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FactSet Regulatory Update: March 2019


By Barrie C. Ingman  |  March 5, 2019


U.S. Treasury Rejects Inclusion of U.S. Territories on EU’s List of Jurisdictions with Strategic AML Deficiencies

On February 13 , the European Commission adopted a new list of third countries (by way of Delegated Regulation) which it regards as having strategic deficiencies in Anti-Money-Laundering/ Counter-Terrorist-Financing frameworks. The European Parliament and Council have one month to approve it, after which it will be published in the EU’s Official Journal and enter into force 20 days thereafter.

Somewhat controversially, four of the new blacklisted jurisdictions are U.S. territories, specifically: Guam, American Samoa, Puerto Rico, and the U.S. Virgin Islands. Other politically sensitive additions to the list include Iran and Saudi Arabia. In response, the U.S. Department Treasury issued a press release raising "significant concerns" about the list and criticized what it claimed was a "flawed process" that diverges from the FATF [Financial Action Task Force] list without reasonable support. The list concludes that "The Treasury Department does not expect U.S financial institutions to take the European Commission’s list into account in their AML/CFT policies and procedures." This final statement raises a potential "conflict of laws" scenario, which, together with the underlying political sensitivities around the development, is likely to pose practical difficulties in terms of decision making for financial services firms.

SEC Proposes Rules to Liberalize Restrictions on Funds Investing in other Funds

The Securities and Exchange Commission (SEC) is proposing a new rule under the Investment Company Act of 1940 to modify the existing prohibitions on funds when seeking to invest in other funds. The proposal would see SEC Rule 12d1 amended so that, under specified circumstances, funds would be permitted to invest in other funds in excess of the limits in section 12(d)(1) of the Act without obtaining an SEC Exemptive Orders.

The amendments are deemed necessary to reflect the changing nature of the funds sector and to rationalize the various statutory exemptions, SEC rules and exemptive orders that have grown up around the central rule over the years, which have collectively generated unnecessary complexity and inconsistent outcomes.

The proposals seek to create a more consistent and efficient regulatory framework for fund of funds arrangements, by rescinding rule 12d1-2 and many of the exemptive orders, replacing them with a comprehensive fund of funds framework under a new rule 12d1-4. Firms have until May 2, 2019 to respond to the proposals. The Proposed  Rule is accessible here.


European Commission Amends MIFID II RTS 11, Modifying Tick Size Regime to Level the Playing Field

On February 13, the European Commission (EC) adopted a Delegated Regulation amending MIFID II Regulatory Technical Standard 11 (RTS 11) to permit EU National Competent Authorities (NCAs) to factor in to tick size calculations pools of liquidity outside the EU and specifically, the volumes traded through third country trading venues with the highest turnover of the relevant instrument.

Trading venues with a smaller tick size can secure a competitive price advantage over rivals and in the case of certain EU instruments, smaller tick sizes in third countries, notably Switzerland, have attracted larger flows of liquidity in those EU instruments. Since tick sizes are determined on liquidity, to level the playing field with third country venues trading EU securities, the EC adopted ESMA’s proposed amendments to RTS 11 permitting NCAs to calculate tick sizes based on pools of liquidity outside the EU. If approved by the European Parliament and Council in the next phase of the legislative process, these measures should also provide a similar degree of protection against UK trading venues following the departure of the UK from the EU.

European Parliament Adopts Proposals to Modify UCITS, PRIIPS, and AIFMD to Facilitate Cross-Border Distribution of EU Funds

In December 2018, the European Parliament’s Economic and Monetary Affairs Committee (ECON) announced it had adopted the European Commission’s proposals for a new Directive and Regulation, and issued a report on both the Directive and Regulation, which propose changes to the UCITS and AIFMD Directives and PRIIPS regulation, to harmonize the conditions applicable to EU funds and thereby further facilitate cross-border distribution of funds they manage. Specifically, the amendments are designed to harmonize marketing requirements and make it easier, quicker and cheaper for EU asset managers to sell funds to a wider range of investors across the Union. ECON has announced that it will further consider these proposals in mid-April 2019.

New EU Prudential Regime for Investment Firms Progresses 

On February 27, the European Commission issued a press release welcoming a political agreement between the European Parliament and Member States on the proposed Investment Firms Regulation (IFR) and Investment Firms Directive (IFD), which form a key part of the EU’s broader Action Plan to strengthen the EU Capital Markets Union initiative, and which set out a new prudential regime for all investment firms save for the largest investment firms that pose similar risks to and carry out bank-like activities, which will be subject to the same rules and supervisory oversight as banks.

