Regulatory Radar: Q2 2016

Welcome to the second 2016 edition of the Ashurst Global Regulatory Radar.

This edition of Ashurst's Global Regulatory Radar looks at some of the key financial regulatory issues that have affected our clients in the first few months of 2016 and also considers key developments on the horizon.

A significant development is the European Commission's decision to delay the application date of MiFID II to 3 January 2018. The proposed delay will have no impact on deadlines for any Level 2 delegated acts and we have covered developments in relation to this area in our edition. The decision by the European Commission has perhaps shifted focus on other regulatory developments such as the Market Abuse Regulation, developments relating to which are also covered in this edition.

In the international arena, two items are of note: the long awaited relaxation of rules in relation to investment in the fintech sector in Japan, and in the US, the U.S Department of Labor’s Fiduciary Rule, a regulatory development representing the biggest change in the investment industry since the Dodd Frank Act.
Here at Ashurst, our international regulatory team remain in close contact so that we can be the first to help and inform our clients on the latest developments.

Asia Pacific

Australia

Proposed law reform – client money and derivatives

On 22 December 2015, the Treasury released a policy paper which set out the Government's key proposals to enhance client money protection for retail clients and the draft legislation and regulations to give effect to those proposals were released for comment on 29 February 2016.
Despite the argument for more comprehensive review and reform of the Australian client money rules, the proposals focus on two particular items relevant to the derivatives markets, which we discuss below.

Retail OTC derivative providers

Historically, many retail OTC derivative providers, such as those providers of CFDs and Margin FX products operating on a "direct market" model, have relied on section 981D of the Corporations Act to use client money to fund the hedging which the provider undertakes with hedge counterparties. Under ASIC Regulatory Guide 212, providers have been required to disclose to retail clients whether they use client money for this purpose.

The intent of the proposed reforms is that retail OTC providers would be prohibited from using client money to fund their hedging transactions, where the clients are retail clients. To achieve this, the draft legislation introduces a new concept of "derivative retail client money" which captures money received in connection with a financial service relating to a dealing in a derivative held by a retail client. For this purpose, the term "retail client" includes sophisticated investors who would otherwise be considered to be wholesale clients.

Section 981D would continue to apply in respect of derivative retail client money received by a licensee in connection with exchange traded derivatives entered into, or acquired, on a licensed market, where the money is used to meet obligations incurred by the licensee under the market integrity rules or operating rules of the market or clearing facility. It would also apply in respect of money received in connection with OTC derivatives which are cleared through a licensed clearing and settlement facility.

The use of general directions to allow licensees to use derivative retail client money will also be restricted. The draft regulations would prohibit licensees from obtaining general directions from retail clients (including sophisticated investors) to use the money for working capital or other general purposes, consistent with ASIC guidance to date in respect of directions which might be regarded as appropriate under regulation 7.8.02(1)(a).

ASIC would also be given powers to make reporting and reconciliation rules in respect of derivative retail client money. A liability regime has been established under the draft legislation in connection with this new reporting framework.

Uncleared derivative transactions for wholesale clients

The December 2015 policy paper foreshadowed that wholesale client participation in derivative markets would be facilitated and supported, and legislation should ensure that the client money regime does not prevent participants in those markets from complying with other regulatory obligations such as meeting margin requirements.

The draft legislation does not completely deliver on that promise. Under the draft legislation, the client money rules would not apply to derivatives that are not cleared through a central counterparty, where the licensee has obtained the wholesale client's written agreement to the money being dealt with other than in accordance with the Australian client money rules.

However, the draft legislation does not disapply the client money rules in respect of centrally cleared derivatives. Money received from wholesale clients in respect of exchange traded or centrally cleared derivatives would still fall to be dealt with as client money under the client money rules, although section 981D would apply to permit such money to be used by the licensee to meet obligations to the clearing and settlement facility.

If, from a policy perspective, it is considered appropriate to permit wholesale clients to opt out of the client money rules in respect of uncleared derivatives, it seems strange that a similar outcome would not be considered appropriate for exchange traded and cleared derivatives. Also, an issue commonly faced by global providers is how they comply with the Australian client money rules in respect of money received in connection with dealings across multiple exchanges and clearing houses, particularly in the context of cross border money flow. The Government's proposals do not address these issues.

Extra funds for ASIC's war chest

On 20 April 2016, the Federal Government announced a reform package which includes promises of additional funding for the Australian Securities and Investment Commission (ASIC). The proposals are a direct response to the ASIC Capability Review paper of December 2015, which made 34 recommendations in relation to the manner in which ASIC's capabilities could be improved. The key headline items of these proposals and the implications for the industry and consumers are set out below.

Investigation and data analysis resources

The reforms have allocated $61.1 million to improve ASIC's data analytics, surveillance resources and information management systems, and a further commitment of $57 million for surveillance and enforcement projects on an ongoing basis.
The ASIC is to be removed from the Public Service Act 1999 (Cth) so as to make it a more flexible and competitive employer, enabling it to attract and retain staff with specialist skills.

Industry funding model

The announcement reaffirms the Government's commitment to implement industry funding for ASIC. It is anticipated that this will come into effect in 2017 in what is proposed to be an extensive consultation with the industry to "refine and settle this funding model".

Medcraft extended and a new Commissioner

The Government announced that it will recommend to the federal Attorney-General that the tenure of ASIC chairmen Greg Medcraft be extended for an additional eighteen months, to provide continuity in the leadership of ASIC.

Law reform response to the FSI

The Government has also allocated $9.2 million to accelerate the implementation of certain recommendations of the FSI.

Customer complaints and dispute resolution

In order to improve the way consumer complaints are handled, the Government proposes to establish a panel to advise on the external dispute resolution and complaints schemes and to assess the merits of integrating these schemes. The panel is due to report back to the government by the end of 2016. In addition, the Government is also providing $5.2 million worth of funding to the Superannuation Complaints Tribunal to deal with legacy complaints and improve internal processes.

ASIC consults on digital robo advice

The ASIC recently released a draft Consultation Paper on digital advice "Consultation Paper 254 Regulating digital financial advice" (CP254), and a draft Regulatory Guide "000 Providing digital financial product advice to retail clients"(the draft RG).

