ACA Europe Digest - November 2016

November 3, 2016

ACA Europe 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 have spent the time reading and analysing regulatory developments and legislation to assist you in staying current. We therefore hope you will find the material both informative and useful in your day-to-day operations and for planning future projects.

Regulatory Horizon 2017

We are delighted to announce our industry-renowned event, Regulatory Horizon, now in its sixth year, will take place on 30 November 2016 at Le Meridien, Piccadilly. This highly-acclaimed and unique event offers an opportunity to hear current and former international regulators, leading market participants and key service providers discuss the regulatory issues we can expect in the year ahead. Our program will include panels and presentations on FCA, SEC, NFA/CFTC, Cybersecurity, GIPS®/Performance Measurement and upcoming European regulatory issues.

We are especially pleased to once again be joined by Rob Taylor, Head of Investment Management at the FCA, to discuss the UK regulator’s priorities and supervision focus for 2017.

Many of the topics discussed below will be included in the agenda for Regulatory Horizon 2017.

For more information about the event, please contact Estelle Lord.


Update on MiFID II dealing commission to pay for research
On 7 April 2016, the European Commission (“EC”) published its final proposals on the much debated inducements rules and permitted ways to pay for research through dealing commissions. These rules broadly confirm the political compromise on paying for research through dealing commissions that was leaked to the industry back in December 2015. Please click here to read our paper examining the details of the reforms.

FCA publishes third MiFID II Consultation Paper
On 29 September 2016, the FCA published its third Consultation Paper (CP16/29) on the implementation of the MiFID II. CP16/29 covers conduct of business issues such as the new rules on inducements and paying for research, and the recording of telephones and electronic communications. The Consultation contains an element of gold-plating in some areas and also provides important pointers about which parts of MiFID II apply to different categories of firms. Please read our latest alert “MiFID II: Which rules apply to which UK firms? Plus: other updates from the FCA’s third Consultation Paper.”

This Consultation is open until 4 January 2017 and a fourth Consultation Paper (on consequential changes to the FCA Handbook) is likely to be published towards the end of this year.

Considerations for Algorithmic and High Frequency Trading Firms
Please click here to read our latest article in our MiFID II series which summarises the important new organisational requirements for clients with algorithmic and high frequency trading (“HFT”) strategies, who arguably face the greatest operational challenges from MiFID II amongst buy-side firms.

Preparing your MiFID II Implementation Plan
MiFID II will come into effect on 3 January 2018. Many of the new measures will require significant changes to your firm’s governance, systems and controls, operating conditions and the conduct of its business activities, and therefore now is the time to initiate your MiFID II Implementation Plan.

ACA’s internal working group has been working for over two years to ensure that our consultants are equipped to help clients understand the relevant deadlines, the issues and the specific areas of focus based on their structure and strategy. We will shortly be contacting clients to translate the new requirements into a meaningful and tailored action plan.

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UK FCA proposes increased AIFMD Annex IV reporting burden
On 4 July 2016, the FCA released a Consultation Paper which contains a significant expansion to current Annex IV reporting requirements.

Full-scope UK AIFMs managing non-EEA AIFs, but not marketing them in the EEA, previously only had to report a very limited amount of information on these non-EEA AIFs. The FCA now proposes that such full-scope AIFMs reporting on a quarterly basis will be required to report the more detailed information set out in Article 24 (2) of the Directive (such as the portfolio risk exposures and the results of stress tests) on all their non-EEA AIFs. In practice, we have found that many firms have already been reporting this information for their master AIFs, thus limiting the additional burden.

For non-EEA AIFMs marketing AIFs within the UK (under Article 42) the position also changes: the FCA now proposes that such AIFMs (again, only those reporting quarterly) must report in full for the master AIFs, where their respective feeder(s) are registered to market in the UK. Previously, firms had not had to report on the master fund vehicles and, as there has been no look-through for the feeder AIFs to assets held by the master, there was limited reporting for master-feeder structures. This follows a similar approach taken by Belgium, Ireland and Luxembourg.

Please click here to read our article which focuses on the implications for non-EEA AIFMs.

AIFMD Passport Extension
On 18 July 2016, ESMA published its advice on extending the AIFMD passport to twelve non-EU countries: Australia, Bermuda, Canada, Cayman Islands, Guernsey, Hong Kong, Japan, Jersey, Isle of Man, Singapore, Switzerland and the United States. Please click here to read our alert where we summarise the findings and attempt to draw some general conclusions about the future of marketing AIFs within the EU.

