatory reforms. (9/5/2013) FSB press release.
Triennial review of foreign exchange and interest rate derivatives turnover. The Bank for International Settlements published preliminary global results from the 2013 Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Markets Activity. (9/5/2013) BIS forex press release; BIS interest rate derivatives press release.
Margin requirements for OTC derivatives. The Basel Committee on Banking Supervision and the International Organization of Securities Commissions published the final framework for margin requirements for non-centrally cleared derivatives. (9/2/2013) Basel Committee press release.
FSB report on OTC derivatives. The Financial Stability Board published a report summarizing progress in over-the-counter derivatives reforms. (9/2/2013) FSB press release.
FSB report on ending “too big to fail.” The Financial Stability Board published a report on the progress made in implementing the FSB’s policy framework for reducing the moral hazard posed by systemically important financial institutions. The report sets out the actions required from the G-20, the FSB and other international bodies to complete the policy initiative to end “too-big-to-fail.” (9/2/2013) FSB press release.
FSB shadow banking recommendations. The Financial Stability Board published policy recommendations regarding the shadow banking system. The recommendations address risks associated with the interaction between the regular banking system and the shadow banking system; the susceptibility of money market funds to “runs”; securitizations; and pro-cyclical incentives associated with securities financing transactions. (8/29/2013) FSB press release.
Financial Stability Board reports on credit agency ratings reliance. The Financial Stability Board published a progress report on reducing reliance on, and strengthening the oversight of, credit rating agencies. The progress report is accompanied by the interim peer review report on national implementation of the FSB principles for reducing reliance on credit rating agency ratings. (8/29/2013) FSB press release.
Financial Stability Board consults on resolution regimes. The Financial Stability Board issued a consultative document on an Assessment Methodology for the Key Attributes of Effective Resolution Regimes for Financial Institutions. Comments should be submitted by October 31, 2013. (8/28/2013) FSB press release.
Basel Committee reports on Basel III implementation. The Basel Committee on Banking Supervision published its fourth report to G20 leaders on progress made in the implementation of Basel III regulatory reforms. The report notes substantial progress with respect to the adoption of the Basel standards by Basel Committee member jurisdictions; the harmonization of capital regulations across member jurisdictions; and the finalization of remaining post-crisis reforms that form part of the Basel regulatory framework. (8/27/2013) BIS press release.
Assessment of derivatives regulation. The Bank for International Settlements’ Macroeconomic Assessment Group on Derivatives published a report on the macroeconomic effects of over-the-counter derivatives regulatory reforms. The report focuses on the effects of mandatory central clearing of standardized OTC derivatives, margin requirements for non-centrally cleared OTC derivatives, and bank capital requirements for derivatives-related exposures. (8/26/2013) BIS press release.
Financial Stability Board progress report on compensation practices. The Financial Stability Board published the second progress report on the implementation of the FSB Principles for Sound Compensation Practices and their Implementation Standards by FSB jurisdictions. The report finds that, while good progress continues to be made, more work needs to be done by national authorities and firms to ensure that implementation of the standards is effectively leading to more prudent risk-taking behavior. The report describes key challenges and evolving practices in the areas of risk adjustment, alignment of compensation with performance and the identification of material risk-takers. (8/26/2013) FSB press release.
Joint Forum consults on longevity risk and point of sale disclosure. The Joint Forum published two consultative papers. The first concerns longevity risk posed by an aging population. The second concerns point of sale disclosure in the insurance, banking and securities sectors. Comments should be submitted by October 18, 2013. (8/15/2013) IOSCO press release.
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US Securities and Exchange Commission Developments
Selected Enforcement Actions
Insider trader to pay US$5.2 Million. The SEC announced that a Bangkok-based trader has agreed to pay US$5.2 million to settle charges that he traded on inside information in advance of a public announcement about a proposed acquisition of Smithfield Foods by a firm in China. The SEC alleges that Badin Rungruangnavarat made more than US$3 million via tips he obtained from a Facebook friend who was an associate director at the investment bank for a different company that was considering a Smithfield acquisition. Without admitting or denying the allegations, Badin agreed to pay US$3.2 million in disgorgement and a US$2 million penalty. (9/5/2013) SEC press release.
