New UK measures to counter avoidance schemes involving transfer of corporate profits

Jeffrey Keey

A new section 1305A of the UK Corporation Tax Act 2009 (CTA 2009) has been introduced by the UK Finance Act 2014 that applies to payments made from March 19, 2014 under avoidance schemes involving the transfer of corporate profits within a group.

This new measure applies if:

  • two companies (“A” and “B”) are members of the same “group”;
  • A and B are party to “arrangements” (whether or not at the same time);
  • the arrangements equate to, in essence, A (directly/indirectly) paying B “all or a significant part” of A’s profits (the “profit transfer”); and
  • one of the main purposes is to gain a “tax advantage”.

If applicable, the profits of A are reassessed for corporation tax on the basis that the profit transfer did not occur.

HM Revenue & Customs (HMRC) released amended guidance on the section on July 24. Groups should examine any arrangements with UK based members to ensure they are not caught by this new anti-avoidance measure.

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ACT issues a supplement to its borrowers' guide to LMA Loan Documentation

Jeffrey Keey 

The UK’s Association of Corporate Treasurers (ACT) recently issued a supplement to its guide for borrowers to the Loan Market Association (LMA) investment grade forms of facility agreement and key negotiating points for borrowers (the ACT Borrower Guide) which will be of interest to those looking to review and negotiate such a facility agreement.

The LMA forms of investment grade facility agreement have been changed a number of times since publication of the ACT Borrower Guide in 2013, in particularly in respect of:

  • amendments to the definitions of “LIBOR”, “Euribor” and related provisions arising from the reforms to their benchmark process and administration;
  • an optional adjustment to the borrower’s right to prepay a defaulting lender;
  • amending the tax clauses to permit affected parties to withhold pursuant to FATCA and imposing information- sharing obligations on all parties;
  • updates to the increased costs clause to highlight the possibility of amendment to reflect commercial deals with regard to the costs associated with Basel III;
  • amended provisions giving an agent protection against incurring liabilities in the discharge of its function;
  • additional matters requiring unanimous lender consent;
  • mandatory costs provisions becoming optional; and
  • amendments to reflect changes that borrowers often seek.

This new supplement considers the changes made and their implications for borrowers.

UK Court characterizes loan agreements as debentures - Implications under the Financial Services and Markets Act 2000

Jeffrey Keey 

The recent UK Court of Appeal decision in Fons Hf v Corporal Ltd and Pillar Securitisation - which found that a loan agreement even if undrawn, is an instrument which evidences or acknowledges debt and consequently a debenture - has created significant legal uncertainty as to whether certain UK loan transactions may be regulated under the Financial Services and Markets Act 2000 (FSMA). 

Pursuant to the FSMA, debentures are “specified investments” subject to the financial regulation regime arising from sections 19 and 21 of that statute. Breach of this regime is a criminal offence and renders any relevant agreement unenforceable by the party in breach. 

The established understanding prior to Fons was that, while loan agreements may create a contractual framework under which loans are advanced, they did not themselves constitute a debenture or other investment creating or acknowledging indebtedness and accordingly were outside the scope of the FSMA (other than in respect of certain consumer credit and mortgage contracts). 

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UK Stamp Duty on the transfer of most AIM shares abolished

Jeffrey Keey and Kate DaSilva -

Stamp taxes on the purchase of most shares admitted to trading on “recognised growth markets” such as the London Stock Exchange’s AIM market have been abolished. UK Stamp duty and stamp duty reserve tax (SDRT) are normally chargeable at the rate of 0.5% of the purchase price of chargeable securities.

Finance Act 2014

The new stamp taxes exemption is set out in Clause 108 (Abolition of stamp duty and SDRT: securities on recognised growth markets) and Schedule 20 of the Finance Act 2014. The exemption took effect from 28 April 2014 and stamp taxes on the purchases of securities listed on “recognised growth markets”, which includes the London Stock Exchange’s AIM market, were abolished provided that those securities are not also listed on a “recognised stock exchange”.

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ASX requirement for non-transferable exchangeable shares may disadvantage Australian corporations looking at a Canadian acquisition transaction

Quentin Markin -

On March 31, 2014, Mamba Minerals, together with its wholly-owned subsidiary, Champion Exchange (Canco), completed the acquisition of all of the common shares of Champion Iron Mines (Champion) by means of a court-approved plan of arrangement. The transaction was structured as an exchangeable share transaction under which certain eligible Canadian shareholders could elect to receive all or part of their consideration in the form of exchangeable shares of Canco instead of ordinary shares of Mamba. The purpose of the exchangeable shares was to offer a tax deferred rollover for eligible Canadian shareholders, rather than the immediate triggering of a taxable disposition under the Canadian Income Tax Act.