Digital advice systems asks clients questions about their personal, financial and lifestyle objectives and circumstances. More sophisticated systems use algorithms to process the client’s answers.

ASIC's approach to regulation

The issues posing the most challenge for ASIC are how to apply the organisational competence obligations to an automated advice model, and what level of standard should be required to monitor and test the underpinning algorithms.

The "best interest" obligations will still apply to automated advice, and if a client is not a suitable candidate for the advice, the advisory relationship should cease.
New market participants are expected to have a strong grasp on Australia’s regulatory requirements, a strong compliance culture, and a commitment to technical quality.

The future of digital and automated advice in Australia

Since 2015, Australian banks have openly discussed offering digital automated advisory advices to clients either through an online banking platform, or for a low fee. Automated advice is expected to develop into a more sophisticated offering, probably combining with money management tools, behavioural tools, big data, and becoming part of our everyday internet banking offerings.

Hong Kong

New Professional Investor Regime and Client Agreement Requirements

On 25 March 2016, a new "professional investor" regime came into effect in Hong Kong. The changes originated in a May 2013 consultation, the conclusions of which were released by the Securities and Futures Commission (SFC) in September 2014. Under the new regime, professional investors who are individuals enjoy protections applicable to retail investors in the Code of Conduct for Persons Licensed by or Registered with the SFC (Code) and corporations, partnerships and trusts will be treated as professional investors only after passing an assessment. Intermediaries must also include a clause reflecting the suitability requirement in their client agreements.

New classification of Professional Investors under the Code

Under the previous regime, all professional investors, including persons falling under the definition of "professional investors" in paragraphs (a) to (i) of Schedule 1 to the Securities and Futures Ordinance (the Institutional Professional Investors), trust corporations, corporations or partnerships under sections 3(a), (c) and (d) of the Professional Investors Rules (the Corporate Professional Investors), and individuals falling under section 3(b) of the Professional Investors Rules (Individual Professional Investors), were subject to the same requirements under the Code. In particular, all could opt out of certain protections contained in the Code, for example, the requirement for intermediaries to ensure that the recommendations or solicitations they made to clients were reasonable in all circumstances (the Suitability Requirement), the need to establish clients' financial situations or to assess their knowledge of derivatives, or the need to enter into written agreements with clients, etc. The SFC is concerned that Individual Professional Investors and Corporate Professional Investors are not sufficiently financially sophisticated in practice, despite qualifying as professional investors, and so requires more protection under the Code.

The new regime increases the application of investor protection under the Code, removing nearly all of the exemptions to requirements, such as the Suitability Requirement, applicable to intermediaries when they deal with Individual Investors. Intermediaries must now deal with all Individual Professional Investors in the same manner they have previously dealt with retail investors, except that it may not be necessary for them to provide certain information under the new paragraph 15.5 of the Code.

Revised assessment criteria have also been introduced for Corporate Professional Investors for determining whether the exemptions should apply. The assessment criteria include whether:

• the Corporate Professional Investor has the appropriate corporate structure and investment process and controls;
• the person(s) responsible for making investment decisions has (or have) sufficient investment background; and
• the Corporate Professional Investor is aware of the risks involved.

Intermediaries must conduct this assessment in writing and keep records of all relevant information and documents obtained in the assessment to demonstrate the basis of the assessment, and must follow the procedures in paragraph 15.3B of the Code before disapplying the relevant requirements.

Client Agreement Requirement

Misselling of financial products and investor protection has been an area of focus for Hong Kong regulators for a number of years. The cornerstone of investor protection under the Code, in the view of the SFC, is the Suitability Requirement. The Suitability Requirement has now been further strengthened by the SFC's new client agreement requirements. In contrast to the previous regime, the exemption from the need for a client agreement with professional investors has been limited and intermediaries must now enter into client agreements with all Individual Professional Investors and Corporate Professional Investors who do not satisfy the assessment criteria set out above.

The SFC has further required the incorporation of the following clause into all client agreements, closely mirroring the Suitability Requirement in paragraph 5.2 of the Code:

"If we [the intermediary] solicit the sale of or recommend any financial product to you [the client], the financial product must be reasonably suitable for you having regard to your financial situation, investment experience and investment objectives. No other provision of this agreement or any other document we may ask you to sign and no statement we may ask you to make derogates from this clause."

The requirement responds to court rulings in Hong Kong in favour of intermediaries in misselling claims brought by clients, which ruled that the non-reliance and non-advisory clauses in bank documentation signed by the clients prevented them from claiming any form of inducement or reliance on representations of the intermediaries. While the SFC could impose sanctions on intermediaries for breaches of the Code (such as breach of the Suitability Requirement), the clients themselves had no form of redress. The mandatory inclusion of the new clause provides a contractual right of claim for investors and shifts the focus of misselling claims away from whether a non-reliance clause is applicable to the suitability of the product sold. The SFC has refused to define the standard of "suitability" and will rely on Courts' future interpretation on the term as a referable guidance when applying the Code's analogous suitability requirement. Nevertheless, individual professional investors and certain corporate professional investors are now under a greater extent of protection by having a direct contractual right of claim in misselling cases.

Intermediaries must comply with the new client agreement requirements by 9 June 2017, but the SFC has given a clear steer that intermediaries should be able to comply with these requirements for the vast majority of clients well before that date.

Government to Introduce Open-Ended Fund Companies in Hong Kong

Background

Currently, an open-ended investment fund may be established in Hong Kong the form of a unit trust but not in corporate form. This is because the Hong Kong Companies Ordinance does not provide for a Hong Kong company to be able easily vary its share capital to meet shareholder subscription and redemption requests (the "capital reductions restriction").

The Financial Services and Treasury Bureau (FSTB) proposed a new open-ended fund company (OFC) structure for Hong Kong in 2014, and issued its consultation conclusions in January 2016. The Legislative Council is now working on a bill on the relevant amendments to the Securities and Futures Ordinance (SFO).

What are OFCs?

