ACA Digest - Regulatory Update May 2015

May 13, 2015

ACA Compliance (Europe) Limited (ACA) is proud to present ACA Digest. ACA Digest provides clients with a brief overview of the major compliance developments facing investment managers including issues we have reported on over the last few months, and a look ahead to what’s on the horizon. Understanding the relevant issues to your business from a regulatory compliance perspective can be a time consuming exercise. ACA has spent the time reading and analysing regulatory developments and legislation so that you don’t have to. We therefore hope you will find the material both informative and useful in your day-to-day operations and for planning future projects.

In this update...


As this significant reform of the European regulatory landscape moves into its implementation phase, ACA will be providing a series of written notes and oral presentations to guide you through the direct and indirect implications for your business. To view our paper entitled "MiFID II: Understanding and Practical Preparation Paper" please click here.

You can also listen to a recording of a our webcast where ACA Consultants James Andrews and Martin Lovick discuss the critical challenges of MiFID II.

MiFID II Related Topics

Telephone Recording
The Financial Conduct Authority (FCA) recently released a Discussion Paper (DP15/3) on "Developing our approach to implementing MiFID II conduct of business and organisational requirements" which proposes to remove the current exemption for discretionary investment managers to record "relevant" telephone conversations and electronic communications. Please click here to read our Client Alert "Recording of telephones and other electronic communications: FCA to end exemption for investment managers". Individual responses to the consultation are also invited by the FCA and can be sent by email by 26 May 2015 to Tom Ward (Strategy and Competition Division) at or via the response form in the Discussion Paper itself.

Dealing Commission
Last July, we sent out a Client Alert when the FCA released its Discussion Paper DP14/3 entitled "The Use of Dealing Commission Regime" seeking views on proposed further changes to its rules. The FCA has now published a feedback statement FS15/1 issued on the 19th February 2015 entitled "Discussion on the Use of Dealing Commission Regime". In this paper, the FCA shares its reaction to ESMA’s MiFID II proposals and outlines the expected next steps for firms. Please click here to read our Client Alert discussing this feedback statement.

Best Execution
On 25 February 2015, ESMA issued a "peer review report" (ESMA/2015/494) examining how EU national regulators supervise and enforce MiFID II’s requirement to provide best execution. The review looked at twenty-nine jurisdictions and was complemented by on-site visits in a further six jurisdictions. They compared the application of the guidelines and the supervisory practices under each regulator. ESMA’s review concludes that the level of convergence across EU jurisdictions is low.

Transaction Reporting
The FCA fined Merrill Lynch International £13.2 million for transaction reporting failures. Merrill Lynch had allegedly incorrectly reported 35,034,810 transactions and failed to report another 121,387 transactions between November 2007 and November 2014. This case highlights the importance that the FCA places on transaction reporting following substantial guidance on the topic in recent years. Many MiFID investment firms rely on their sell-side counterparties to make transaction reports on their behalf. Delegation may still be possible under MiFID II but is expected to become harder due to the wider scope of the data to be reported and renewed emphasis on accuracy.

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Market Abuse

Market Abuse Thematic Review
The FCA recently released a paper setting out the findings of its Thematic Review: "Asset management firms and the risk of market abuse" (TR15/1). This paper focuses on systems and controls to mitigate the risk of insider dealing, improper disclosure, and market manipulation. The FCA’s Thematic Review should be viewed as a wakeup call for firms to review the effectiveness of their existing procedures. Please click here to read our practical recommendations for addressing this topic: "Market Abuse Controls: The FCA’s Guide to Good and Bad Practice".

Latest FCA figures show dramatic increase in suspicious transaction reports to the FCA
Recent FCA figures show a dramatic increase of 24% in the number of suspicious transaction reports (STR) filed with the FCA in the past year. A total of 1,626 suspicious transaction reports were filed in 2014, compared with 1,308 the previous year. The figures are in stark contrast to the pre-financial crisis era in 2007 with just 328 such reports sent to the Financial Services Authority (FSA). It is believed that the increase in STRs is due to better reporting procedures inside firms (encouraged by the FCA), rather than an indication of increased market abuse.

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The new Irish corporate vehicle for establishing investment funds - the Irish Collective Asset - management Vehicle (ICAV) came into full operation on 12 March 2015. The ICAV has been initiated in order to provide a more tailored, bespoke corporate solution designed to meet the needs of European investment funds and their investors, and is expected to become a highly popular vehicle for UCITS and AIF managers in Europe. The structure has particular advantages for non-EU managers for admitting US taxable investors, which may offer a significant challenge to the commonly used Cayman / Delaware LP master-feeder structure. Please click here to read our paper on this topic: "The Irish Collective Asset Management Vehicle (ICAV)".

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Conflicts of interest: what can go wrong

Angela Burns, approved person (CF2) Non-Executive Director, fined £154,800 and banned by the FCA for falling below the standards of integrity and fit and proper person.

The FCA published a Decision Notice against Angela Burns deciding to ban and fine the former non-executive director £154,800 for failing to disclose her conflicts of interest.

Angela Burns was approved as a non-executive director (NED) for two mutual funds in January 2009 and February 2010, respectively. In 2006, Ms. Burns completed a consultancy project for US-based investment manager and maintained contact with them allegedly with a view to providing additional services in the future. Upon taking up her NED positions Ms. Burns notified the investment manager of her new role and renewed her request for consultancy work. Ms. Burns did not tell the mutual funds that she was at the same time trying to obtain work from the investment manager. She also withheld material information about her previous employment from the FSA and the mutual funds as she was in dispute with her previous employer.