As part of the approval process, Mamba sought confirmation from the Australian Securities Exchange (ASX) on which it was and remains listed (under its new name Champion Iron Limited), that in the opinion of the ASX “the terms that apply to each class of equity securities … be appropriate and equitable” as required by ASX Listing Rule 6.1. The ASX subsequently granted that confirmation in respect of the exchangeable shares but subject to conditions, including that the exchangeable shares not be transferrable. As a result, the transaction terms were ultimately amended, and the exchangeable shares made non-transferrable save for certain transfers that are integral to the operation of the exchangeable share structure, and transfer where, in effect, no beneficial ownership change occurs. Champion issued a press release on March 10, 2014 announcing the transfer restriction applicable to the exchangeable shares.

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FINTRAC advises of prohibition against certain conduct with corrupt foreign officials from Ukraine

Last week, in connection with the bringing into force of the Freezing Assets of Corrupt Foreign Officials (Ukraine) Regulations on March 5, 2014 under the Freezing Assets of Corrupt Foreign Officials Act, FINTRAC issued an advisory note cautioning Canadians, both locally and abroad, of the prohibition against (i) dealing, directly or indirectly, in any property, wherever situated, of a listed politically exposed foreign person; (ii) entering into or facilitating, directly or indirectly, any financial transaction related to a dealing referred to in (i); and (iii) providing financial services or other related services in respect of any property of a listed politically exposed foreign person. A politically exposed foreign person is one that is named in the regulations under Schedule 1 and includes, among others, certain former Ukrainian officials.

Under the FACFOA generally, Canadians are required to advise the Commissioner of the RCMP if they are in possession or have control over property of any of the corrupt foreign officials listed in the regulation, as well as provide information in respect of any transaction or proposed transaction relating to such property.

For further details, see the March 7, 2014 FINTRAC Advisory.

European Commission proposes "Volcker Rule"-style regulation

Simon Romano and Laura Levine

Following the United States’ lead in implementing the Volcker Rule, on January 29, 2014, the European Commission proposed a Regulation of the European Parliament and of the Council on structural measures improving the resilience of EU credit institutions.

Generally speaking, the proposed regulation aims at enhancing financial stability in the EU by means of structural reform of large banks. More specifically, and subject to certain thresholds and exceptions, the proposed regulation prohibits credit institutions and entities within the same group from (a) engaging in “proprietary trading” in financial instruments and commodities, or, (b) with their own capital or borrowed money and for the sole purpose of making a profit for their own account, (i) acquiring or retaining, directly or indirectly, units or shares of alternative investment funds (AIFs) or (ii) investing, directly or indirectly, in derivatives, certificates, indices or any other financial instrument the performance of which is linked to shares or units of AIFs. The proposed regulation would apply to EU credit institutions and their EU parents, their subsidiaries and branches, including those in non-EU countries, and to branches and subsidiaries in the EU of banks established in third countries; however, foreign subsidiaries of EU banks and EU branches of foreign banks could be exempted from the prohibition if they are subject to a legal framework deemed to be equivalent to the proposed regulation.

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Five developments to follow in 2014 - Shareholder proposals and director election

Stéphane Rousseau and Benoît C. Dubord -

Shareholder proposals are a staple of annual shareholders meetings. In the U.S. and Canada, proposals are mainly made by labour-affiliated investors, individual activists, and social-, policy- or religious- oriented investors. They cover a wide range of topics from corporate governance to corporate social responsibility.

In 2013, in the U.S., the most common topics dealt with political contributions and lobbying, board declassification and independent chairs. In Canada, compensation issues, such as say-on-pay or limiting CEO compensation, consisted of more than half the proposals in 2013.

According to U.S. and Canadian corporate law, the board of directors manages the business and affairs of a corporation. Shareholder proposals can only be presented as recommendations. Thus, a board of directors is not legally compelled to implement a proposal that is approved by a majority of shareholders.

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Time is of the essence in public disclosures by dual-listed AIM companies

Jeffrey Keey and Kate DaSilva -

A recent reprimand by the London Stock Exchange of an AIM/TSX dual-listed company for not releasing an announcement in the UK at the same time as the announcement was released in Canada highlights the importance of ensuring that dual-listed AIM companies comply with the AIM Rules for Companies at all times (the AIM Rules).

Pursuant to Rule 10 of the AIM Rules, “information which is required to be notified by the AIM Rules must be notified by the AIM company no later than it is published elsewhere”. In practice, this means that an announcement by a dual-listed AIM company cannot be released to a foreign market at a time the AIM market is closed. This includes situations where information is made public in Canada solely through publication on SEDAR. 

Thus, if such information is required to be disclosed pursuant to the AIM Rules, any filing on SEDAR must be announced in the UK at the same time. It is important to note that this rule, as reinforced by the recent warning issued by the AIM team, precludes the company from making an announcement when one market is open and the other is closed, regardless of whether the same announcement is made immediately upon the other market opening the following business day.