OFCs are open-ended collective investment schemes structured as corporates with limited liability and variable share capital, which can either be publicly or privately offered. In addition to the flexibility to create and redeem shares based on investment demands, the proposed OFCs will have some key characteristics similar to a conventional limited company .

The FSTB proposes to require directors of an OFC to delegate investment management to an investment manager, licensed by the Securities and Futures Commission (SFC) to carry out Type 9 regulated activity (i.e. asset management). It is intended that such arrangement will ensure that Hong Kong reaps the down-stream benefits of the new regime and build up Hong Kong's fund manufacturing capabilities.

In terms of investment scope, the FSTB proposes to allow privately offered OFCs to invest in cash, currency forwards, loans, distressed debt structured in the form of securities, cash deposits and currencies. Privately offered OFCs will be allowed in other asset classes if they do not exceed 10 per cent of the total gross asset value of the fund.

The FSTB does not propose any prohibition on the creation of different share classes under an OFC, however, this will be subject to relevant OFC code requirements such as disclosure in any offer documents.

Investor protection

The FSTB also seeks to provide safeguards to the assets of the OFCs. First, it is proposed that an OFC's assets must be segregated from those of its investment manager and entrusted to a separate and independent custodian for safe keeping. Second, if the OFC is set up as an umbrella fund (i.e. with a number of sub-funds for different investment objectives and policies), the assets and liabilities of each sub-fund must be ring-fenced to that particular sub-fund in order to limit the contagious effect of insolvency of a sub-fund within the umbrella fund (generally known as the "protected cell" structure).

Supervisory and enforcement framework

In terms of the supervisory and enforcement framework, the FSTB proposes that directors of an OFC need not be licensed under the SFO. However, the OFC itself and its key operators (proposed to be the directors, investment manager and custodian) will be subject to the SFC's proposed OFC legislation and OFC code and certain registration requirements; whereas the investment manager will need to be licensed by or registered with the SFC, and be subject to (i) the Code of Conduct for Persons Licensed by or Registered with the SFC, (ii) the Fund Manager Code of Conduct and (iii) the proposed OFC code of the SFC.

Legislative timetable

On 27 January 2016, the Securities and Futures (Amendment) Bill 2016 (Bill), which incorporates the proposed amendments relating to OFCs to the SFO, was introduced into the Legislative Council.

The SFC will conduct a separate public consultation on the draft OFC subsidiary legislation and the proposed OFC Code in which they plan to set out the more detailed requirements and guidance for OFCs.

Tokyo

Proposed amendment of the Japanese Banking Laws, the Japanese Payment Service Laws and other related legislation to boost fintech sector in Japan

On 4 March 2016, a Bill amending the Japanese Banking Act and other related laws was submitted to the Diet. The Bill, which seeks to remove regulatory hurdles to investment in the fintech sector and is in response to developments in this area, is expected to be considered by the Diet by the end of June 2016 and to be enforced within one year from its promulgation.

Key parts of the Bill include:

Facilitating investment by banks in non-financial sector

The Bill amends the Japanese Banking Act to make it easier for Japanese banks to invest in non-financial companies by easing previous restrictions in relation to acquiring stakes. Previously, Japanese banks could not own more than a 5-15 per cent stake in non-financial companies. The Bill also expands the list of businesses that a subsidiary of a bank is able to engage so as to include a business that will enhance or is expected to enhance the sophistication of its banking business or for the convenience of its customers.

Facilitating a Receiving Order of the Bank's subsidiary from companies outside its Group

The Bill amends the requirement for a bank's subsidiary engaging in the bank's ancillary business to earn not less than 50 per cent of its income from its parent bank, by making it easier for a subsidiary to receive an order related to outsourced work from companies outside of its parent banking group.

Registration requirement for virtual currency exchange business

The legal nature of virtual currency is unclear under current rules and a virtual currency is not viewed as a legal currency and not required to obtain a licence under the relevant rules to engage in the business. The Bill imposes registration requirements and other regulatory obligations on an entity engaging in virtual currency exchange. The Bill defines a virtual currency and the definition of a virtual exchange business includes a business that engages in the sale of virtual currency or exchange of virtual currency with other virtual currency; and an intermediary, brokerage, or agency services in relation to such services.
A virtual currency exchange operator registered under the Japanese Payment Service Act will be required to take necessary measures to safeguard information, protect customers' interests and to manage customers' assets separately from its own assets (its asset management should be audited periodically by certified public accountants or an audit firm). The details of these requirements will be described in the regulation, ordinance, and guidelines for their enforcement.
In addition, a virtual currency exchange business operator should be subject to requirements such as preparing book accounts and business reports and to submit such business reports audited by certified public accountants or an audit firm.

Furthermore, a registered virtual currency exchange business operator is required to take the necessary procedures to prevent Anti-Money Laundering under the Act on Prevention of Transfer of Criminal Proceeds of Japan. These include: (i) compliance with the KYC Procedure; (ii) preparing and keeping KYC documents; (iii) creating and keeping transaction documents; and (iv) confirming required items when entering into transactions with its customers.

Europe

EU

MiFID II Review

The European Commission has issued the long-awaited Delegated Acts covering research, product governance and custody. Points to note are as follows:

Research

The Commission has stuck with its highly controversial original proposal that research counts as an inducement and therefore recipients of research either have to pay for it out of their own resources, or establish a research payment account to enable underlying client visibility on the cost. However, trade-by-trade method of funding the account is permitted, even if the costs of execution do still have to be separated from research costs.

Key proposals in relation to research are as follows:

• Managers cannot pay for research in a way that is linked to the volume or value of transactions executed on behalf clients with a broker. Brokers, can however collect the "client research charge" alongside a transaction commission, provided it is separately identified.

• Asset managers must set an overall research budget and this may not be exceeded.
• The recitals make clear that research commissioned and paid for by a corporate issuer does not count as an inducement. This is, however, subject to an "open availability" requirement. It is hoped that this is given a wide definition and retail distribution is not required.
• Sales notes are not considered inducements but are considered as "acceptable minor non-monetary benefits" (in contrast to the approach under the Market Abuse Regulation which treats them in the same way as substantive research).
• Firms may delegate the administration of the research payment account.

