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Regulatory Update: November 2020


By FactSet Insight  |  November 10, 2020

Marine Hutinel, Barrie C. Ingman, and Nels Ylitalo contributed to this article.

Each month, FactSet's Regulatory team offers a rundown of the most important developments in compliance and regulatory news. Read on to see which stories dominated the conversation last month.

european union

ESMA Provides Update on Various MiFID II Developments

As part of its broader statutory review of MiFID II (of which the latest tranche of developments are summarized in our August update), and following updates to its “Quick Fix” initiative (summarized in our September update), the European Securities and Markets Authority (ESMA) announced on September 24, 2020, a Consultation into MiFIR Reference Data and Transaction Reporting and, on September 25, 2020, a Consultation on the MiFID II OTF Regime. ESMA has identified transparency and the cost of market data as two of the biggest problems with MiFID II.

These consultations were quickly followed by the publication of proposals for draft rules for third-country firms on September 28, 2020 and proposals to simplify the MiFIR non-equity transparency regime, published on September 29, 2020 (which were preceded by ESMA’s September 1, 2020 call for evidence on the transparency regime).

Then, on October 1, 2020, ESMA published an updated statement on the impact Brexit will have on MiFID II, MiFIR (and the Benchmark Regulation), covering various technical topics and consequences arising out of the UK’s departure from the bloc.

ESMA Delivers Tepid Response to Dividend Arbitrage Scandal

Following its preliminary findings on the criminal investigations occurring across the EU on dividend arbitrage schemes, on September 24, 2020, ESMA announced it had published its final report into “Cum/Ex, Cum/Cum and withholding tax (WHT) reclaim schemes.”

Steven Maijoor, ESMA’s Chair stated: “Today’s Final Report is the result of almost two years of thorough legal and economic analysis by ESMA’s experts.” The report concludes that the matters under investigation are principally tax issues and proposes that national competent authorities (NCAs) should be empowered to share information with tax authorities. The report further indicates that amendments to the Market Abuse Regulation might contribute to the detection and prosecution of such schemes.

Further ESG Regulatory Developments Announced

On October 1, 2020, the European Commission published FAQs on the new Commission Platform on Sustainable Finance. The “Platform” will be responsible for formulating technical screening criteria for the EU’s Taxonomy Regulation over the coming years, together with responsibility for providing broader sustainable finance research and advisory services to the Commission.

On October 2, 2020, ESMA responded to the European Commission’s consultation on a proposed EU Green Bond Standard (GBS) by emphasizing that the success of such an initiative hinged on the standard’s credibility, which is contingent on the need for a new regulatory regime governing green bond assessors, in much the same way as credit ratings agencies are regulated.

In its response, ESMA also indicated that it supported proposals for an EU Social  Taxonomy, which it saw as a prerequisite for reliable standards for social bonds (just as it sees the current EU Taxonomy Regulation on environmental sustainability as a pre-requisite for standards supporting EU Green Bonds).

ESMA’s response came just a week before the Commission announced on October 7, 2020, the EU’s intention to issue $100bn of EU Social Bonds as part of its COVID recovery program, in relation to which, the Commission announced it had “adopted” ICMA’s Social Bond Framework.

EC Opens Consultation on the Review of the Alternative Investment Fund Managers Directive (AIFMD)

The European Commission opened a public consultation in October to gather views from the alternative investment fund managers, distributors, industry representatives, investors and investor protection associations, financial markets authorities, and citizens on potential changes to the AIFMD. Interested parties can complete the consultation’s 102 question survey online through January 29, 2021.

ESMA Publishes Final Report on Amendments to MAR for Promotion of Use of SME Growth Markets

On October 29, 2020, ESMA published its final report on amendments to the Market Abuse Regulation (MAR) for the promotion of the use of the SME growth market. ESMA’s draft regulatory technical standard (RTS) and implementing technical standard (ITS) deal respectively with liquidity contracts and insider lists for SME growth markets. ESMA has transmitted the final report to the European Commission and is submitting the proposed RTS and ITS for endorsement.

united kingdom

FCA Announces Expedited and Extended Climate Reporting Rules

On October 2, 2020, the Department of Work and Pensions (DWP) published correspondence between the FCA and the Pensions Minister, outlining the FCA’s plans to implement proposals to introduce TCFD-aligned climate-related disclosures by listed issuers. The FCA stated that they “expect to do further work to adopt the TCFD’s recommendations more widely within our rules, including as they apply to asset managers and contract-based pension schemes….[and] intend to consult on implementing client-focused TCFD-aligned disclosures for asset managers and contract-based pension schemes in the first half of 2021… [and] aim to finalize rules by the end of 2021, with new obligations coming into force in 2022.”

