Canadian Securities Law : Canadian Securities Lawyer & Attorney : Stikeman Elliott Law Firm : Montreal, Ottawa, Calgary, Vancouver, Montreal, Toronto

The U.K. Financial Services Authority last week published a discussion paper focusing on the prudential requirements for banks and investment firms that engage in trading activities. The paper makes recommendations in three key areas:

1. Valuation - the FSA recommends an increased regulatory focus on valuing traded positions as an input into capital resources.
2. Coverage, coherence and the capital framework - a change in the structure of the capital framework is recommended in order to bring greater coherence and reduce the opportunities for structural arbitrage in the banking sector and wider financial system.
3. Risk management and modelling - the FSA recommends measures intended to improve firms' risk management and modelling standards, and ensuring that they are aligned with regulatory objectives.

The FSA is accepting comments on the discussion paper until November 26 and is expecting to issue feedback in the first half of 2011.

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On July 29, the Committee of European Securities Regulators published a set of recommendations, pursuant to a review of the Markets in Financial Instruments Directive, intended to improve the functioning and transparency of securities markets. The recommendations include advice on equity markets, non-equity markets transparency, transaction reporting and investor protection and intermediaries.

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On Monday, Her Majesty's Treasury launched a consultation to gather views on the British Government's proposals to reform the UK's financial regulatory framework. As discussed in our post of June 17, the proposals would: (i) give the Bank of England the authority over macro-prudential regulation; (ii) establish a new prudential regulator, operating as a subsidiary of the Bank of England, that would regulate financial firms; and (iii) establish a new Consumer Protection and Markets Authority to regulate the conduct of financial firms providing services to consumers. The just-released consultation document provides further details regarding the proposals and asks specific questions for public comment.

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In a speech Tuesday to the British Bankers' Association, Lord Adair Turner, Chairman of the Financial Services Authority (FSA) discussed a new approach to regulation in the U.K. Specifically, Lord Turner discussed a "major shift in philosophy" towards a "more pre-emptive and instrusive approach to supervision". This would involve analyzing trends in the economic and market environment to identify potential risks to consumers, examining firms' business models to understand the drivers of profitability, reviewing whether firms have product development and approval processes that weed out innappropriately marketed or harmful products and taking action to ensure customers are protected where incentives, structures or products are found that would likely lead to poor customer outcomes.

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On June 27, the G-20 Toronto Summit concluded with the release of a Declaration by members outlining next steps "to ensure a full return to growth with quality jobs, to reform and strengthen financial systems, and to create strong, sustainable and balanced growth." With respect to financial sector reform, the Declaration speaks of four pillars: (i) a strong regulatory framework, including improved transparency and regulatory oversight of hedge funds, credit rating agencies and OTC derivatives; (ii) effective supervision; (iii) the resolution and addressing of systemic institutions; and (iv) transparent international assessment and peer review. 

The next G-20 Summit is scheduled for November 11-12 in Seoul.

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The European Parliament adopted a resolution last week calling for more transparency and stricter rules respecting derivative trading. The resolution was passed in anticipation of legislative proposals expected in September from the European Commission on the subject.

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In a June 16 speech at the Lord Mayor's Dinner for Bankers & Merchants of the City of London, the Chancellor of the Exchequer outlined a plan to reform financial regulation in Britain. Specifically, the Chancellor announced a plan to abolish the current tripartite system of regulation, which consists of the Financial Services Authority (FSA), the Bank of England and the Treasury, and wind down the FSA.

In place of the current system, an independent Financial Policy Committee at the Bank of England would be tasked with macro-prudential regulation.  According to the Secretary to the Treasury, Mark Hoban, "[o]nly central banks have the broad macroeconomic and markets understanding, the authority and the knowledge required to make macro-prudential judgments." Meanwhile, a new prudential regulator, operating as a subsidiary of the Bank of England would regulate financial firms, including banks, investment banks and insurance companies. Finally, a new Consumer Protection and Markets Authority would be established to regulate the conduct of financial firms providing services to consumers.

According to the Chancellor, the transition to the new regulatory system is intended to be completed in 2012.

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The International Organization of Securities Commissions (IOSCO) yesterday published a revised Objectives and Principles of Securities Regulation to incorporate principles based on "lessons learned from the recent financial crisis". Eight new principles were added to the document, including principles related to hedge funds, credit rating agencies and auditor independence. According to IOSCO the principles "outline the basis of an appropriate, effective and robust securities regulatory system".