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Market Abuse

Compliance Monitoring and Surveillance under MAR
The EU’s Market Abuse Regulation (“MAR”) came into effect on 3 July 2016. Please click here to read our article “Making sense of the Market Abuse Regulation” which sets out the details of the MAR reforms. Since 3 July, we have seen further informal guidance from the FCA and industry best practice is starting to settle. In our latest alert , we update clients on recent key developments - including surveillance practices, cancellation of orders and guidance for recipients of market soundings - and also take a look at how firms have been adapting their policies and processes in response.

Market Abuse Regulation Assistance
Here at ACA, we have developed Market Abuse Regulation Assistance which enables clients to address MAR’s enhanced requirements:

Insider dealing focused reviews: designed to assist with key aspects of the monitoring and testing of trading activity, including:

  • Review of trading activity:review of relevant trading documentation, employees’ personal trading activity, books and records relating to potential sources of inside information, to identify insider dealing risks that may require further analysis by the firm.
  • Policies and procedures review:reviewing the firm’s policies and procedures relating to insider dealing and personal account trading and providing our recommended enhancements.
  • Electronic communications review:reviewing electronic communications records provided by the firm and performing focused searches designed to identify potential insider dealing activities.

Enhanced MAR training: ACA’s in-person trading tailored to your business and strategy, providing senior managers, front line investment and compliance staff with comprehensive training on the aspects of MAR relevant to your firm.

FCA increases focus on market abuse
In Market Watch 50 (29 April 2016) the FCA reminded firms to stay focused on market abuse prevention and control and also called for improved quality in transaction reporting. It also contained observations from their recent supervisory visits on suspicious transaction reporting. The FCA reminded firms of their obligation to submit transaction reports in line with the requirements set out in SUP 17 and TRUP. They continue to monitor poor quality data in transaction reports and implicitly question the ability of some firms to meet the more complex requirements of MiFIR.

In Market Watch 51 (28 September 2016), the FCA set out some high level observations following a review of market abuse controls at certain market making firms, with a focus on those trading in small and mid-cap companies. The FCA notes that their findings will be of interest to all market making firms, and also reveal some of their main priorities:

  1. Market abuse risk awareness: the FCA noted that regular risk assessments are clearly important in mitigating the risks of market abuse.
  2. Information barriers:in its review, the FCA found that where firms physically segregate individuals or teams that regularly have access to confidential or inside information, they must be able to demonstrate more effective controls. However, where this is not possible forms should consider taking extra steps to ensure that information barriers are properly managed and maintained.
  3. Wall crossing procedures and insider lists:the FCA noted that the level of documentation of procedures was generally poor across the firms it reviewed.
  4. On-going monitoring and surveillance:the FCA noted some good examples of monitoring during its review where firms periodically monitor the trading activity of market makers during periods when individuals at the firm had been wall-crossed.

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Payment for Order Flow

Market Watch 51 also provides an update on Payment for Order Flow (“PFOF”) following the FCA’s guidance on the practice in 2012 and its thematic review in 2014. It is clear that the FCA do not like the practice and views PFOF as representing a clear conflict of interest between brokers and their clients. In their view, brokers are incentivised to pursue payments from market makers rather than ensuring that they provide best execution for their clients. They also see it as undermining the transparency and efficiency of the price formation process and distorting competition by creating barriers to entry in market making.

Whilst large investment banks have ceased PFOF, a number of independent brokers continue to charge market maker commission in respect of eligible counterparty (“ECP”) business.

The FCA also highlights that MiFID II will place further restrictions on PFOF; in particular, the obligation to act honestly, fairly and professionally is extended to ECPs. This is a clear statement from FCA that PFOF will be incompatible with FCA rules from 2018.

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Proposed Central Clearing Delay
On 13 July 2016, ESMA published a consultation paper proposing to change the phase-in period for central clearing of over-the-counter (‘OTC’) derivatives applicable to financial counterparties with a limited volume of derivatives activity. The paper proposes a two year delay of the clearing obligation for all Category 3 financial counterparties (i.e. non-clearing members with less than €8bn gross notional non-cleared OTC derivatives).

The reason for the proposed change to provide such firms with additional time to comply with the clearing obligation and to help them mitigate the difficulties they are encountering in connecting to central clearing counterparties (‘CCP’). Direct membership at a CCP requires firms to meet certain minimum criteria and it is usually not feasible for financial counterparties with a limited volume of activity to access CCP’s directly by becoming a clearing member.