During Ms. Burns’ tenure as NED of both mutual funds, one mutual fund placed a £350 million mandate and the other was considering placing a £750 million mandate with the investment manager.

Tracey McDermott, former Director of Enforcement and Financial Crime said:

"The position of NEDs is critical to the effective functioning of a board and to maintaining confidence of customers. Because of the nature of their role, NEDs are more likely to have a portfolio of appointment and are likely to find themselves having to manage conflicts of interest more frequently than their fellow directors."

A person’s failure to disclose a conflict of interest, amongst other things, can jeopardise his or her ability to perform an FCA-approved person role. The FCA takes non-disclosure, even if not deliberate, very seriously as it brings into question whether any individual is "fit and proper" and can lead to fines and a potential lifetime ban from the industry. We recommend that firms review their staff’s executive and NED relationships with existing and potential business partners, clients and competitors to confirm adherence to the FCA’s Principles for Business relevant to conflicts.

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FCA Business Plan and Risk Report 2015/2016

Risk Outlook
This report emphasises culture within firms along with supporting policies and procedures (e.g. performance management and remuneration). Controls for anti-money laundering and anti-bribery corruption also remain significant areas of focus; the FCA continues to communicate its expectations of firms’ financial crime systems and controls via: "Financial crime: a guide for firms", last updated on 27 April 2015.

The FCA now places more emphasis on sector and market-wide analysis. On structure, the Supervision Department will be divided into Retail & Authorisations, Investment, and Wholesale & Specialists. This is in-line with the FCA’s December 2014 Strategy document. Of general interest is the intention to launch an Efficiency and Effectiveness Review in 2015 which will assess its value-for-money in areas including governance and decision-making.

Key Priorities
In its new "market-focussed" approach, the FCA intends to conduct fewer thematic and market study reviews than previously, but to "undertake deeper and more impactful investigations". Of note is the intention to launch a market study on asset management in 2016. While the full scope remains to be determined, charges paid by investors and the factors driving those charges are likely to be an area of focus. A "post-authorisation review of funds" is also due to be conducted in 2016. This will review whether UK authorised funds meet investors’ expectations on investment mandates, disclosures, and compliance with risk parameters.

Furthermore, the FCA is set to investigate conflicts of interest inherent for the operators of dark pools – which themselves will be subject to new limits under MiFID II.

The FCA reminds us of its focus on holding individuals personally accountable for how their firms operate and the consequences of misconduct. It highlights the need for a change in culture, supported by appropriate policies and procedures (e.g. performance management).

The removal of the distinction between C3 and C4 firms (lowest conduct risk categories) is confirmed, as well as the supervision of individual firms using a more risk-based approach, and removing some of the FCA standard Pillar 1 – Firm Systematic Framework activity. It is not clear as of yet when the removal of distinction will be confirmed.

Finally, the FCA announces an increase in its funding requirement by 8.6%, a pointer to the likely increase in annual fees paid by firms. A policy statement finalising the periodic fee rates and making any other rules is expected next month.

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FCA’s Approach to Social Media

The FCA has published finalised guidance and a feedback summary "FG15/4: The FCA’s supervisory approach to financial promotions in social media". Social Media is defined as "websites and applications that enable users to create and share content or participate in social networking".

The main message to firms who want to use social media to advertise their products is:

  1. Is it a financial promotion (i.e. an invitation or inducement to engage in financial activity); and
  2. Is there a commercial interest on the part of the communicator “in the course of business”?

If so, the fundamental requirement for the financial promotion to be “clear, fair and not misleading” still holds and firms should take this into account when promoting through social media. The rules are “media neutral” so there remains the requirement to add the appropriate disclaimers and risk warnings, although this will be quite a challenge due to the character limitations in many forms of social media.

Note also that each communication (e.g. via Twitter status or a Facebook post) should be considered individually and comply with the relevant rules. However the responsibility for the sharing or forwarding of a communication (e.g. retweet) lies with the communicator not the originator, so firms will not be held responsible so long as the original communication was compliant.

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Money Laundering Regulation IV

This update of the European anti-money laundering and counter-terrorism financing framework has been meandering through the relevant EU institutions for the last couple of years, but formal adoption is now expected shortly. Full implementation across the EU is expected by late 2016 but the UK is likely to implement it much sooner.

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Investment Management Compliance Testing Survey

This is the 10th anniversary of the Investment Management Compliance Testing Survey sponsored by the Investment Adviser Association, ACA Compliance Group, and OMAM. Each year we seek to gather information for the purpose of reporting on industry trends. This year’s survey covers topics in the following areas:

  • Business Continuity Planning
  • Alternative Investment Products
  • Oversight of Third Parties
  • Email Review and Testing
  • Trading Issues and Errors
  • Personal Trading / Code of Ethics
  • Enterprise Risk Management
  • Cybersecurity
  • Social Media

The survey is open to compliance professionals at SEC-registered investment advisers. Participants are invited to a free webinar to discuss the results. If you are an SEC registered firm and have not yet participated, please click here to take the survey.

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Looking ahead

  • European Commission’s Delegated Acts on MiFID II are expected in June/July 2015;
  • Upcoming ACA webinar on “A practical approach to monitoring for Market Abuse / Insider Dealing - SEC/FCA” (date to be confirmed)
  • Upcoming Client Alert on pre-approval and notifications to the FCA for changes in control.

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Please contact Martin Lovick or Mary Campion or your regular ACA consultant with any questions on the above.