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The International Organization of Securities Commissions (IOSCO) announced today that securities regulatory authorities from South Korea, Uruguay, Iceland, the Maldives, Saudi Arabia and Syria have been invited (the latter four states pending membership approval) of the IOSCO Multilateral Memorandum of Understanding concerning Consultation, Cooperation and the Exchange of Information (MMoU). The MMoU provides a mechanism through which securities regulators may exchange information and assist one another in enforcing compliance with their respective securities laws and regulations.

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On May 25, the Committee of European Securities Regulators (CESR) released a statement describing the "intensifying close co-ordination of its members' market surveillance efforts" in light of recent market volatility in euro denominated debt instruments. The CESR also stated that it is of the view that structural reforms should be "rapidly introduced to enhance the transparency, organisation and functioning" of the bond and CDS markets, which are currently largely over-the-counter. According to the CESR, it is also working on measures to enhance the "organisation and integrity of OTC derivatives markets".

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In light of concerns that national financial regulations may not sufficiently prevent future financial crises, the Technical Committee of the International Organization of Securities Commissions (IOSCO) yesterday published a report entitled "Principles Regarding Cross-Border Supervisory Cooperation". The report considers how regulators can enhance cross-border cooperation so as to "better supervise the entities that they regulate that have expanded their operations across borders." Specifically, the report provides a set of principles intended to guide cooperative supervisory arrangements among international regulators.

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The Globe and Mail, among other media outlets, is reporting today that Germany has banned naked short selling of euro-denominated government bonds, credit default swaps based on the bonds and shares of the country's ten most important financial institutions. The ban, which apparently took effect at midnight, will run until March 31, 2011. According to Reuters, the move caught Germany's European Union colleagues off guard and elicited a particularly strong response from the French Finance Minister, who stated that France would not introduce a similar ban. Whether other EU countries follow suit, however, remains to be seen.

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The Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) released two reports yesterday regarding OTC derivatives. The first, Guidance on the application of the 2004 CPSS-IOSCO Recommendations for Central Counterparties to OTC derivatives CCPs, provides guidance to central counterparties clearing OTC derivatives in applying the Technical Committee's 2004 recommendations. Considerations for trade repositories in OTC derivatives markets, meanwhile, provides a set of considerations for trade repositories in OTC derivatives markets and relevant authorities.

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The Technical Committee of the International Organization of Securities Commissions (IOSCO) recently released a consultation report addressing recent regulatory initiatives that impact credit rating agencies. Specifically, the report is intended to evaluate whether, and if so how, international initiatives implement the four IOSCO principles regarding credit rating agencies, being: (i) quality and integrity in the rating process; (ii) independence and conflicts of interest; (iii) transparency and timeliness of ratings disclosure; and (iv) confidential information.

IOSCO is accepting public comments on the report until August 6, 2010.

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On April 23, the Canadian Securities Administrators (CSA) announced the recent signing by eight members of the CSA of a Supervisory Cooperation Arrangement with the China Banking Regulatory Commission with respect to a program that allows Chinese institutional investors to invest pooled funds in approved overseas financial markets. According to Jean St-Gelais, Chair of the CSA, the arrangement "paves the way for Chinese commercial banks to conduct investments on behalf of their clients with Canadian-based financial institutions" in participating jurisdictions. The arrangement is currently in effect in Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Quebec and Saskatchewan and, pending ministerial approval, is scheduled to take effect in Ontario on June 22, 2010.

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The International Monetary Fund (IMF) recently released a chapter of its semiannual Global Financial Stability Report dealing with over-the-counter derivatives. Specifically, the chapter considers the role of central counterparties in making OTC derivatives markets "safer and sounder" and reducing counterparty risk.

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The U.K. Financial Services Authority (FSA) announced new rules last week intended to improve the clarity respecting the costs charged by investment advisers. Specifically, as of 2011, firms will need to be upfront with respect to the costs of their services and will no longer be able to embed the cost of their advice in the cost of a product. Further, firms will not be permitted to accept commissions for recommending specific products. According to FSA director Sheila Nicoll, “[t]here is a need to reconnect the adviser and client, where one pays for the services of another, and without the distraction of commission. Only then can consumers have real confidence and trust in the advice they are receiving.”

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The European derivatives exchange Eurex recently announced that Quebec's Autorité des marchés financiers (AMF) has provided a regulatory exemption allowing Eurex to offer its products in Quebec. According to the Eurex release, Quebec customers will now have direct access to trading on its exchange. 