Ultimately, this rule is designed to prevent investors in one jurisdiction from gaining a competitive edge over others by virtue of that market having access to information at a time when the same is not available through approved channels to all markets. Practically speaking, companies should be mindful to keep their advisors in each of the jurisdictions where it is listed up to date and abreast of announcements or matters which the board anticipate being the subject of an announcement, particularly their AIM nominated advisor.

Surge of corporate interest in relocating to the UK as a result of UK Tax Reform

Jeffrey Keey and Stanley McKeen -

Recent amendments to the UK tax regime have resulted in as many as 60 multinational companies looking to complete global and regional headquarter relocations into the UK in the next 18 months, according to Ernst & Young (November 2013).

This increased interest in relocating to the UK has been primarily driven by: (i) reductions to the UK’s corporation tax rate, which is currently at 23% (to be reduced to 21% from April 2014 and to 20% from April 2015) and the benefits of the UK’s wide double taxation network, participation exemption, lack of withholding tax on dividends and non-taxation of disposals by non-residents; (ii) reforms to UK Controlled Foreign Companies (CFC) legislation and (iii) implementation of the new “Patent Box” regime. 

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African M&A: Review of new merger control regulations for 19 African nations

Jeffrey Keey and Stanley McKeen -

On January 14, 2013 a new merger control regime created by the Common Market for Eastern and Southern Africa (COMESA) came into force. The regime requires notification of mergers where at least one of the parties operates in two or more of COMESA’s member states. Failure to notify may result in penalties and/or the merger being of no legal effect in the COMESA region.

COMESA’s merger control regime affects 19 African nations and is enforced by the COMESA Competition Commission (CCC). Decisions made by the CCC are adjudicated by COMESA’s Board of Commissioners.

In November, proposals aimed at improving the merger control regime are expected to be reviewed by COMESA’s Council of Ministers. In the meantime, companies need to be aware of the current regulation and some of its peculiarities.

Response to the merger control regime has been mixed. Applause for its original aim of streamlining mergers in COMESA’s 19 member states has been silenced due to concerns over high filing fees, low thresholds for filings, long review periods and conflicting views regarding whether the CCC has exclusive jurisdiction to review transactions meeting COMESA’s filing thresholds. It is also unclear how the regime will operate in relation to mergers consummated outside the COMESA region that fall within the scope of the merger control regime.

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Alternative investment fund managers regulations 2013 - disclosure and reporting requirements for Canadian fund managers

Jeffrey Keey and Stanley McKeen -

As we initially discussed in an earlier post, Canadian managers of private equity, venture capital and other fund structures that are not regulated as “investment funds” under Canadian securities laws may, in the UK, be subject to marketing and related restrictions imposed by the Alternative Investment Fund Managers Regulations 2013 (the UK Regulations) when marketing alternative investment funds (AIFs) to professional investors in the UK pursuant to the UK’s national private placement regime. 

The UK Regulations, which implement the European Alternative Investment Fund Managers Directive (the Directive), came into force on 22 July 2013. As required by the Directive, the UK Regulations effectively regulate a much broader array of fund structures than conventional alternative investment funds. While EU member states were required to implement the Directive prior to July 22, 2013, only 12 of 31 EU member states had completed full legislative transposition within the deadline. Many of these 12 member states will provide transitional relief from the obligations imposed by the Directive for a one (and in some cases two) year period.

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UK Takeover Code expands jurisdiction

Jeffrey Keey and Stanley McKeen -

Effective September 30, 2013, the UK’s City Code on Takeovers and Mergers will be extended to apply to all Channel Islands, Isle of Man (British Crown Dependencies) and UK incorporated companies that have securities admitted to trading on the London Stock Exchange’s Alternative Investment Market or any other multilateral trading facility (MTF) in the UK, irrespective of whether their central management and control is in the UK, or the British Crown Dependencies (the residency test).  

In other words, the Code will remove the current residency test for such companies that have their registered office in the UK, Channel Islands or the Isle of Man. Thus, companies incorporated in those jurisdictions that may not have been subject to the Code due to their directors being located overseas will now be subject to the Code.

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Canadian regulators sign MOUs with European Regulators under AIFMD

Alix d'Anglejan-Chatillon -

Following our recent post, the Ontario Securities Commission, the Autorité des marchés financiers, the Alberta Securities Commission and British Columbia Securities Commission announced earlier today that they have entered into supervisory Memoranda of Understanding (MOUs) with financial regulators of a number of European Union (EU) and European Economic Area (EEA) member states for the supervision of alternative investment fund managers as required under the EU Alternative Investment Fund Managers Directive (AIFMD).  The AIFMD entered into force on July 22.

The AIFMD will directly impact both Canadian managers which manage funds in the EU and Canadian funds marketed in the EU by Canadian or EU-based fund managers.  Significantly, the AIFM Directive effectively regulates a much broader array of fund structures than conventional alternative investment funds and covers hedge funds, private equity funds, venture capital funds, real estate funds, commodity funds, investment trusts and other collective investment vehicles.   As a result, managers of funds that are not regulated as “investment funds” under Canadian securities laws may be subject to the application of AIFMD in connection with their European activities.