Inducements

The delegated acts contain more guidance on the nature of the sort of additional service that might justify saying a payment to a third party is "designed to enhance the quality of the relevant service to the client". The guidance suggests that the following would work:

• providing non-independent advice on, and access to, a wide range of instruments;
• the provision of non-independent advice combined with annual reviews or similar ongoing services; or
• the provision of access, at competitive prices to a wide range of financial instruments, along with value-added tools.

Product governance

MiFID II contains important product governance requirements aimed at making all MiFID "products" subject to a similar regime to that applying at the moment to complex products being distributed to retail investors (such as retail structured products).

Custody and client money

There is a requirement to obtain explicit consent to depositing money in qualified money market funds (although this is not defined).

Market Abuse Regulation update – Market soundings

The Market Abuse Regulation applies from 3 July 2016 and there have been a number of developments in this area, with perhaps the most interesting relating to market soundings. In February 2016, ESMA published a consultation paper on draft guidelines on the Market Abuse Regulation covering two areas: (i) guidelines for persons receiving market soundings (MSRs); and (ii) guidelines on when the legitimate interests of issuers may justify delaying disclosure of inside information, and situations in which the delay of disclosure is likely to mislead the public.

ESMA states that it will consider the feedback received with a view to finalising the guidelines and publishing a final report by early Q3 2016.
Key points to note in relation to the consultation paper are as follows:

ESMA requires in its draft proposals (for the first time) that a MSR must keep a list of all the MSR staff who are in possession of the information communicated to it in the course of market soundings. The requirement relates to information which is received, not simply inside information and is therefore focused on controlling information flow in general within the MSR, not simply flows of inside information. The requirement requires a list to be drawn up of all those who are in possession of the information.

Internal procedures and staff training

The draft guidelines require MSRs to establish, implement and maintain internal procedures to ensure that the information received in the course of the market sounding is internally communicated only through pre-determined reporting lines and on a need-to-know basis. The aim is to ensure that the information received in the course of the market sounding is treated confidentially and does not freely spread within the MSR.

MSR's staff who are entrusted to receive and process the information received from market soundings must then be properly trained on the relevant internal procedures and on the prohibitions which arise as a result of being in possession of inside information.

Record-keeping

In keeping with the rest of the Market Abuse Regulation, ESMA continues to emphasise the importance of record-keeping and intertwines this obligation throughout the consultation paper. It sets out the types of information that MSRs must keep records of for a period of five years (these have to be kept in a durable medium that ensures accessibility).

Guidelines on legitimate interests of issuers to delay inside information and situations in which the delay of disclosure is likely to mislead the public

ESMA's guidelines set out three situations where the delay of disclosure of inside information is likely to mislead the public. These are where the relevant (to be delayed) inside information:

• is materially different from a previous public announcement of the issuer on the matter to which the inside information refers to;

• regards the fact that the issuer’s financial objectives are likely not to be met, where such objectives were previously publicly announced; and
• is in contrast with the market’s expectations, where such expectations are based on signals that the issuer has previously set.

The issuer can delay disclosure where certain conditions are met where its legitimate interests are likely to be jeopardised by immediate public disclosure of that information. The guidelines set out non-exhaustive cases where this is likely to be the case.

The Delegated Regulation supplementing the Market Abuse Regulation relating to appropriate arrangements, systems and procedures for disclosing market participants (DMPs) conducting market soundings was published in May 2016. The draft regulatory technical standards relating to this are contained in Annex 8 of ESMA's Final Report on 28 September 2015. There are no significant changes, but the following may be of interest:

• Two new recitals have been added (recitals 5 and 9 of the Delegated Regulation). While recital 9 simply relates to the timing of the Delegated Regulation coming in to force, Recital 5 is more interesting in that it sets out, explicitly, the importance of record-keeping in relation to market soundings, and the fact that the protections will only apply where the market soundings rules and record-keeping requirements are followed to the letter.
• The Draft RTS recital 6 states that due to: (1) the evolving nature of information and (2) the fact that an assessment as to whether information constitutes inside information or not can be complex, DMPs should keep records of their assessment. New recital 6 removes (1), which although not a significant change by any means, perhaps suggests a reluctance to "get into" the point that information may evolve from being confidential to inside over time.
• In relation to Articles 3(3)(c) and Article 3(3)(g), and Articles 3(4)(c) and 3(4)(e) of the Delegated Regulation – whether or not market soundings involve the disclosure of inside information, a standard set of information must be requested from and provided to the market sounding recipient (MSR). This includes confirmation that the person is authorised to receive market soundings, and their consent to receive such soundings.

France

The AMF guide on European Long-Term Investment Funds (ELTIF)

The French Autorité des marchés financiers (AMF) has issued a guide on ELTIFs. This follows the move by the French legislator to authorise professional specialised funds (fonds professionnels spécialisés), professional private equity funds (fonds professionnels de capital investissement) and securitisation vehicles (organismes de titrisation) to grant loans, in line with the ELTIF Regulation (EU) 2015/76).

The document does not officially constitute the formal position of the AMF, but contains guidelines drafted to help, in particular, fund managers who would like to obtain authorisation from the AMF to use the ELTIF label for a French fund or to market a non-French ELTIF in France through the passporting mechanism provided by AIFMD.

The guide, drafted in the form of a Q&A, contains a lot of practical information that would assist fund managers in:

• obtaining the right to use the "ELTIF" label for a French investment fund;
• complying with the rules applicable to the manager of an ELTIF;
• complying with the investment rules of an ELTIF (the guide gives details on the eligible assets, the companies in which an ELTIF may invest, the diversification ratio and the concentration and leverage requirements to be complied with); and
• complying with the conditions applicable to the marketing of an ELTIF in France (the guide provides details on the information which needs to be included in the prospectus or marketing materials of an ELTIF, the specific requirements applicable to the marketing of an ELTIF to retail investors, and the specific conditions under which an ELTIF can be marketed in France through the European passporting procedure).

Given their purpose and the flexibility of the regime, ELTIFs are expected to appeal to a wide range of investors. The fact that such funds can actually grant loans under specific conditions should contribute to their appeal, with ELTIFs potentially becoming a remarkable alternative to more classic ways of financing.