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Earlier this month, the Committee of European Securities Regulators (CESR) released a report recommending a pan-European short selling disclosure regime. While acknowledging that legitimate short selling plays an important role in financial markets by contributing to efficient price discovery, increasing market liquidity and facilitating hedging and other risk management activities, the report also cites concerns that it can be used in an abusive fashion. Specifically, short selling can drive down the price of financial instruments to a distorted level, contribute to disorderly markets and, especially in extreme market conditions, otherwise have an adverse impact on financial stability. In the interests of enhanced transparency about short selling activity, the objective in developing the disclosure model proposed by the disclosure requirement is to reduce or mitigate the negative consequences and risks of short selling without having an undue adverse impact on the benefits which the practice brings to markets.

The report proposes a two tier disclosure system whereby a short position reaching a specified initial threshold (0.2% of a company's issued share capital) would need to be disclosed to the relevant regulator. Incremental changes of short position of 0.1% would require further notification  to the regulator, while a second threshold (0.5%) would also trigger a public disclosure requirement.

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On Monday, the International Organization of Securities Commissions (IOSCO) published a final report entitled "Principles for Periodic Disclosure by Listed Entities". The report is intended to provide securities regulators with a framework for establishing or reviewing their periodic disclosure regimes. According to the report, its principles-based format "allows for a wide range of application and adaptation by securities regulators." 

Specifically, the report identifies the following principles as being "essential" for periodic disclosure regimes: (i) periodic reports should contain relevant information; (ii) for those periodic reports in which financial statements are included, the persons responsible for the financial statements provided should be clearly identified and should state that the financial information provided is fairly presented; (iii) the issuer's internal control over financial reporting should be assessed or reviewed; (iv) information should be available to the public on a timely basis; (v) periodic reports should be filed with the relevant regulator; (vi) the information should be stored to facilitate public access; (vii) disclosure criteria; (viii) equal access to disclosure; and (ix) equivalence of disclosure.

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Yesterday, the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) announced the launch of a comprehensive review of financial market infrastructure standards, including payment systems, securities settlement systems and central counterparties. The review, which will be led by CPSS members (consisting of central banks, including the Bank of Canada), members of the IOSCO Technical Committee (which includes the OSC and AMF), the IMF and World Bank, is part of an initiative "to reduce the risks that arise from interconnectedness in the financial system."

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Back in December, the U.K. Financial Services Authority (FSA) announced the publication of proposals intended to "rebuild people's trust and confidence in the retail investment market by raising standards of professionalism." The FSA's proposals address issues respecting the governance of professional standards for retail investment advisers, the application of principles to the corporate pension market and advice on pure protection products (certain types of insurance). With respect to professional standards, the FSA proposes an internal FSA model to govern professional standards.

The FSA is accepting responses on its proposals until March 16, 2010.

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The Australian Government's Productivity Commission, an independent research and advisory body on economic, social and environmental issues, recently issued a report on the topic of executive compensation in Australia. The voluminous report considered such issues as the recent trends in Australia in executive pay, the effectiveness of existing regulatory oversight, the role of boards and the transparency of compensation disclosure. Ultimately, the report recommended reform in five areas: improving board capacities, reducing conflicts of interest, ensuring well-conceived compensation principles, improving relevant disclosure and facilitating shareholder engagement.

Specifically on the topic of shareholder engagement, the Commission recommended a "two strikes" mechanism to address an "unresponsive" board. Under the recommendation, where a company's compensation report received a "no" vote of 25% or more, the board would have to explain how shareholder concerns were addressed in the subsequent report. Where the subsequent report also received a "no" vote of 25% or more, a resolution would be put to shareholders that the elected directors who signed the directors' report for that meeting stand for re-election at an extraordinary general meeting. If this resolution was carried by more than 50% of the votes, the meeting would be held within 90 days.

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On November 5, the International Accounting Standards Board (IASB) and the U.S.Financial Accounting Standards Board (FASB) released a statement reaffirming their commitment to improving IFRS and U.S. GAAP and to bring about their convergence. The joint statement also described the boards' plans and milestone targets for individual projects.

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On November 3rd, the International Organization of Securities Commissions (IOSCO) announced the publication of a consultation report regarding conflicts of interest within private equity firms. An IOSCO report on private equity risks of May 2008 recommended further work on the subject, leading to the immediate report.

Specifically, the report examines the potential conflicts of interest that may exist within a private equity firm or fund and proposes a number of principles to mitigate such risks. The principles discussed include establishing written policies to identify and mitigate conflicts of interest, the need to implement a process for investor consultation relating to such conflicts and ensuring the clarity of investor disclosure. IOSCO is accepting public comment on the report until February 1, 2010.