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OSC, ASC and BCSC ink supervisory MOU deals with Bank of England and FCA

The OSC today announced that it had, along with the ASC and BCSC, entered into Memoranda of Understanding with the Bank of England and the U.K. Financial Conduct Authority regarding mutual assistance in the supervision and oversight of regulated entities that operate in both the U.K. and the participating Canadian jurisdictions. The MOUs are subject to Ministerial approvals.

Canadian and EU regulators negotiating to allow Canadian fund managers to continue to market in the EU

Jeffrey Keey -

Canadian managers of funds that are currently marketed into the European Union (EU) should be aware of the broad ambit of the Alternative Investment Fund Managers Directive (the AIFM Directive) and of the restrictions the AIFM Directive may impose as of July 22, 2013 on their activities in the EU.  Significantly, Canadian managers of private equity, venture capital and other fund structures that may not be regulated as “investment funds” under Canadian securities laws may be subject to marketing and related restrictions imposed by the AIFM Directive which effectively regulates a much broader array of fund structures than conventional alternative investment funds.

We understand from unofficial consultations with staff of the Ontario Securities Commission and the Quebec Autorité des marchés financiers that they are currently negotiating a supervisory cooperation Memorandum of Understanding (the MOU) with the European Securities and Markets Authority (ESMA) with the intention of having co-operation agreements in place with individual EU member states prior to the July 22,  2013 deadline for EU member states to implement the AIFM Directive.

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UK implements "twin peaks" model of financial regulation

On April 1, the U.K. moved to a "twin peaks" model of financial regulation that saw the Financial Services Authority cease to exist and its work split between two new regulatory authorities. Specifically, the Prudential Regulation Authority, part of the Bank of England, has been tasked with the prudential regulation of deposit-takers such as banks and credit unions, as well as insurers and major investment firms. Meanwhile, the Financial Conduct Authority will now regulate the conduct of financial services firms "to ensure that business across financial services and markets is conducted in a way that advances the interests of all users and participants."

As we've discussed previously, the implementation of the new regulatory regime follows a process initiated in 2010, when Lord Adair Turner, Chairman of the FSA , discussed a "major shift in philosophy" towards a "more pre-emptive and intrusive approach to supervision".

IOSCO releases report on regulation of DMIs

Margaret Grottenthaler -

On June 6, the International Organization of Securities Commissions (IOSCO) published its Final Report on International Standards for Derivatives Market Intermediary Regulations. The report, which focuses on OTC derivative market intermediaries (DMIs) that deal with non-retail clients and counterparties, makes various recommendations with respect to: (i) the obligations of DMIs; (ii) requirements to manage counterparty risk; and (iii) protecting participants in the OTC derivatives market from unfair, improper or fraudulent practices.

The report sets out its recommendations in very general terms that are not likely to provide much in the way of specific guidance for local regulators. It recommends for example the establishment of minimum standards for the registration or licensing of DMIs. Relevant material information on licensed or registered DMIs should be publically available. According to the recommendations, market authorities should also consider imposing some form of capital or other financial resources requirements for DMIs that are not prudentially regulated.

The report also recommends that DMIs be subject to business conduct standards tailored to the OTC derivatives market. DMIs would also be required to have effective corporate governance frameworks in place, supervisory policies and procedures to manage their OTC derivatives operations, and risk management systems to manage OTC derivatives related business risks.

Ultimately, the report is intended to further G-20 Leaders' objective of reforming the OTC derivatives market to improve transparency, mitigate systemic risk and protect against market abuse.  Of more interest to Canadian market participants will be the CSA consultation paper on market intermediary regulations to be published later this summer. 

Proposed changes to the UK's Listing Rules - Key changes explained

Kate DaSilva and Stanley McKeen -

In January of this year the U.K. securities regulator, the Financial Services Authority (the FSA), issued Consultation Paper CP12/2 proposing amendments to rules applied by it as the UK Listing Authority to companies listed or seeking listings on the UK’s regulated stock market (the Listing Rules). As we discussed briefly earlier this week, the paper proposes a series of changes, primarily to the Listing Rules, but also to rules which apply to prospectuses being issued in the UK (the Prospectus Rules) and to the on-going share capital, financial and other disclosures required in respect of companies listed in the UK (the Disclosure and Transparency Rules). Key proposed amendments apply to transactions, reverse takeovers (RTOs), externally managed companies (also known as special purpose acquisition companies or "SPACs"), the sponsor regime and the ability to buyback more than 15% of a company’s own shares.   