The AMF guide on UCITS V

UCITS V (2014/91/EU) has been transposed into French law by the Ordinance dated 17 March 2016.
In the run-up to the transposition into French law of UCITS V, the AMF sought to provide asset management companies with answers to the main questions concerning the impact of UCITS V on their business.

The guide on UCITS V, published by the AMF, is not intended to be exhaustive, and incorporates statements that could change, depending upon the final regulatory provisions and level 2 and 3 measures stemming from UCITS V.

The guide specifically addresses changes related to:

• the function of the depositary, notably in terms of its missions and responsibilities;
• the asset management companies' remuneration policies; and
• the sanctions applicable to asset management companies.

The aim is to harmonise these rules with those introduced by AIFMD and specifically applicable to asset management companies authorised to manage AIFs.

The "SAPIN II" Bill of law on transparency, anti-corruption and economic modernisation

On 30 March 2016, the French government published the "Sapin II Bill" which seeks to reinforce the fight against corruption and enhance transparency in France. The Bill also includes a series of measures designed to modernise the economy.

The Bill allows the French Government to take, by way of Ordinances, measures designed to facilitate the financing of French undertakings (through, e.g. the ability for investment funds to grant loans, or the ability for investors to acquire loan receivables from credit institutions or financing companies by derogation to the French banking monopoly rules).

The Bill also contains several provisions aimed at reinforcing the transparency and the safety of derivative transactions. In particular, the scope of the favourable regime resulting from the Collateral Directive is to be extended to cover: financial obligations resulting from contracts entered into between a clearing house and a clearing member; between a clearing member and a client; and between a clearing house and a client. Furthermore, the rules relating to banking secrecy are be amended to ensure that clearing houses and counterparties to a derivative transaction are allowed to comply with their reporting obligations vis-à-vis non-European trade repositories. Initial margin provided as collateral to secure derivative transactions which are not centrally cleared should be protected against any action taken by the creditors of the collateral receiver.

The Bill also permits the French Government to transpose into French law, by way of Ordinances, various European Directives and Regulations, including, those related to market abuse and payment services. The French Government would also be entitled to amend French law to ensure that asset management companies no longer fall within the legal definition of investment firms within the meaning of MiFID.

The Bill contains new provisions designed to prohibit any sort of direct or indirect promotional communications by electronic means to non-professional (retail) clients, including potential clients, when such communications are related to the provision of investment services relating to financial contracts which are not listed on a regulated market or multilateral trading facility and for which: (i) the maximum risk amount is not known at the time of the investment; (ii) the risk of loss exceeds the amount of the initial investment; or (iii) the risk of loss compared to the corresponding potential advantages is not reasonably understandable, taking into account the specific nature of the relevant financial contract. The AMF would, under the proposals, be entitled to determine the categories of products falling within the scope of this prohibition, based on the factors mentioned above, and taking into account the fact that the terms "financial contracts" seem to refer to derivative products only. The AMF would also be in a position to determine the types of promotional communications targeted by the prohibition, but the information made available on the website of the investment services providers marketing such financial contracts would not be subject to it.

Spain

Exceptions to apply for trading on a secondary market of Spanish financial companies listed in a MTF

Law 24/1988 of 28 July, on the Spanish Securities Market Act restated by means of Royal Legislative Decree 4/2015 of 23 October 2015, provides that any listed company on a multilateral trading facility (MTF) (i.e. Mercado Alternativo Bursátil or MAB) that exceeds a market capitalisation of €500m, has to apply for admission to trading on a secondary market, within nine months of reaching this threshold, where such capitalisation lasts for longer than six months.

On 16 March 2016, the CNMV published Circular 1/2016, establishing the conditions for excluding certain issuers of shares traded on a MTF from the requirement to apply for the admission to trading in a regulated market. Such requirements include the following:

• the entity in question must be a financial company or an investment company (i.e. entities regulated by Law 35/2003 on UCITS, Law 22/2014 on AIF, and Law 11/2009, on SOCIMIS);
• the market capitalisation, as set out above, must be €500 million for six months; and
• the percentage of shares distributed to the public at market close on the day ending the six month period is less than 25 per cent of the shares comprising its share capital.

Ruling from Spanish Supreme Court (tribunal supremo) on interpreting the criminal liability of legal entities

The Supreme Court has, via two Judgments (Judgment No. 54/2016 of 29 February 2016 and Judgment No 221/2016 of 16 March 2016) provided guidance for the first time on the interpretation of criminal liability of legal entities.

Legislation setting out the circumstances in which criminal liability can be attributed to legal entities was introduced in 2010, and was amended in 2015 by the reform of the Spanish Criminal Code. The requirements established in the Criminal Code were recently considered by the Attorney General's Office via Circular 1/2016 in January 2016. The Judgments handed down in the Spanish Supreme Court are, however, not consistent with guidance emerging from the Attorney General's Office. However, taken together, they serve as an important reference point for companies establishing compliance programmes, as well as providing an indicator as to what to expect from Courts in this area.

The most important issues emerging from both Judgments are as follows:

• Legal entities are beneficiaries of the same inalienable rights underlying criminal law which apply to individuals, such as the presumption of innocence or the right to a judicial process with guarantees. In this regard, the Supreme Court states that both individuals and legal entities are two different legal subjects that must be individually indicted.
• The possible criminal liability of a legal person shall be based on the absence of monitoring and control systems within the company. Interpretation of who has to evidence this absence of monitoring and control differs between the Supreme Court and the Attorney General's Office.
• Separation between the criminal liability attributable to the legal entity and the individual that committed the offence.
• When applying penalties such as dissolution, factors to be considered include the economic and social consequences of thepenalty to be imposed, with a particular emphasis on the potential consequences for the entity's employees.
• The "direct or indirect benefit" for the legal entity refers to any kind of advantage. Therefore, this concept allows the declaration of legal entities as criminally liable even if the offence does not translate into any real benefit for the company.