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The U.K. Financial Services Authority (FSA) released a discussion paper today titled "A regulatory response to the global banking crisis: systemically important banks and assessing the cumulative impact". The paper focuses on two major issues: (i) the "dangers" posed by systemically important banks that are considered too big or interconnected to fail, or too big to rescue; and (ii) how the cumulative impact of various capital and liquidity regime changes should be assessed. U.K. and international policy developments are considered and of particular note, the migration of OTC derivatives to central counterparty clearing is cited as a risk-reducing policy initiative.

Responses to the discussion paper are being accepted until February 1, 2010.

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The Senior Supervisors Group, consisting of financial supervisors from nine different countries, including the U.S. Securities and Exchange Commission and the Office of the Superintendent of Financial Institutions (Canada), issued a report today (October 21) titled "Risk Management Lessons from the Global Banking Crisis of 2008". The report identifies deficiencies in the "governance, firm management, risk management, and internal control programs that contributed to, or were revealed by, the financial and banking crisis of 2008." The weaknesses identified in the report include the failure of some boards and managers to establish and adhere to acceptable levels of risk, as well as compensation programs that "conflicted with the control objectives of the firm". Despite recent progress in improving risk management practices at financial firms, the report concludes that weaknesses remain that still need to be addressed.

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The U.K. Financial Services Authority (FSA) released a Feedback Statement yesterday summarizing and responding to comments it received in response to its proposals on regulating short selling as published in a discussion paper of February 2009. While the discussion paper concluded that direct constraints on short selling, such as a 'tick' rule, were not justified, it proposed enhancing the transparency of short selling. In considering the feedback received, the FSA reiterated its position that direct constraints on short selling are not justified at this point, while also stating that no major aspects of the proposals for a disclosure regime should change.

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The International Organization of Securities Commissions (IOSCO) recently released a consultation report respecting the transparency of structured finance products. The report sets out the factors to be considered by market authorities when considering the enhancement of post-trade transparency of structured finance products. Meanwhile, the Joint Forum, established under the auspices of the Basel Committee on Banking Supervision, IOSCO and the International Association of Insurance Supervisors recently released a report considering the issues surrounding special purpose entities.

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At the recent Pittsburgh summit, leaders of the G-20 met to, according to the leaders' statement, "turn the page on an era of irresponsibility and to adopt a set of policies, regulations and reforms to meet the needs of the 21st century global economy." The leaders' statement released on September 25 specifically discussed strengthening the international financial regulatory system by reforming compensation policies and practices and improving over-the-counter derivatives markets.

With respect to executive compensation, the G-20 endorsed the implementation standards of the newly-created Financial Stability Board respecting compensation, including: (i) avoiding multi-year guaranteed bonuses; (ii) requiring a significant portion of variable compensation be deferred, tied to performance and tied to appropriate clawbacks; (iii) ensuring that compensation for those having a material impact on the firm's risk exposure align with performance and risk; (iv) making compensation policies and structures transparent through disclosure requirements; (v) limiting variable compensation as a percentage of total net revenue when it is inconsistent with the maintenance of a sound capital base; and (vi) ensuring that compensation committees overseeing compensation policies are able to act independently. The Financial Stability Board is expected to complete a review of actions taken by national authorities to implement its compensation principles by March 2010. A progress report discussing actions taken and to be taken in the future was also released.

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Chairman Schapiro Photo Courtesy of www.sec.gov

The U.S. Securities and Exchange Commission (SEC) and the U.K. Financial Services Authority (FSA) announced plans today "to explore common approaches to reporting and other regulatory requirements for key market participants such as hedge funds and their advisers." Specifically, the two regulators "agreed to identify a common, coherent set of data to collect from hedge fund advisers/managers" in order to help the regulators identify risks to their regulatory mandates and objectives. The announcement, subsequent to a meeting between the SEC and FSA, stated that discussions also included OTC markets and central clearing, accounting issues, regulatory reform, credit agency oversight, short selling and corporate governance and compensation practices. Today's release follows an announcement by the U.S. Commodity Futures Trading Commission (CFTC) yesterday that the CFTC had signed a memorandum of understanding with the FSA "to enhance cooperation and the exchange of information relating to the supervision of cross-border clearing organizations."

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On September 14, the International Organization of Securities Commissions (IOSCO) released a report outlining proposed standards "aimed at addressing regulatory issues of investor protection which have arisen due to the increased involvement of retail investors in hedge funds through funds of hedge funds." The report's proposals focus on the two particular areas of concern identified in an earlier report of June 2008, being: (i) liquidity risk; and (ii) the due diligence process. As stated by the release, the standards "form part of a larger body of work that IOSCO has been engaged in with regards to addressing the regulatory issues presented by hedge funds."