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FSA proposes tightened regulation of reverse takeovers

Kate DaSilva and Stanley McKeen -

Earlier this year, the U.K. Financial Services Authority issued a consultation paper proposing amendments to the UK Listing Authority's Listing Rules that would, among other things, amend the regulations respecting reverse takeovers. According to the FSA, the proposed changes would ensure that reverse takeovers could not be employed as a "back-door" route to listing for otherwise ineligible companies.

Definition of "reverse takeover"

Under the amendments, a reverse takeover would be defined as

a transaction, whether effected by way of direct acquisition by the issuer or a subsidiary, an acquisition by a new holding company of the issuer or otherwise, of a business, a company or assets:

(1) where any percentage ratio is 100% or more; or

(2) which in substance results in a fundamental change in the business or in a change in the board or voting control of the issuer.

When calculating the percentage ratio, the issuer should apply the class tests [these consist of a gross assets test, a profits test, a consideration test and a gross capital test].

In considering whether a fundamental change in the business occurred, the FSA would consider the extent to which the transaction would change the strategic direction or nature of the business, the impact the transaction would have on the industry sector classification of the enlarged group and the impact on the end users and suppliers. According to the consultation paper, the proposed definition would remove "any uncertainty as to which structures result in a reverse takeover".

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IOSCO issues consultation report on ETFs

Last week, the International Organization of Securities Commissions (IOSCO) released a consultation report intended to provide industry and regulators with guidelines against which the quality of regulation and industry practices concerning exchange traded funds could be assessed. Specifically, the report outlines a number of proposed principles related to the structuring of ETFs, classification and disclosure, and marketing and sale of shares. IOSCO is accepting comments on its consultation paper until June 27, 2012. For more information, see Principles for the Regulation of Exchange Traded Funds

Canadian regulators sign MOU with ESMA regarding credit rating agencies

The Ontario Securities Commission, Quebec's Autorité des marchés financiers and the British Columbia Securities Commission today announced that they have entered into a Memorandum of Understanding with the European Security Market Authority with respect to the supervision and oversight of credit rating agencies. The MOU outlines terms and conditions, as well as a framework for consultation, cooperation and information-sharing between the organizations. Assuming Ministerial approval, the MOU will come into effect on April 20, 2012.

EU adopts new regulation on short selling and credit default swaps

On February 21, the European Union adopted a regulation on short selling and certain aspects of credit default swaps. The regulations are intended to introduce common EU transparency requirements and harmonize the powers that regulators can use in exceptional situations where there is a serious threat to financial stability. As we discussed in an October 2010 post, the regulation was initially proposed by the European Commission in a few years ago.

Canadian regulators sign MOU with Australian regulator

Earlier this month, the Ontario Securities Commission, Quebec's Autorité des marchés financiers, the Alberta Securities Commission and the British Columbia Securities Commission announced the signing of a memorandum of understanding with the Australia Securities and Investments Commission. The MOU is intended to facilitate the supervision of regulated entities operating in both Canada and Australia by providing a mechanism for consultation, cooperation and exchange of information among the regulators.

CFTC and SEC release joint report on international swap regulation

On January 31, the U.S. Commodity Futures Trading Commission and the Securities Exchange Commission released a joint report on how swaps and security-based swaps are regulated internationally. Specifically, the report describes the regulatory framework for OTC derivatives in the Americas, EU and Asia, analyzes the similaries and differences across jurisdictions, considers issues regarding harmonization and makes a number of regulatory recommendations.

FSB releases Canada peer review report

On January 30, the international Financial Stability Board released its Peer Review of Canada report. The peer review, undertaken in 2011, was intended to assess Canada's progress in addressing issues identified during this country's Financial Sector Assessment Program (FSAP) review in 2007-2008. FSAP assessments of member countries occur every five years, with peer reviews typically following two or three years later.

Ultimately, the report concluded that Canadian authorities have made good progress in addressing FSAP recommendations on banking supervision, stress testing and the early intervention regime. According to the report, authorities have also taken steps to address issues with respect to ABCP and structured finance markets and have also made progress on recommendations in the securities sector.

The report's conclusions on the last point may be of particular interest. Specifically, the FSB notes the improvements made on such issues as coordination among provincial regulators, registration reform and enforcement actions. According to the report, however, additional steps are still needed.

Notably, the report cites the fact that the passport system does not address policy development or enforcement matters. Further, while the passport system is intended to sustain coordination, the report notes that the CSA is not a legal entity and relies on the goodwill and consensus of its members. According to the report, a single national securities regulator is preferable. The FSB also highlights issues with respect to, among other things, the oversight reviews of SROs, the effectiveness of enforcement actions, the oversight of derivative products and the differences in regulation of market intermediaries.

Final CPSS/IOSCO report on OTC derivatives data reporting released

Last week, the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions published a final report regarding OTC derivatives data reporting and aggregation requirements. Among other things, the report sets out recommendations with respect to such things as minimum data reporting requirements, access to data by authorities, and the development of an international product classification system for OTC derivatives. As we discussed in a post last year, the CPSS and IOSCO released a draft of the report in August 2011, and the final version reflects public comments received during the consultation process.