Whistleblower awards. The SEC announced that three whistleblowers have been awarded more than US$25,000, combined, for tips and information they provided to help the SEC and Justice Department stop Locust Offshore Management, a sham hedge fund. This is the first installment of anticipated payments to the whistleblowers as additional assets are collected from the purported hedge fund manager. The whistleblowers are expected to ultimately receive approximately US$125,000 in total. (8/30/2013) SEC press release.
Investment advisor allegedly misused soft dollars and engaged in cherry picking. The SEC instituted contested administrative proceedings against J.S. Oliver Capital Management and its President, Ian O. Mausner, for allegedly engaging in a cherry-picking scheme that awarded more profitable trades to hedge funds in which Mausner and his family had invested, while allocating less profitable trades to other clients, including a widow and a charitable foundation. The SEC further alleged that Mausner and J.S. Oliver misappropriated more than US$1.1 million in soft dollars for undisclosed purposes such as a payment to Mausner’s ex-wife. The SEC also charged Douglas F. Drennan, a portfolio manager at J.S. Oliver, for his role in the soft dollar scheme. (8/30/2013) SEC press release.
SEC alleges portfolio manager deceived investment company’s CCO. The SEC filed its first enforcement action under Rule 38a-1(c) of the Investment Company Act for misleading and obstructing a chief compliance officer (CCO). The SEC filed settled administrative proceedings against Carl Johns for forging documents and misleading his employer’s CCO to conceal his failure to report personal trades. Without admitting or denying the allegations, Johns agreed to settle the matter by paying more than US$350,000 and being barred from the securities industry for at least five years. (8/27/2013) SEC press release.
SEC sued by whistleblower. According to Courthouse News Service an attorney in the SEC’s New York regional office has sued the Commission. Kathleen Furey claims the SEC retaliated against her after she complained that an assistant director in the New York office blocked efforts to investigate certain investment managers. (9/6/2013) Whistleblower.
Fee Rate Advisory. The SEC announced that the fiscal year 2014 fees that public companies and other issuers pay to register their securities with the Commission will be set at US$128.80 per million dollars. (8/30/2013) SEC Release No. 33-9447; SEC press release.
Business continuity planning. The SEC, CFTC and the Financial Industry Regulatory Authority jointly issued an advisory on business continuity and disaster recovery planning. The advisory encourages firms to review their business continuity plans with the goal of reducing recovery time after significant events. (8/16/2013) Separately, the SEC’s Office of Compliance Inspections and Examinations issued a Risk Alert on business continuity and disaster recovery planning for investment advisers. (8/27/2013)
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US Commodity Futures Trading Commission Developments
New Final Rules
Compliance obligations for commodity pool operators. The CFTC issued a final rule regarding the compliance obligations of commodity pool operators registered with the SEC as investment companies. These entities will be allowed to use SEC disclosure, reporting, and recordkeeping requirements to comply with the new CFTC regulations, provided that they comply with the SEC’s requirements. (8/13/2013) CFTC Release 6663-13.
Swap clearing exemption for cooperatives. The CFTC issued final rules exempting swaps between qualified cooperatives from the CFTC’s Part 50 clearing requirements. Reporting counterparties still must report that they have elected not to go through the clearing process. (8/13/2013) CFTC Release 6665-13.