The proposals seek to deliver a more proportionate and appropriate prudential regime that better reflects the risk profiles and business models of investment firms, whilst maintaining financial stability. The proposed rules reflect the fact that existing prudential requirements were designed for banks and are not sufficiently calibrated to the risks of investment firms. As such, under the current proposals, investment firms would still be subject to capital, liquidity, and risk management rules, but these would be applied differentially according to the size, nature and complexity of the specific firm. The proposals also contain strengthened and enhanced equivalence rules for third country firms. Further technical work will be undertaken following the announced political agreement so that the European Parliament and Council can formally adopt final legislative texts. More information on the initiative is accessible here.

ESAs Defer PRIIPS Amendments but Issue Risk Disclosure Requirements in Supervisory Statement

On February 8, the European Supervisory Authorities (ESAs) published final recommendations on amendments to the PRIIPs KIDS Delegated Regulation, deciding to defer the proposed amendments in favor of a more comprehensive review of the rules in 2019. In the interim, they issued a Supervisory Statement on performance scenarios to promote a consistent approach and mitigate the risk of generating inappropriate return expectations, together with a recommendation that manufacturers include a warning in KIDs about performance scenarios. 

EC Publishes Draft Regulation to Integrate ESG factors into MIFID II Suitability Rules and the IDD

On February 25, ESMA published the responses it received to its Consultations on integrating sustainability into the MIFID II, UCITS, and AIFMD regimes. This follows the European Commission Announcement in January 2019 that it had published draft Delegated Acts to amend the MiFID II Organizational Requirements Regulation (Delegated Regulation 2017/565) and the Insurance Distribution Directive, to require firms to take into account client sustainability preferences when providing investment advice, portfolio management and when distributing insurance-based investment products; measures that are part of the Commission's Action Plan on Financing Sustainable Growth and its commitments under the Paris Climate Agreement.

The Commission can adopt the Delegated Acts once new disclosure provisions for sustainable investments and sustainability risks, which put in place an EU-wide definition for ESG considerations, have been agreed at EU level. In the absence of objections from the European Council and Parliament, the Delegated Acts are expected to enter the Official Journal by the end of 2019, with a phase-in transition period.

ESMA Proposes Further Regulation of ICOs and Crypto-Assets

ESMA has published advice to the European Commission, Council, and Parliament recommending ICOs and crypto-assets be subject to EU-wide regulation. The Advice clarifies existing rules governing crypto-assets that qualify as financial instruments under MIFID II and recommends extending the application of EU regulations to cover all crypto-assets to protect consumers and combat money laundering.

The publication makes clear that existing rules require interpretation or modification if they are to apply to crypto-assets without gaps and ambiguity. ESMA also recommends rules governing risk disclosures apply so that consumers are made aware of the potential risks associated with crypto-asset investments. 

U.S., EU, and UK Announce a Series of Brexit Related Measures

As a contingency in the event of a no-deal Brexit, the FCA has published its own version of ESMA’s Financial Instrument Reference Database (FCA FIRDS) together with a "Next Steps Overview" setting out what firms need to do to comply with the on-shored MIFID II transaction reporting regime. The FCA  have also published a webpage that advises UK firms on how to prepare for Brexit.

In joint press releases, ESMA and the FCA have announced the signing of "Memorandums of Understanding" that facilitate ongoing  cooperation and information sharing between regulatory authorities EU fund managers, which, among other matters, will permit the delegation of portfolio management services to UK firms and establish arrangements for the supervision of Credit Rating Agencies and Trade Repositories. 

Prior to this, on February 6, 2019,  ESMA issued a Supervisory Briefing detailing the steps National Competent Authorities should take (in anticipation of Brexit) to ensure authorisation requirements for firms are met when seeking to establish a presence in the EU and for firms with operations in both the UK and EU, including the ability to supervise the entity in question. The briefing is specifically designed to ensure firms do not deploying regulatory arbitrage by establishing letter box entities in the EU. 

The following week, at the European Financial Forum in Dublin on February 13 , ESMA’s Chief Executive Steven Maijoor delivered a remarkably political Speech on Brexit, citing Oscar Wilde on the tragedy of getting what you want. Maijoor discussed the short term impact and transitional measures and steps ESMA will be taking in relation to MIFID II transparency data, the double volume cap mechanism, the tick size regime and the trading obligation. Over the longer term, Maijoor was clear that the EU would take all measures necessary to protect its financial markets by, where necessary, reinforcing measures governing access to the market in EU financial instruments and minimizing the scope for regulatory arbitrage in favor of the UK over the EU. 

