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On January 11, 2016, the US Securities and Exchange Commission issued its Office of Compliance Inspections and Examinations’ 2016 priorities. Areas of focus for this year include liquidity controls, public pension advisers, product promotion, and two investment products – exchange-traded funds and variable annuities. The priorities also provide for continuing emphasis on protecting investors in ongoing risk areas such as cybersecurity, microcap fraud, fee selection, and reverse churning. The examination priorities address issues across a variety of financial institutions, including investment advisers, investment companies, broker-dealers, transfer agents, clearing agencies, and national securities exchanges. The priorities may be adjusted in light of market conditions, industry developments and ongoing risk assessment activities. OCIE selected the priorities in consultation with certain SEC policy divisions and regional offices, the SEC’s Investor Advocate, and other regulators.

The SEC press release is available at: http://www.sec.gov/news/pressrelease/2016-4.html and the Examination Priorities for 2016 are available at: http://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2016.pdf.

On July 14, 2016, the Securities and Exchange Commission announced the settlement of an enforcement action against RiverFront Investment Group (“RiverFront”), an investment advisory firm, for failing to properly prepare clients for transaction costs.

At issue is a wrap fee program, in which a subadviser uses a sponsoring brokerage firm to execute their trades on behalf of clients, and the costs of the trades are included in an annual wrap fee paid by the client.  The SEC alleges that RiverFront actually used brokers in addition to the wrap program sponsor to execute most of its wrap program trading, resulting in additional costs to the client.  Although RiverFront disclosed that some “trading away” from the sponsoring broker could occur, the firm inaccurately described the frequency, and thus the disclosures were materially misleading.

In the press release, Sharon Binger, Director of the SEC’s Philadelphia Regional Office, stated, “Investors in wrap fee programs pay one annual fee for bundled services without expecting to pay more, so if subadvisers like RiverFront trade in a way that incurs additional costs to clients, those costs must be fully and clearly disclosed upfront so investors can make informed investment decisions.”

The SEC’s National Exam Program includes wrap fee programs as a 2016 examination priority, particularly in assessing whether advisors are fulfilling fiduciary and contractual obligations to clients and properly managing issues such as disclosures, conflicts of interest, best execution and trading away from the sponsor.

Without admitting or denying any wrongdoing, RiverFront consented to a $300,000 settlement and to post on its website the volumes of trades by market value executed away from sponsors and the associated transaction costs passed onto clients on a quarterly basis

The FCA has stated that all FX derivative transactions and those FX spot transactions that are ancillary to transactions in MiFID financial instruments were within the scope of the best execution requirements set out in MiFID. Further, best execution would still apply when the firm was dealing as principal, including where dealing with a professional counter party, where the counter party was placing legitimate reliance on the firm. As regards other FX spot transactions, the FCA considered that the obligations arising would vary according to the nature of the relationship between market participants i.e. whether acting as agent, as principal or as principal with some discretion.

The Council’s Permanent Representatives Committee (Coreper) has asked the Netherlands presidency to start negotiations regarding a proposed one-year delay to the revised Markets in Financial Instruments Directive and Regulation (MiFID 2 and MiFIR) with EP as soon as possible so as to enable adoption at first reading of legislation enacting the extension. Under the Council’s approach the deadline for the Member States to transpose MiFID 2 would be set for 3 July 2017 whilst the date of application of both MiFID 2 and MiFIR would be set for 3 January 2018. (Source: Council announces negotiations on proposed MiFID 2 delay)

The Council’s Permanent Representatives Committee (Coreper) has asked the Netherlands presidency to start negotiations regarding a proposed one-year delay to the revised Markets in Financial Instruments Directive and Regulation (MiFID 2 and MiFIR) with EP as soon as possible so as to enable adoption at first reading of legislation enacting the extension. Under the Council’s approach the deadline for the Member States to transpose MiFID 2 would be set for 3 July 2017 whilst the date of application of both MiFID 2 and MiFIR would be set for 3 January 2018. (Source: Council announces negotiations on proposed MiFID 2 delay)

The Market Abuse Regulation (MAR) becomes directly effective in Irish law from 3 July 2016. MAR is to be supplemented by delegated regulations (Delegated Regulations), and implementing technical standards and guidelines (Implementing Regulations) to be adopted by the European Commission and the European Securities and Markets Authority. In time, there will also be specific Irish implementing regulations. [Read more]

Source: William Fry

The Economic Secretary to the Treasury, Harriett Baldwin, has announced that the UK will:

1. Establish a FinTech panel to (a) set an overarching FinTech strategy for the UK; and (b) monitor and drive forward FinTech initiatives;
2. Create a professional services information hub, to make it easier for FinTech businesses to find the services they need; and
3. Work with UK Trade and Investment to establish ‘FinTech Bridges’ with priority global markets, to help UK FinTechs to expand internationally.

Harriett Baldwin said, “The government wants to ensure that the UK continues to be the best place in the world to be a FinTech company … The[se] measures … show that we are … committed to initiatives which will make our FinTech sector even stronger“. The government will be announcing more policies to support the FinTech sector in due course. [Read more]

At first glance, PRA regulatory measures are of little interest to the buy-side. However, the PRA’s first consultation paper (CP 9/16) on the implementation of Recast MiFID (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR) is worth noting for its impact on sell-side firms with whom the buy-side interact.

Source: Eversheds

The European Parliament formally agreed to delay the rollout of the Markets in Financial Instruments Directive II for one year, until January 3, 2018, according to published reports. The European Commission had recommended such action in February 2016 (Click here for details in the article, “EC Formally Proposes Delaying MiFID II Rollout for One Year” in the February 14, 2016 edition of Bridging the Week.) [Read more]

Source: Katten Muchin Rosenman LLP