UK Takeover Code - Final changes support target boards

Sandra Bates

Further to our May 2011 post, the UK Takeover Panel has finalised significant amendments to the UK Takeover Code which, when implemented on September 19, 2011, will herald a substantial rebalancing of power in favour of target boards.

As expected, the principal amendments to the Code are substantially the same as originally proposed by the Panel. This draws a line under the Panel’s protracted consultation process triggered by the political furore arising from the successful takeover by Kraft of Cadbury in 2010.

From a strategic and commercial perspective, the most important changes are:

  • the banning of break fees and other common deal protection measures;
  • the public identification of all potential bidders at the start of a transaction via a “possible offer” announcement to be made by the target company;
  • the imposition of a fixed four week period between the “possible offer” announcement identifying a potential bidder and the announcement of a fully financed firm offer (or a statement that no offer will be made) by that bidder; and
  • the requirement for all bidders to disclose details of the financing of the offer (including the refinancing of any existing target company debt) and the fees and expenses associated with the financing in the offer document and to publicly disclose (via a website) the financing documents. 
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CPSS/IOSCO release report on OTC derivatives data reporting and aggregation

Earlier this week, the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions released a consultative report that makes various recommendations regarding OTC derivatives data reporting and aggregation requirements. As we discussed in October 2010, IOSCO formed a Task Force on OTC Derivatives Regulation last year with a mandate that included coordinating the efforts of international regulators with respect to OTC derivatives and producing a report on data reporting and aggregation requirements by July of this year.

Among other things, the report recommends that: (i) at a minimum, transaction level data be reported to trade repositories and that such data include at least transaction economics, counterparty information, underlier information, operational data and event data; (ii) trade repositories implement measures to provide effective and practical data access to authorities; (iii) a standard system of Legal Entity Identifiers be developed and implemented for the aggregation of OTC derivatives data; and (iv) a standard product classification system for OTC derivatives products be developed, led by industry and in consultation with authorities.

The CPSS and IOSCO are accepting comments on the consultative report until September 23, 2011.

UK moves to a new financial regulatory model

As we've discussed in the past, the UK financial regulatory universe is undergoing, in the words of Financial Services Authority Chairman Adair Turner, a "major shift in philosophy". Under the new system of regulation, the Financial Policy Committee of the Bank of England will be responsible for macro-prudential regulation, a new Prudential Regulation Authority is being created as a subsidiary of the Bank of England to supervise deposit takers, insurers and significant investment firms and a new Financial Conduct Authority will be responsible for regulating conduct in retail and wholesale markets.

In preparation for the upcoming changes, the FSA recently published a document outlining how the FCA is expected to approach the delivery of its objectives. Specifically, the document sets out the objectives and powers of the FCA and the regulatory approach expected to be taken. The document also provides a summary of the FCA's plans to coordinate with regulatory authorities in the UK and internationally.

The FSA's paper follows publication of a consultation document by HM Treasury in February that provided further details on the UK Government's proposals for regulatory reform and the more recent White Paper, which takes into account public response to the consultation document.

Amendments to UK Takeover Code would restrict deal protection measures

As we discussed in this November blog post, the UK's Panel on Takeovers and Mergers made a number of recommendations last year regarding the amendment of the City Code on Takeovers and Mergers. Specifically, the Panel recommended, among other things, strengthening the position of offeree companies in a takeover bid by prohibiting deal protection measures and inducement fees other than in certain limited cases and requiring the disclosure of offer-related fees. The Panel has now released proposed amendments to the Code to implement its earlier recommendations. Comments on the proposals are being accepted until May 27. The Panel expects to release final text of the amendments once it has considered responses to its proposals.

CPSS and IOSCO release report on financial market infrastructures

On March 10, the Bank for International Settlements'  Committee on Payment and Settlement Systems and the International Organization of Securities Commissions released a consultative report containing a set of principles designed to apply to financial market infrastructures that record, clear and settle transactions in financial markets. The new principles, which consider such issues as credit and liquidity risk management, settlement, efficiency and transparency, are intended to replace the existing sets of CPSS and CPSS-IOSCO standards and provide greater consistency in the regulation and oversight of FMIs worldwide.

The OSC, AMF and Bank of Canada recently cited their participation in developing the report and encouraged Canadian stakeholders to provide comments to IOSCO and the BIS by the July 29, 2011 deadline.

For more information, see Principles for financial market infrastructures.