Amendments on the securities clearing, settlement and recording system introduced by Royal Decree 878/2015, of 2 October

Royal Decree 878/2015, on the Clearing, Settlement and Recording of Transferable Securities (Royal Decree 878/2015), was published in the Spanish Official Gazette on 3 October 2015 and most part of it came into force on 3 February 2016, repealing Royal Decree 116/1992, of 14 February, on Representation of Securities through Book-entries and the Clearing and Settlement of Stock Exchange Transactions.

The key amendments introduced to the clearing, settlement and recording system are as follows:

• the intervention of a central counterparty in multilateral operations of regulated markets and multilateral trading systems that will allow net settlement balances. This new central counterparty represents the movement from the current multilateral system to a bilateral system based on net balances. This clearing entity has been set up in compliance with the European Market Infrastructure Regulation (EU 648/2012);
• the elimination of the principle of assurance in the delivery (since the central counterparty will carry out the management of counterparty risk); and
• the elimination of the current system of registration of equity securities based on registration references, introducing a new system based on the balance of securities (as already occurs in the fixed income securities system).

Sweden

Supreme court ruling regarding underwriting liabilities

Subscription of shares in a Swedish company is subject to formal requirements in the Swedish Companies Act. An undertaking to subscribe for shares in a manner which does not meet the formal requirements, e.g. an agreement to underwrite a new issue of shares, is subject to the risk of being unenforceable. The Swedish Supreme Court has now tried a case regarding the financial liabilities of parties failing to meet their "underwriting" commitments. When the parties who had agreed to subscribe for the new shares did not meet their obligations, a third party stepped in and subscribed for the shares and simultaneously acquired the issuing company's claims against the defaulting parties. The defaulting parties argued that: (i) they did not have any liabilities since the underlying commitment to subscribe for shares was unenforceable; and (ii) that the issuing company had not suffered any damage since the third party had subscribed for the shares and consequently there was no claim for damages against them which the third party could have acquired from the issuing company. The Swedish Supreme Court distinguished the case from the question whether an undertaking to subscribe for shares could be enforceable as such and noted that this was still questionable. The court then found, however, that the agreement to underwrite was valid and binding at least to such extent that non-performance created a legal basis for a liability to pay damages. The court also found that the claim for damages had arisen already when the default occurred and was not affected by a subsequent third party subscription combined with the transfer of the claim against the defaulting parties.

Parties entering into underwriting arrangements or other undertaking to subscribe for shares in a Swedish company should be aware that the actual obligation to subscribe for shares may be unenforceable if it does not comply with the requirements, but the commitment may still result in an obligation to pay damages.

SFSA advocates a ban on inducements wider than MIFID II

The Swedish Financial Supervisory Authority (SFSA) has published a position paper where it continues to argue the case for introducing a complete prohibition against all forms of inducements being paid by product providers to investment advisers, insurance intermediaries and others financial intermediaries. The Swedish Ministry of Finance is expected to address the topic in connection with the implementation of MiFID II in Sweden. Given the proposed delay of MiFID II, a separate legislative initiative on the topic cannot be ruled out. The Ministry of Finance has, so far, not come out in public support of the SFSA's position.

Sweden implements MAR in July 2016

The Swedish Government has presented its legislative proposal to the Parliament to implement the legislation required to implement the EU Market Abuse Regulation (MAR) in Sweden. While the substantive provisions of MAR are directly applicable in Sweden, supporting legislation is required regarding enforcement and sanctioning powers, etc. The legislation is proposed to enter into force on 3 July 2016, i.e. on the date when MAR enters into force.

UK

New obligations on UK businesses to disclose details of their controllers

New law came into force in April 2016 aimed at making the control of UK businesses more transparent. The rules require UK companies to create a "PSC register" disclosing details of individuals (PSCs) and legal entities (RLEs) that exert control or significant influence over them. Although publicly traded UK companies are exempt from this requirement as they are subject to their own disclosure regime under DTR 5, their subsidiaries must comply. A UK limited liability partnership (LLP) and a Societas Europaea registered in the UK must also keep and maintain a PSC register, and the PSC regime applies to them with appropriate modifications. Partnerships and limited partnerships are not required to keep a PSC register. A UK company or UK LLP acting as a general partner in a limited partnership structure will need to keep a PSC register.

What must the PSC register contain?

In summary, the PSC register must contain details of:

(a) any individual who exercises direct significant control over the company;

(b) the first legal entity (if there is one) above the company in the corporate structure which is subject to an appropriate disclosure regime, that is, a UK unlisted company or a publicly traded company (which could be an overseas company) of the type described above; or

(c) where there is no entity above the company which meets the criteria in (b), the details of any individual who has an indirect majority stake in the company.
A PSC register must not be blank; if there are no persons or legal entities within the above categories, that must be stated and if the company is in the process of obtaining information, that must be stated.

Who is a person with significant control?

A person with significant control (PSC) can only be an individual (but nationality and residence are irrelevant) and in a UK company is an individual who:

• Owns, directly or indirectly, more than 25 per cent of the company's shares (Condition 1);
• Holds, directly or indirectly, 25 per cent of the company's voting rights (Condition 2);
• Holds the right, directly or indirectly, to appoint or remove a majority of the board of directors (Condition 3);
• Holds the right to exercise, or actually exercises, significant influence or control over the company (Condition 4); or
• Holds the right to exercise, or actually exercises, significant influence or control over the activities of a trust or a firm that is not a legal entity but meets one or more of the above conditions in relation to the company (or would do so if it were an individual) (Condition 5).

An RLE is a legal entity (that is, a body corporate or a firm) that:

• would have met the conditions for being a PSC had it been an individual (that is, it would have owned more than 25 per cent of the company's shares, held more than 25 per cent of the company's votes or could have appointed or removed a majority of the company's board of directors); and
• is either required to keep its own PSC register or is subject to the disclosure requirements of a publicly traded company with voting shares admitted to trading on: a UK regulated market; another EEA state market; or on one of the specified markets in the USA, Switzerland, Japan and Israel; and is the first such entity above the company in the chain of ownership.

This means that a company's RLE will often be another UK private company, a UK LLP or a publicly traded company with voting shares admitted to trading on one of the markets specified above.

From 30 June 2016, details of the company's PSC register must be published at Companies House and updated annually as part of the new Confirmation Statement (which replaces the current Annual Return).