UK Regulatory Authorities Publish Quarterly Regulatory Developments Pipeline

On September 18, 2020, the UK’s financial regulatory authorities published an update of their Regulatory Initiatives Grid. It summarizes approximately 150 upcoming regulatory developments spanning the UK banking and financial services sector. Notable initiatives include the proposed new Duty of Care within financial services and Brexit related initiatives such as the introduction of a new Gibraltar Authorization Regime. More perennial topics covered include operational resilience, Libor transition, and a host of prudential matters including the upcoming HMT review of Solvency II.

UK Bans Sale of Crypto-Derivatives and Speculative Illiquid Securities to Retail Clients

On October 6, 2020, the FCA announced a ban on the sale, marketing, and distribution of derivatives and exchange-traded notes (ETNs) of derivatives that reference certain types of crypto-assets. The ban applies in relation to retail consumers and commences on January 6, 2021.

The step is part of a trend towards more product intervention by the FCA aimed at retail investor protection and follows its consultation to make permanent certain temporary measures prohibiting the sale of speculative illiquid securities to retail investors following the London Capital & Finance (LCF) “mini-bonds” scandal, which saw 11,625 investors lose £237.2 million collectively. This second ban comes into force on January 1, 2021, as indicated in the updated Regulatory Initiatives Grid discussed in the previous section.

UK Announces Strategy to Overhaul Companies House Diligence Arrangements

On September 18, 2020, the UK government announced plans (subject to availability in the Parliamentary calendar) to reform Companies House in light of findings in the 2019 Corporate Transparency and Register Reform Consultation, which identified several flaws in the platform that had been exploited by money launderers and fraudsters.

Key proposed measures include mandatory verification checks on directors and “persons with significant control” (PSCs) with retroactive application to existing directors and PSCs. The proposals also recommend Companies House be given enhanced powers to query, investigate and remove information from the register and firms, it is proposed, will in turn have to report any inconsistencies between information they hold, and information contained on the platform.

United States

SEC Adopts New Fund of Funds Arrangements

On October 7, 2020, the U.S. Securities and Exchange Commission (SEC) adopted a final rule under the Investment Company Act of 1940 (the “Act”) to streamline and enhance the regulatory framework applicable to funds that invest in other funds (“fund of funds” arrangements). Related changes include: rescission of rule 12d1-2 and certain exemptive relief from sections 12(d)(1)(A), (B), (C), and (G) of the Act that has permitted fund of funds arrangements, and related amendments to rule 12d1-1 and Form N-CEN.

In adopting the changes, the SEC cited the approximately five-fold increase from 2008 to 2019 of mutual fund assets that are invested in other funds, the utility of fund of funds arrangements for asset allocation, as well as the decades of experience the SEC now has regulating fund of fund arrangements.

SEC Adopts New Auditor Independence Requirements

On October 16, 2020, the SEC adopted amendments to update certain auditor independence requirements with the intent to sharpen the independence analysis on “relationships or services that are more likely to pose threats to an auditor’s objectivity and impartiality.” Areas of focus for the amendments include certain definitions such as audit and professional engagement period, debtor-creditor relationships, the business relationships rule, inadvertent violations for M&A, and various other changes.

The SEC notes that voluntary early compliance is permitted, but that auditors currently subject to the independence requirements of Rule 2-01 are not required to apply the final amendments until 180 days after publication in the Federal Register.

CFTC and SEC Adopt Customer Margin Rules for Security Features

On October 22, 2020, the Commodity Futures Trading Commission (CFTC) and the SEC adopted rule amendments to lower the margin requirement for an unhedged security futures position from 20% to 15%, and to adopt conforming revisions to the security futures margin offset table.

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