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The U.K. Financial Services Authority (FSA) released proposals on July 9 that would require financial firms to publish their complaints data every six months. The required information would include the number of complaints opened and closed, the percentage of claims closed within eight weeks and the percentage upheld. The FSA would also publish results from the whole sector twice a year. The FSA is accepting comments on the proposals until October 30, 2009.

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The International Accounting Standards Board (IASB) yesterday announced that it has issued a final version of its International Financial Reporting Standard (IFRS) for small and medium-sized entities (SMEs). SMEs are described as entities that publish general purpose financial statements for external users such as owners that are not involved in managing the business, creditors and credit rating agencies, but that do not have public accountability. According to the IASB, the IFRS for SMEs will "provide improved comparability for users of accounts; enhance the overall confidence in the accounts of SMEs; and reduce the significant costs of maintaining standards on a national basis." The IFRS for SMEs simplifies many of the principles of full standards and is a result of a number of years of working group development, round-table meetings and field-tests of a draft IFRS.

While the Canadian Accounting Standards Board (AcSB) has stated that the standard for SMEs will not be adopted in 2011 along with IFRS for publicly accountable companies, it is conceivable that the new standard will become a requirement at some point in the future.

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The International Organization of Securities Commissions today released a report, entitled Hedge Funds Oversight: Final Report, containing "high level principles that will enable securities regulators to address, in a collective and effective way, the regulatory and systemic risks posed by hedge funds in their own jurisdictions while supporting a globally consistent approach."

The six principles outlined are:

1. Hedge funds and/or hedge fund managers/advisers should be subject to mandatory registration;
    
2. Hedge fund managers/advisers that are required to register should also be subject to appropriate ongoing regulatory requirements relating to organizational and operational standards, conflicts of interest and other business conduct rules, investor disclosure and prudential regulation;
    
3. Prime brokers and banks that provide funding to hedge funds should be subject to mandatory registration, regulation and supervision and should have risk management systems and controls in place to monitor their counterparty credit risk exposures;
    
4. Hedge fund managers/advisers and prime brokers should provide information for systemic risk purposes to the relevant regulator;
    
5. Regulators should encourage and take account of the development, implementation and convergence of industry good practices, where appropriate; and
    
6. Regulators should have the authority to cooperate and share information with each other where appropriate so as to facilitate efficient and effective oversight of globally active managers/advisers and/or funds.

The report, which was prepared by the IOSCO Task Force on Unregulated Entities established in November 2008 to support the G-20 in restoring global growth and reforming the world’s financial systems, recommends that all securities regulators apply these principles in their regulatory approaches.

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On June 19, the International Organization of Securities Commissions announced the publication of Regulation of Short Selling, a report containing "high level principles for the effective regulation of short selling." The four principles recommended by the report are as follows:

1. Short selling should be subject to appropriate controls to reduce or minimise the potential risks that could affect the orderly and efficient functioning and stability of financial markets.
    
2. Short selling should be subject to a reporting regime that provides timely information to the market or to market authorities.
    
3. Short selling should be subject to an effective compliance and enforcement system.
    
4. Short selling regulation should allow appropriate exceptions for certain types of transactions for efficient market functioning and development.

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The Bundestag, Germany's lower house of parliament, has passed a law restricting executive compensation.  According to Bloomberg, the measures go beyond U.S. and British proposals on the subject.

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The Technical Committee of the International Organization of Securities Commissions (IOSCO) recently published a consultation report with respect to policies on direct electronic access (DEA) to markets. The report reviews risks and concerns associated with DEA arrangements and proposes guidance with respect to pre-conditions for DEA, information flow and adequate systems and controls. Comments on the report may be submitted to the IOSCO until May 20, 2009.

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On Monday, the SEC announced that it had entered into a mutual recognition arrangement with the Australian Securities and Investments Commission (ASIC), together with the Australian Minister for Superannuation and Corporate Law. The agreement provides a framework for the parties to consider exemptions to regulations that would allow American and Australian exchanges and broker-dealers to operate in both jurisdictions without being subject to double regulation.  A Memorandum of Understanding Concerning Consultation, Cooperation and the Exchange of Information Related to the Enforcement of Securities Laws and a Memorandum of Understanding Concerning Consultation, Cooperation and the Exchange of Information Related to Market Oversight and the Supervision of Financial Services Firms were also agreed to, and are intended to apply broadly to all U.S. and Australian market activity.

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