FCA releases Policy Statement on implementation of the Market Abuse Regulation

On 28 April 2016, the FCA released its Policy Statement (PS16/13) on implementation of the Market Abuse Regulation (2014/596/EU). This includes feedback on its previous Consultation Papers (CP15/35 (Policy proposals and Handbook changes related to the implementation of the Market Abuse Regulation, November 2015) and CP15/38 (Provisions to delay disclosure of inside information within the FCA's Disclosure and Transparency Rules, November 2015)), and related amendments to the FCA Handbook.

Points raised in the Policy Statement include the following:

Areas on which the FCA has discretion under EU MAR (options on how to implement)

The FCA confirms that issuers will only have to provide a written explanation of any delayed disclosure of inside information on request from the FCA. Transactions by PDMRs will only have to be disclosed where the threshold of EUR 5,000 is met. Issuers may however disclose, on a voluntary basis, all transactions regardless of the threshold if they wish. The FCA also states that ESMA is considering the issue of currency conversion, and how conversions from the Euro to local currencies will work in practice.

Research recommendations, COBS 12.4

In relation to guidance on the scope of Article 20 EU MAR, the FCA refers to a respondent's suggestion that the proposed amendments to the definition of non-independent research raised the possibility that very brief sales notes would be described as non-independent research. The FCA clarifies that "irrespective of this change, provided that short-term sales notes objectively fall under the definition of an investment recommendation and do not constitute investment research, these have always been classified as non-independent research".

Insider lists, DTR 2.8

The FCA states that it will provide information on its website in relating to the electronic means to submit insider lists to the regulator (as referred to in Article 2(5) of Commission Implementing Regulation included at Annex XIII of ESMA's Final Report dated 28 September 2015).
The FCA maintains its position that DTR 2.8.8G provision of the Handbook (which says an issuer need not maintain a list of insiders at third parties if there is a contractual agreement that the third party will do so) is incompatible with EU MAR Article 18(1) and should not be maintained.

Code of Market Conduct

In relation to: MAR 1.2 (market abuse – general), the FCA confirms it will not be amending the proposals set out in CP 15/35 on this.
The FCA confirms that the concept of trading information is irreconcilable with EU MAR, and that it will not be reinstating MAR 1.3.5E (reference to the Chinese wall).

The FCA states that it has decided to maintain MAR 1.6.10G (factors to be taken into account in determining whether or not a person's behaviour amounts to manipulating transactions), 1.6.15G(3) and (4) (examples of market abuse) in amended form.

Next steps

The FCA sets out a number of "next steps" and reiterates its already stated view that it expects firms to comply with EU MAR as of 3 July 2016. It emphasises that the timing for publication of the EU MAR Level 2 texts in the Official Journal has not yet been announced and remains uncertain; states that further signposts will be added to the Handbook relating to further EU MAR implementing measures after publication of those measures. It notes that three sets of guidelines ESMA has been mandated to draft under EU MAR have not yet been finalised and may trigger future reassessment of Handbook provisions depending on the outcome. The FCA states that it will continue to monitor changes to the Level 2 texts and Guidelines related to EU MAR, and make further consequential amendments to the Handbook accordingly.

Areas on which we may see further guidance

The FCA highlights the following areas, among others:

• The scope of Article 20 EU MAR on whether sales notes constitute investment recommendations, and the extent to which holdings of a firm should be aggregated with those of natural persons producing recommendations in the name of the firm.
• The information to be provided for UK nationals in the column of the insider list which refers to a "National Identification number" and, what happens if a person refuses to communicate personal information and whether agreement to be included on an insider list can be obtained by way of a clickthrough email.

Germany

New legal regime for loan origination and loan restructuring by Alternative Investment Funds in Germany

On 12 May 2015, the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) announced significant changes to its administrative practice in to the way it would view/govern loan loan origination as well as restructuring and prolongation of loans by AIFs. Prior to this, loan origination by German investment funds was only carried out by real estate funds granting loans to the fund's real estate vehicles under certain conditions. The move by Bafin follows ESMA's interpretation and some other EU member states that loan origination forms part of collective investment management. This interpretation is based, in particular, on the rules relating to EuVECA and ELTIF (these are allowed to originate loans).

As of 18 March 2016, some AIFs are allowed to originate loans and others have at least more flexibility with regard to the restructuring of loan receivables and may grant loans to subsidiaries of the AIF.

GERMAN AIFs - Loan origination

Section 20 paragraph 9 of the German Capital Investment Act (Kapitalanlagegesetzbuch, KAGB n.F) sets out an exhaustive list of situations where an AIF is permitted to originate loans as part of its collective invest management (.i.e. without a banking licence).

Under the new regime, closed-ended special AIFs will be able to originate loans subject to a number of restrictions:

• Borrowing by the closed-ended special AIF is limited to 30 per cent of the net capital of the AIF that is available for investments pursuant to section 285 paragraph 2 No. 1 KAGB n.F (the "Investable Capital").
• Loans granted to a single borrower shall not exceed 20 per cent of the Investable Capital.
• The AIF may not grant loans to consumers. Special rules apply to loans that are granted to companies of which the closed-ended special AIF is already a shareholder (shareholder loans) according to section 285 paragraph 3 KAGB n.F.
• The new regime permits shareholder loans up to an amount of 50 per cent of the Investable Capital subject to certain conditions.

Open-ended special AIFs

The new regime does not allow loan origination by open-ended special AIFs but they may under certain conditions originate shareholder loans. Close-ended retail AIFs can only originate shareholder loans subject to meeting substantial additional requirements. There will be no changes for open-ended retail AIFs, in particular open-ended retail real estate AIFs, which will continue to be able to grant shareholder loans to subsidiaries holding retail assets.

Closed-ended retail AIFs

The German legislator holds the view that retail investors are hardly in a position to adequately assess the risks connected with loan origination. Therefore, closed-ended retail AIFs may only originate shareholder loans subject to meeting substantial additional requirements.

Open-ended retail-AIFs

There will be no changes for open-ended retail-AIFs. In particular, the possibility for open-ended retail real estate AIFs to grant shareholder loans to subsidiaries holding real estate assets according to section 240 KAGB remains unaffected.