IOSCO releases principles on point of sale disclosure

The Technical Committee of the International Organization of Securities Commissions (IOSCO) released a report last week setting out principles designed to assist market authorities when considering requirements regarding point of sale disclosure. Specifically, the principles articulated by the report for disclosure of key information are:

  1. Key information should include disclosures that inform the investor of the fundamental benefits, risks, terms and costs of the product and the remuneration and conflicts associated with the intermediary through which the product is sold. Such product disclosure could include the name of the investment and type of product, the risk and reward profile of the product and its fees and costs.
  2. Key information should be delivered, or made available, for free, to an investor before the point of sale, so that the investor has the opportunity to consider the information and make an informed decision about whether to invest.
  3. Key information should be delivered or made available that is appropriate for the target investor.
  4. Disclosure of key information should be in plain language and in a simple, accessible and comparable format to facilitate a meaningful comparison of information disclosed for competing collective investment scheme products.
  5. Key information disclosures should be clear, accurate and not misleading to the target investor. Disclosures should be updated on a regular basis.
  6. In deciding what key information disclosure to impose on intermediaries and product producers, regulators should consider who has control over the information that is to be disclosed.

Closer to home, as we discussed in December, the Ontario Minister of Finance has now approved amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure, (first published in October 2010 and approved with minor changes) to implement point of sale disclosure for mutual funds. These amendments became effective on January 1.

U.K. Takeover Panel proposes changes to Takeover Code

Earlier this year, the Code Committee of the U.K. Panel on Takeovers and Mergers released a Consultation Paper setting out suggestions for possible amendments to the Takeover Code and requesting public feedback. The Consultation Paper resulted in an unprecedented number of responses and on October 21, the Code Committee issued a report outlining its conclusions on the principal issues considered. Notably, the Code Committee focused on comments made to the effect that it has become to easy for “hostile” offerors to succeed and on the potential for the outcome of an offer to be unduly influenced by the actions of “short-term” investors, concluding that hostile offerors can obtain a tactical advantage over the target to the detriment of the target and its shareholders. In light of this conclusion, the Code Committee intends to move forward with proposals that are aimed at reducing this tactical advantage and improving the offer process to better consider the position of persons, in addition to target shareholders, who are affected by the takeover.

Specifically, the Code Committee recommended: 

  1. Increasing the protection for offeree companies against protracted "virtual bid" periods whereby a potential offeror announces that it is considering making an offer but doesn't commit to doing so.  The proposals would require that potential offerors be named in the announcement following an approach, which would initiate an offer period. Except with consent of the Takeover Panel, the potential offeror would then have four weeks to clarify its intentions;
  2. Strengthening the position of the offeree company by prohibiting deal protection measures and inducement fees other than in certain limited cases. According to the Code Committee, contractual protections (such as undertakings given by the target to the offeror to take or refrain from taking certain actions) have detrimental effects for offeree company shareholders. The proposals would also clarify that offeree company boards are not limited in the factors that they may take into account in providing their opinion and recommendation on the offer;
  3. Increasing transparency and improving the quality of disclosure by requiring the disclosure of offer-related fees and requiring further financial disclosure with respect to offerors and the financing offers; and
  4. Providing greater recognition of the interests of the offeree company employees by improving the quality of disclosure with respect to the offeror's intentions and improving the ability of employee representatives to make their views known. In this regard, the Committee recommended requiring that statements regarding the offeror’s intentions about the target and its employees, locations of business and fixed assets be expected to hold true for at least one year following the offer becoming or being declared wholly unconditional.

According to the report, the Code Committee will now publish further consultation papers setting out the proposed amendments in full.

CSA members sign agreement with Chinese insurance regulator

The Canadian Securities Administrators announced last week that eight of its members (the provincial regulators but for Newfoundland and PEI) signed a regulatory cooperation agreement with the China Insurance Regulatory Commission. According to the CSA release, the agreement "paves the way for Chinese insurers to invest in financial products on Canadian markets regulated by CSA participating jurisdictions." The agreement is currently in effect in seven jurisdictions and, pending ministerial approval, will take effect in Ontario on January 12, 2011.

IOSCO announces OTC derivative regulation task force

On October 15, the International Organization of Securities Commissions (IOSCO) announced the formation of a task force intended to coordinate the efforts of international regulators with respect to over-the-counter (OTC) derivatives markets. Specifically, the Task Force on OTC Derivatives Regulation will be charged with developing consistent international standards, coordinating other related international initiatives and serving as a centralized group within IOSCO for the consultation and coordination generally on related issues.

The Task Force's work, to follow a phased approach will include: (i) conducting a study by the end of January 2011 on exchange and electronic platform trading for derivatives; (ii) producing a report by July 2011 on data reporting and aggregation requirements; and (iii) setting out consistent international standards for OTC derivatives regulation in the certain areas.

FSA proposes changes to complaints handling standards

On September 30, 2010, the U.K. Financial Services Authority (FSA) released a consultation paper proposing changes to its rules regarding how financial firms handle consumer complaints. Specifically, the FSA proposed: (i) abolishing the current two-stage complaints handling process; (ii) requiring firms to identify a senior individual responsible for complaints handling; (iii) setting out guidance regarding how firms can satisfy rules relating to root cause analysis of complaints received; (iv) providing guidance regarding the requirement that firms take into account decisions of the ombudsman service and other material when resolving complaints; and (v) increasing the ombudsman service's award limit from £100,000 to £150,000. The changes are proposed to be implemented between August 2011 and July 2012 and would, according to the FSA, "improve how customers are treated when they complain to firms, and ultimately lead to increased consumer confidence in financial services".