ESMA’s Chief Executive also discussed the EU’s recognition of UK settlement and clearing houses under EMIR and ancillary measures to avoid market disruption including steps to facilitate the repapering of derivatives contracts. Other more broader Brexit related transitional measures discussed included the European Parliament’s proposal to grant ESMA the power to issue "No Action Letters," the ever-present need for regulatory convergence among the remaining EU 27 Member States in response to Brexit, the strengthening of MIFID II’s third country regime and the growing importance of the EU’s Capital Markets Union suite of legislative proposals following Brexit. 

Finally, on February 25, 2019, the U.S. Commodity Futures Trading Commission (CFTC), the FCA, Bank of England and HM Treasury together issued a Joint Statement declaring a host of measures to ensure the ongoing trading, clearing and settlement of derivatives between the U.S. and UK.


FCA Commences 2019 With Record Fines

On January 16, 2019, the FCA published a final notice to former Keydata CEO, Stewart Ford, giving him 16 days to pay a fine of £76 million for breaching Statements of Principles for Approved Persons 1 and 4, for failing to act with integrity and for failing to deal with the regulator in an open and honest way. This is the largest fine ever imposed on an individual. Former KeyData sales Director was also fined over £3.2 million. Both individuals also received Prohibition Orders, preventing them from undertaking any further regulated activities. The Notices follow a ruling by the Upper Tribunal in November 2018 upholding the original decision on Appeal. Ford and Owen have 28 days from the date of the notices to appeal the Decision to the Court of Appeal. In the notices, the FCA further stated that they would seek to recover the sums if they were not paid on time.

Keydata designed and distributed retail investment products in bonds from Luxembourg based companies that invested in U.S. senior life settlement policies (so called "Death Bonds"). Aware of multiple concerns with the products, the two individuals failed to disclose the risks to investors, advisors, or regulators and continued to design and distribute further investment products. Ford then took over £70 million out of the investments for himself and paid Mr Owen millions in undisclosed sales commissions. The firm went insolvent in 2009 and was put into Administration by the regulator.

Around 30,000 investors lost an estimated £450 million following the firm’s collapse, much of which had to be covered by the Financial Services Compensation Scheme, which in turn has bought multiple litigation cases against advisors for negligence to cover the costs. Other litigation and regulatory activity arising from the case has included a £151 million claim against HSBC, a prohibition order against the firm’s Compliance Officer for failing to act with integrity and to act openly and honestly with the regulator, large scale fines by the FCA against advisors who sold Keydata products, investor claims filed in the U.S. and a failed suit bought by Ford for £650 million against the FCA and PwC for triggering the collapse of the firm.

FCA Announces First Enforcement Action Under its Competition Law Powers

On February 21 , The FCA issued a press release announcing its first formal enforcement action under its new competition law powers. Three firms and one individual were sanctioned. The individual and two of the firms were fined, with the remaining firm granted immunity for co-operating with the investigation. The case involved several asset management firms sharing pricing and volume bidding intentions leading up to the pricing of several primary market offerings. The FCA noted in its press release that such conduct undermines the competitive price bidding process for new issuance, which has the potential to distort the market value of the firm, raising its cost of capital. 

FCA Announces New Fund Disclosure Rules Following its Asset Management Market Study Findings

On February 4 , the FCA issued Policy Statement 19/4  setting out new rules developed in response to findings from its Asset Management Market Study (AMMS). The new rules mandate more precise disclosures from fund managers to give consumers a better understanding of how their money is managed. This is the second set of rules issued under the AMMS. The first set of rules was published in April 2018 and focused on the charging of box profits, conversions of investor’s funds and a suite of governance related issues including a requirement to demonstrate that investors are being given value for money. 

The statement includes non-Handbook guidance on the FCA’s expectations of how firms might comply with the existing requirements in practice in relation to explaining fund objectives and investment policies including explanations of non-financial objectives. Fund managers must further disclose in Key Information Documents (KIDs) features of their investment strategy fundamental to how the product is managed. Whereas the rules contain disclosures in relation to the use of benchmarks, a requirement to present past performance against a benchmark and a requirement that performance fees set down in a prospectus must be calculated after the deduction of all other fees. 

The new Handbook rules and guidance concerning benchmarks come into force on May 7, 2019 for new funds and on 7 August 2019 for existing funds. The new rules and guidance on performance fees come into force on August 7, 2019. The new provisions clarifying how COBS 4 applies to the key investor information document came into force on February 4, 2019. The FCA expects AFMs to take the non-Handbook guidance on objectives into consideration when reviewing fund documentation. 

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Barrie C. Ingman

Regulatory Advisor




The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.