Loan restructuring

The restructuring and prolongation of loans by some AIFs will no longer be considered as loan origination for banking law purposes and will consequently be permitted for all AIFs (which can acquire loans and subject to existing product rules set out in the KAGB) without a banking licence.
German AIFMs – new obligations for AIFMs managing loan originating funds

All German AIFM managing AIFs that originate and/or acquire loans (including shareholder loans and unsecuritised loans) will become subject to the procedures for large exposure credits (Millionenkreditverfahren) and thus will have to fulfil certain notification requirements.

Fully authorised AIFM

A fully authorised AIFM managing an AIF that originates and/or acquires (and restructures) loans (which are not shareholder loans) has to comply with specific risk management requirements pursuant to section 29 paragraph 5a KAGB n.F.

Sub-threshold AIFM

A sub-threshold AIFM will become subject to certain risk management requirements that are only applicable to fully authorised AIFMs where the sub-threshold AIFM manages an AIF that originates loans (restructuring and acquisition are excluded).

EU AIFs/AIFMs

The legislator has not provided that EU AIFs/AIFMs must comply with the same risk and process requirements as German AIFs/AIFMs. For EU AIFs/AIFMs under German law, the origination is deemed to be a part of the collective portfolio management, which is now generally excluded from triggering banking licence requirements under the German Banking Act and will consequently be allowed to the extent that it falls within the scope of collective portfolio management under the relevant legislative regime of the home member state of the respective EU AIF/AIFM.

Third country AIFs/AIFMs

Furthermore, third country AIFs/AIFMs will be allowed to originate loans to German borrowers after passing an AIF-distribution notification granted by BaFin for their managed third country AIFs (Vertriebsanzeigeverfahren). BaFin will only grant such distribution if the third country AIF/AIFM complies with the minimum requirements of the AIFMD.

UCITS

Loan originating and restructuring is not permissible for UCITS and this position is in line with UCITS V.

North America

US

Final Fiduciary Rules

On 8 April 2016, the U.S. Department of Labor released its final version of a suite of new rules, new exemptions, and amendments to existing rules and exemptions regarding institutions and individuals providing advice to retirement plan participants and IRA owners for compensation. This sweeping rulemaking is the biggest change in the investment industry since the Dodd Frank Act and will dramatically alter the securities, banking and insurance landscape in the context of retirement assets. Put simply, many current arrangements and practices will no longer work and even when they can, the new contractual, compliance, and record-keeping obligations will be massive.

Redefining who is a fiduciary of an employee benefit plan or individual retirement account (IRA)

The final rule greatly expands the universe of people and entities who are "investment advice fiduciaries." This is extremely important because in the absence of an exemption, a fiduciary adviser cannot receive (i) commissions paid by a plan, participant, beneficiary or IRA, or (ii) commissions, sales loads, rule 12b-1 fees, revenue-sharing or other payments from third parties that provide investment products.

The rule describes (i) the kinds of communications that constitute investment advice, and (ii) the types of relationships in which those communications give rise to fiduciary investment advice responsibilities. Specifically, the rule provides that persons render investment advice if they provide, for a direct or indirect fee or other compensation:

• A recommendation as to the advisability of acquiring, holding, disposing of, or exchanging, securities or other investment property, or a recommendation as to how securities or other investment property should be invested after they are rolled over, transferred or distributed from the plan or IRA; or
• A recommendation as to the management of securities or other investment property, including recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services, selection of account arrangements (e.g., brokerage versus advisory); or recommendations with respect to rollovers, distributions or transfers from a plan or IRA, including whether, in what amount, in what form, and to what destination such a rollover, transfer or distribution should be made.

The types of relationships covered by the rule are:

• Persons who acknowledge or represent that they are acting as a fiduciary;

• Advice given pursuant to a written or verbal agreement, arrangement or understanding that the advice is based on the particular investment needs of the recipient; and
• Recommendations directed to a specific recipient regarding the advisability of a particular investment or management decision with respect to securities or other investment property of the plan or IRA.

There are numerous exclusions, including for certain arm's length sales transactions, platform providers and investor education, that are beyond the scope of this communication. Be sure to check with your legal counsel.

Establishing the "Best Interest Contract Exemption"

Financial institutions that are investment advice fiduciaries may use this new, principles-based exemption to receive compensation (either paid to them directly or to their affiliates and related entities) for (i) services provided in connection with a purchase, sale or holding of a security or other investment property by a plan, participant or beneficiary account, or IRA, or (ii) as a result of an investment fiduciary's investment advice to a retirement investor. In particular, to rely on the exemption, financial institutions generally must:

• acknowledge fiduciary status with respect to investment advice to the retirement investor;
• adhere to impartial conduct standards requiring them to:

1.  give advice that is in the retirement investor's best interest (i.e. prudent advice that is based on the investment objectives, risk tolerance, financial circumstances, and needs of the retirement investor, without regard to the financial or other interests of the financial institution, its representatives, or their affiliates);
2. charge no more than reasonable compensation; and
3. make no misleading statements about investment transactions, compensation, and conflicts of interest;

• implement policies and procedures reasonably and prudently designed to prevent violations of the impartial conduct standards;
• refrain from giving or using incentives for representatives to act contrary to the retirement investor's best interest; and
• fairly disclose the fees, compensation, and material conflicts of interests associated with their recommendations.

Individual representatives relying on the exemption must adhere to the impartial conduct standards when making investment recommendations.

Dates

The Fiduciary Rule is effective on 7 June 2016. The Fiduciary Rule and several conditions of the Best Interest Contract Exemption (for example, the acknowledgement of fiduciary status, adhering to the impartial conduct standards, and certain disclosures) have an applicability date of 10 April 2017. Other conditions of the Best Interest Contract Exemption (including the contract requirement and certain representations and warranties regarding conflicts of interest) will not be applicable until 1 January 2018. There is a transition period from 10 April 2017 to 1 January 2018 during which investment fiduciaries can receive otherwise prohibited compensation if they comply with certain modified conditions related to the impartial conduct standards and disclosures.