In Canada, changes to IIROC's Dealer Member Rules requiring its members to designate a complaints officer and establish complaint-handling procedures went into effect on February 1 of this year. Changes to the MFDA policy regarding complaint handling also took effect on February 1. The CSA have also proposed amendments to National Instrument 31-103 Registration Requirements and Exemptions and the related companion policy with respect to client complaints and dispute resolution. While these provisions currently apply to all registrants, one of the proposed amendments would exempt IIROC and MFDA members from the relevant sections of NI 31-103CP now that MFDA and IIROC rules have come into effect.

Basel Committee releases corporate governance principles

The Basel Committee on Banking Supervision yesterday released guidance intended to assist banks in enhancing their corporate governance frameworks. Principles for enhancing corporate governance provides guidance with respect to such issues as the responsibilities of the board, board qualifications, risk management and internal controls and the board's oversight of a compensation system's design and operation. The document also provides guidance respecting the role of supervisors.

According to the Basel Committee, the principles "address fundamental deficiencies in bank corporate governance that became apparent during the financial crisis." A consultative version of the document was published in March 2010.

EC releases short sales proposal

Last month, the European Commission unveiled a proposed regulation intended to address short selling and certain aspects of credit default swaps. According to the EC, its proposal would, among other things, improve transaction transparency, provide for a coordinated European framework and address specific risks of naked short selling. If adopted, the regulation is expected to take effect on July 1, 2012.

For more information, see the EC's press release, frequently asked questions, text of the EC proposal, the impact assessment and the summary of impact assessment.

European Commission proposes OTC derivatives regulation

Citing the need to increase transparency and reduce counterparty and operational risk, the European Commission recently released new proposals to regulate the OTC derivatives market. Among other things, the proposals would require trades in OTC derivatives in the EU to be reported to central data centres (trade repositories) accessible to regulators. A new European Securities and Markets Authority would be responsible for registering and monitoring trade repositories, while standard OTC derivatives would have to be cleared through central counterparties. The EC expects the proposals to be promulgated by the end of 2011.

For more information, see the EC Press Release and the accompanying Impact Assessment.

FSA proposes changes to regulation of trading activity

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.

CESR publishes proposals following review of MiFID

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.

UK Treasury launches financial regulation consultation

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.

FSA Chairman discusses UK regulatory changes

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 intrusive 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.

G-20 Toronto Summit declaration speaks of financial reform

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.

European Parliament calls for stricter derivatives rules

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.

UK to overhaul financial regulation

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.

IOSCO publishes revised objectives and principles for global regulators

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".

Six securities authorities join IOSCO consultation and cooperation MOU

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.

CESR increases coordination of members' market surveillance efforts

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".

IOSCO publishes Principles Regarding Cross-Border Supervisory Cooperation

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.

Germany bans naked short selling

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.

CPSS and IOSCO release two reports regarding OTC derivatives

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.

IOSCO releases consultation paper regarding credit rating agencies

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.

Eight Canadian securities commissions sign arrangement with Chinese regulator

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.

IMF releases chapter on reducing risk respecting OTC derivatives

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.

FSA announces new rules on adviser commissions

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.”

Eurex receives regulatory exemption from AMF

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. 

European securities committee recommends short selling disclosure regime

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.

IOSCO publishes periodic disclosure principles

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.

IOSCO and CPSS to review standards for financial market structures

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."

FSA proposes enhancing standards for investment advisers

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.

Australian commission makes recommendation for "two strikes" approach to executive compensation

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.

IASB and FASB reaffirm commitment to improve IFRS

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.

IOSCO publishes report on private equity conflicts of interest

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.

FSA releases discussion paper respecting global banking crisis

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.

Senior Supervisors Group issues report on risk management and internal controls

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.

FSA releases summary of responses to its discussion paper on short selling

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.

Recently released reports consider structured finance products and special purpose entities

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.

G-20 Leaders' Statement speaks of executive compensation reform

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.

SEC and FSA discuss common approaches to regulatory issues

Chairman Schapiro
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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."

IOSCO publishes regulatory standards respecting funds of hedge funds

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."

FSA announces proposals requiring financial firms to publish complaint data

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.

IASB publishes IFRS for small and medium-sized entities

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.

IOSCO publishes report regarding regulation of hedge funds

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.

IOSCO publishes report on regulation of short selling

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.

Germany restricts executive compensation

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.

IOSCO report on direct electronic access to markets published

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.

Mutual Recognition Agreement signed between SEC and Australian Securities and Investments Commission

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.