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IMS Asset Management and Securities Regulatory Update, September 2011
Having had their summers ruined by volatile markets, risk managers’ working lives deteriorated even further this month following the latest induction to the rogue traders’ Hall of Fame. While few concrete details have yet entered the public domain it appears that Kweku Adoboli may have actually hinted at his worsening predicament on Facebook up to a week in advance.
Investment firms now face the thorny dilemma of whether to ban social networking by staff or to perhaps embrace it within their compliance monitoring and risk management procedures! On a serious note, many firms will or should have been diligently stress testing their anti-fraud and risk management controls with the scenario of a 31 year old building-up billions of dollars of exposure while he is meant to be hedging.
So with all the economic anxiety and the man in the street now asking the legitimate question of how a single staff member can wipe out a global company's entire quarter's profits (equivalent to the savings meant to accrue from the loss of 3,500 jobs), it is perhaps partially understandable that Hector Sants, FSA chief executive, said in June 2011 that trust in the financial sector is at an all time low. However, not all members of a sector deserve to be tarred by the same brush. For instance, it is likely that only a miniscule minority of journalists hacked mobile phones, but the resulting implications are always felt by an entire group. Such is the way of law and regulation, that new rules are introduced to curb the past excesses of the few while the entire sector and ultimately its consumers meet the added cost of doing business.
The other financial story of the summer has been the dramatic impact on the markets of the Eurozone debt crisis. With politicians lurching from one inconclusive solution to the next, it was only matter of time before that great anachronistic spectre of capital markets – the short selling ban – was wheeled out. ESMA did a reasonably good job of publicising the matter promptly but failed miserably at persuading the EU’s regulators to act in unison in relation to short selling, which ideally would have been not to introduce any prohibitions.
And so onto this edition and our pervasive theme of coping with regulatory change. On that, we have updated our Regulatory Timeline first published in January.
The EU will have made progress over the summer in negotiating the final draft of the Short Selling Regulation and European Markets Infrastructure Regulation. We will cover these in subsequent publications. As we report below, ESMA has conducted its consultations on the “Level 2” detail of AIFMD and we await its advice to the Commission in November. Upcoming changes to FSA rules are discussed in our articles on voice recording and client money and assets. We use the opportunity of the FSA’s themed work and related enforcement associated with the promotion – or mis-promotion of regulated funds – to recap on the fundamentals of to whom hedge and private equity funds may be marketed to in the UK.
The Weavering judgement and Visser enforcement case afford a valuable opportunity to discuss corporate governance from first principles. And as usual, we discuss a number of developments in the world of financial crime before concluding with our enforcement round-up. The FSA certainly appears to be going out with a bang in terms of the volume of enforcement cases. This is one last hurrah that authorised firms would not wish to feature in.
If you have any questions regarding any of the articles below, please contact Peter Moore, Stephen Burke or Alan Leale-Green. Alternatively telephone 020 7408 2448 to speak to your usual IMS contact.
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The European Exoskeleton Exercise: ESMA consults on AIFMD Level 2 measures
After countless drafts, the Alternative Investment Fund Managers Directive (“AIFMD” or “the Directive”) was published in the Official Journal of the European Union (“EU”) on 1 July 2011 and came “into force” on 21 July 2011. However, rather than this represent an actual implementation date, the AIFMD process has only reached the halfway stage (if even that).
Out on a wire: when do asset managers need to record mobile phone communications
In advance of a rapidly approaching deadline, many financial services firms in the UK are currently gearing-up to meet a new rule introduced by the Financial Services Authority (“FSA”) requiring the recording and retention for at least six months, of order and trade related conversations made on mobile phones.
Corporate governance under the microscope - institutional investors reminded to be buyer beware
Corporate governance is defined as the laws, processes, and policies that determine how an organisation is managed, administered and controlled. In a typical hedge fund structure, the need for effective corporate governance can arise at both the manager and also at the level of the fund board.
Short of ideas: the Short Selling Ban's European tour, summer 2011
With capital market commentators quick to draw parallels between the sharp falls of this summer and the chaos of 2008, certain European regulators looked desperately to the same tools to prop up markets, often citing the (unevidenced) possibility of attacks on financial stocks by rumour mongering speculators as justification.
"Feed me CMAR" - the spreading vine of the FSA's client money and asset rules post Lehmans
As part of its more intensive approach to supervision and specifically its enhanced focus on client assets post the collapse of Lehman Brothers, the FSA has recently introduced new reporting requirements for firms which hold client assets.
Marketing Unregulated Collective Schemes: UK restrictions
In July 2010 the Financial Services Authority (“FSA”) published the results of a themed review (this is where the FSA picks a topic and visits a subsection of the industry to investigate that topic) of Independent Financial Advisors (“IFAs”).
Financial Crime round-up, Summer 2011
In September 2011, the FSA published the latest issue of its financial crime newsletter – Issue 15, its first since Issue 14 of July 2010.
Enforcement round-up, Summer 2011 - more injunctions, an outbreak of layering and a timely reminder to take two weeks of continuous holiday per year.
Injunctions remain the weapon of choice for the FSA, who recently obtained an interim High Court injunction preventing a number of companies and individuals related to “Da Vinci Invest Ltd” (a UK-registered but Swiss based fund manager) from committing market abuse.