The proposal does not affect the phase-in period applicable to Category 1 and Category 2 financial counterparties. The consultation closed on 5 September 2016 and ESMA will consider all feedback received with a view to publishing a report by the end of 2016.

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Introducing REP-CRIM: The Annual Financial Crime Report

In December 2015, the FCA consulted on the proposed introduction of an annual financial crime return (REP-CRIM), intended to replace its previous approach involving ad-hoc collection of data on financial crime risks with risk-sensitive, targeted supervision. On 29 July 2016, the FCA published a Policy Statement setting out the final rules and guidance notes for this report. The new financial crime reporting regime applies from 31 December 2016 and has to be submitted on an annual basis, within 60 business days of the firm’s accounting reference date. Click here to read our alert on the main features of the REP-CRIM. In addition, we suggest some steps that firms can take now to ease the burden of reporting for the first time.

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On 23 June 2016, the UK electorate voted by a small majority to leave the European Union. This result defied the predictions of most pollsters and the financial markets which had started to factor in a “remain” verdict in the preceding days. As the political dust starts to settle, firms will want to start thinking about the long term implications to their businesses. For a longer term perspective, please click here to see our paper published in April. In our view, the bulk of this analysis, and its conclusions, hold good.

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Cybersecurity Risks

On 2 May 2016, HFMWeek reported that Rob Taylor, the UK FCA’s Head of Investment Management, accused the hedge fund sector of being “short-sighted” with regards to cybersecurity risks.

Subsequently, Nausicaa Delfas, FCA Director of Specialist Supervision, delivered a speech on “Our approach to cyber security in financial services firms” on 21 September 2016. The key points from the speech were that cyber risk is an ever-evolving and asymmetric threat. The FCA is looking for a ‘security culture’ in firms of all sizes, from the governing body down to the level of the individual employee. The key is: good governance, identification and protection of key assets, detection, response and recovery and information sharing, with the regulator and other parties. Cyber resilience is now clearly a high priority for the FCA and they have created a specialist team to lead on this issue. In our opinion, this is likely to lead to specific guidance from the FCA similar to that already issued by other regulators.

How ACA Aponix Can Help
ACA Aponix provides risk assessments, written information security policies, staff training, and vendor diligence as part of our core service offering. Please contact with any questions or for further information on how we can assist you with addressing cybersecurity risk.

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SEC Adopts Amendments to Form ADV and the Books and Records Rule
On August 25, the U.S. Securities and Exchange Commission ("SEC") adopted amendments to Form ADV. The amendments will require advisers to provide additional disclosures about their business including more detailed information about their separately managed accounts, their use of social media outlets that the firm controls, any outsourced Chief Compliance Officers, and other offices maintained by the adviser. The amendments also provide a more formal method for several related advisers operating a single advisory business to register using a single Form ADV (“umbrella registration”). The new books and records rule requires advisers to maintain additional materials related to calculation and distribution of performance information. Most of the amendments require compliance by October 2017, though the umbrella registration provisions could have immediate implications. The full rule release can be found here.

Questions regarding this release may be directed to Andrew Petillon at or +44 (0)20 7042 0500.

SEC continues to Target Offshore Advisers
On October 18, 2016 the United States Securities and Exchange Commission announced yet another enforcement action against a foreign investment manager, this time charging that Bank Leumi in Israel “provided investment advice and induced securities transactions for U.S. customers for more than a decade without registering as an investment adviser or broker-dealer as required under U.S. securities laws.” The SEC’s order finds that Bank Leumi le-Israel B.M, Leumi Private Bank, and Bank Leumi (Luxembourg) S.A. violated Section 15(a) of the Securities Exchange Act of 1934. Leumi Private Bank also violated Section 203(a) of the Investment Advisers Act of 1940. Bank Leumi agreed to admit the facts in the SEC’s order, acknowledge that its conduct violated the federal securities laws, and accept a censure and a cease-and-desist order.

This is just the latest enforcement action against foreign investment managers who are conducting business with U.S. persons in the absence of the required regulatory registrations. We first alerted clients to the SEC’s heighted scrutiny on foreign firms and their registration status back in March of 2014, and this scrutiny has continued with a string of similar cases, leading to this most recent action. Please click here to read more.

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Looking Ahead

  • FCA’s fourth consultation paper on the implementation of MiFID II is due by the end of 2016; this will be followed by a Policy Statement on all MiFID II implementation issues in the first half of 2017.
  • ESMA’s report on the proposed change to the phase-in period for central clearing of OTC derivatives (for financial counterparties with smaller OTC portfolios) is due by the end of 2016.

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