Proposed Rules and Requests for Comment
Concept release on automated trading. The CFTC published a concept release on risk controls and system safeguards for automated trading environments. It seeks comments on existing industry practices, their efficacy and implementation, and the need for additional measures. Comments should be submitted within 90 days after publication in the Federal Register, which is expected shortly. (9/9/2013)
Proposed rules for derivatives clearing organizations. The CFTC issued proposed rules that would impose additional standards for systemically important derivatives clearing organizations. The rules pertain to governance, risk management, financial resources, and other matters, consistent with the Principles for Financial Market Infrastructures standards. Comments should be submitted by September 16, 2013. (8/13/2013) CFTC Release 6664-13.
CFTC approves temporary SEF registrations. The CFTC’s Division of Market Oversight announced the approval of applications submitted by TW SEF LLC and DW SEF LLC for temporary registration as swap execution facilities. (9/9/2013) CFTC press release.
Third phase of swaps clearing begins. The CFTC’s Division of Clearing and Risk reminded swaps market participants that the third phase of required clearing for certain credit default swaps and interest rate swaps began on September 9, 2013. (9/9/2013) CFTC press release.
Position limits readied. The Wall Street Journal reported that the CFTC may vote at the end of this month on new position limits for derivatives in certain physical commodities. The CFTC’s original position limits were vacated by a US district court last year. (9/8/2013) Position limits. The US district court’s opinion can be viewed here.
CPO reporting relief. The CFTC’s Division of Swap Dealer and Intermediary Oversight provided no-action relief to commodity pool operators of SEC-registered funds that trade in commodity interests through wholly-owned controlled foreign corporations (CFCs). Enforcement action will not be recommended against commodity pool operators of SEC-registered funds for failure to provide separate reports for their CFCs to the National Futures Association, provided that the commodity pool operators consolidate the CFC’s information with that of the registered fund. (9/5/2013) CFTC press release.
SRO fees. The CFTC announced the fees for its review of rule enforcement programs at registered futures associations and designated contract markets. Each SRO is required to pay its fee on or before October 28, 2013. (8/27/2013) 78 FR 52907.
Retail commodity transactions interpretation. The CFTC issued an interpretation concerning its authority over retail commodity transactions under the Commodity Exchange Act. The interpretation clarifies the CFTC’s view of the meaning of “actual delivery” and provides guidance on how the CFTC will determine whether a transaction involves actual delivery. (8/23/2013) CFTC press release.
Limited no-action relief from portfolio reconciliation requirements announced. The CFTC’s Division of Swap Dealer and Intermediary Oversight, in response to a request from the International Swaps and Derivatives Association, issued a no action letter regarding Regulation 23.502, portfolio reconciliation, for swap dealers and major swap participants who intend to rely on the European Market Infrastructure Regulation’s provisions regarding risk mitigation. (8/23/2013) CFTC Letter No. 13-50.
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US Banking Developments
FDIC adopts rule on deposits at foreign branches. The FDIC approved a rule which makes clear that deposits in foreign branches of US banks are not FDIC-insured, even though they can be deposits for purposes of the national depositor preference statute. (9/10/2013) FDIC press release.
OCC Bulletin on capital requirements proposal. The OCC issued a Bulletin on a joint notice of proposed rulemaking published by federal banking regulators. The proposal would increase the leverage capital requirements for the largest US banking organizations. Comments should be submitted by October 21, 2013. (8/20/2013)
Federal Reserve Board assessment fees. As required by the Dodd-Frank Act, the Federal Reserve Board established annual assessment fees for its supervision and regulation of large financial companies. The rule establishing the fees is effective October 25, 2013. Fees for 2012 fees will be due December 15, 2013. (8/16/2013) Federal Reserve Board press release.
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US Judicial Developments
Transfer agent liability under Section 5 of the Securities Act. The SEC filed a civil enforcement action against defendants in connection with sales of unregistered securities and the US district court entered summary judgment in the SEC’s favor. Reversing in part, the US Court of Appeals for the Ninth Circuit held that genuine issues of fact exist regarding whether the transfer agent and its owner were necessary participants and substantial factors in the distribution of the unregistered stock sufficient to impose liability under Section 5 of the Securities Act. The Court noted that transfer agents should be held to the same standard of liability under Section 5 as other participants in a securities offering. The Court also affirmed a magistrate judge’s order denying a co-defendant’s motion to stay the proceedings and an order requiring disgorgement. (9/10/2013) SEC v. CMKM Diamonds, Inc.
Court limits extraterritorial reach of the Securities Exchange Act. The US Court of Appeals for the Second Circuit affirmed the convictions of Alberto Vilar and Gary Tanaka, of Amerindo Investment Advisors, for defrauding their clients. In doing so, the Court held that Securities Exchange Act Section 10(b) does not apply to extraterritorial conduct, regardless of whether liability is sought criminally or civilly. (8/30/2013) US v. Vilar. See our Client Alert here.
Securities lending suit dismissed. A US district court dismissed without prejudice a lawsuit alleging that managers of exchange-traded funds received excess compensation for lending the funds’ securities. (8/28/2013) Laborers’ Local 265 Pension Fund v. iShares Trust.
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US Exchanges and Self-Regulatory Organizations
ISDA Dodd-Frank Act - EMIR agreement. The International Swaps and Derivatives Association published the “DFP2 to EMIR Top Up Agreement.” The document is meant to allow for EMIR-compliant documentation for parties that have adhered to the Dodd-Frank March Protocol (DFP2) and do not wish to adhere to the ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol (EMIR Protocol) as well. ISDA also published an explanatory memo to assist in the consideration of the DFP2 to EMIR Top Up Agreement. (9/10/2013) ISDA press release.
ISDA publishes arbitration guide. The International Swaps and Derivatives Association published the 2013 ISDA Arbitration Guide. (9/9/2013) ISDA press release.
NYSE eligibility proceedings rule amended. NYSE Regulation advised that a new set of rules governing investigations, discipline of member organizations and covered persons, sanctions, cease and desist authority, and other procedural rules modeled on the rules of the Financial Industry Regulatory Authority have become effective. The new rules include the NYSE Rule 9520 Series, which governs eligibility proceedings for persons subject to statutory disqualifications who are not FINRA members or associated persons. (9/4/2013) NYSE Regulation Information Memo 13-18.
FINRA revisions to the Series 16 examination. The Financial Industry Regulatory Authority announced revisions to the Supervisory Analyst (Series 16) examination program. The changes will appear in Series 16 examinations administered on or after October 28, 2013. (8/27/2013) FINRA Regulatory Notice 13-28.
Account-type indicators elimination date extended. NYSE Euronext advised it is extending to February 3, 2013, the date on which it will eliminate certain obsolete equities Account Type Indicators. (8/23/2013) NYSE Euronext Information Memo No. 13-17.
ISDA EMIR Standard Agreement Amendment. The International Swaps and Derivatives Association announced the availability of the “ISDA Standard Amendment Agreement - 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Form.” (8/20/2013) ISDA notice.
FINRA disciplinary publication rule approved. The Financial Industry Regulatory Authority announced SEC approval of amendments to FINRA Rule 8313 (Release of Disciplinary Complaints, Decisions and Other Information), which governs the release of disciplinary and other information by FINRA to the public. (8/20/2013) FINRA Regulatory Notice 13-27.
FINRA updates Private Placement Form. The Financial Industry Regulatory Authority updated the form firms use to file offering documents and information pursuant to FINRA Rules 5123 (Private Placements of Securities) and 5122 (Private Placements of Securities Issued by Members). The updated form includes six new questions. FINRA also updated the Private Placement Form Frequently Asked Questions. (8/19/2013)FINRA Regulatory Notice 13-26.
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WE ARE ALSO THINKING ABOUT
Our Securities Litigation Alert/White Collar Alert: “United States v. Vilar: new limits on extraterritorial securities enforcement.”
Our Financial Services Alert/Financial Services Regulatory Alert: “Six federal agencies revise proposed rule on risk retention, removing controversial provisions.”
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