The Financial Report – Volume 5, No. 2 – January 2016 (Global)


•  Discussion and Analysis

•  News from the Americas

•  US Securities and Exchange Commission Developments

•  US Commodity Futures Trading Commission Developments

•  US Banking and Treasury Department Developments

•  US Judicial Developments

•  US Exchanges and Self-Regulatory Organizations

•  News from Asia and the Pacific

•  News from Europe

•  Global Regulators

Discussion and Analysis

This week, the United States Supreme Court agreed to hear a case that could help to define what conduct constitutes insider trading and what level of proof the government must meet to successfully prosecute alleged insider trading violations. The Court’s announcement came as a surprise to many industry commentators—last October, the Court had declined to consider another case involving many of the same issues.

The issue centers on whether the government must prove that an investor knew his information came from a corporate insider who received a “tangible benefit” for passing along the tip.

In the current case, the Ninth US Circuit Court of Appeals, based in San Francisco, upheld the conviction of Bassam Salman, who received trading tips from his brother-in-law, a former investment banker. Mr. Salman was sentenced to three years in prison for trading on inside information. His brother-in-law had pleaded guilty in connection with the same activities at issue in the current case.

Mr. Salman’s defense counsel sought to rely upon the New York-based Second US Circuit Court of Appeals’ ruling in late 2014 that severely limited insider-trading prosecutions. In that case, United States v. Newman, the court held that two hedge fund managers could not be convicted of insider trading unless it could be shown that they knew the original source of the information had received a concrete benefit. Mr. Salman argued that evidence of a family relationship between the tipper and the tippee was not enough to demonstrate that the insider passing along the tip received a tangible personal benefit. The Ninth Circuit rejected that argument in its ruling last July, and Mr. Salman has been serving his prison sentence since August 2014.

Presumably, in agreeing to consider the issue, the Supreme Court will clarify what is considered to be a personal or tangible benefit to sustain an allegation of insider trading against a person receiving non-public information from such a tipper. Of course, it also is possible that the Court will rule narrowly, based on the specific facts of the case, and will not meaningfully resolve the confusion of what constitutes a personal benefit. In the current case, the government argued that Mr. Salman “knew full well” that his brother-in-law was providing the information as a gift to him – that he provided the information because it would be personally beneficial.

Prosecutors have said that the Newman ruling significantly hampered their ability to pursue some insider trading cases by narrowly defining what constituted a benefit to the tipper. By finding that mere “friendship” or the exchange of career advice was not enough to constitute a personal benefit, the government only could pursue investigations in which it could demonstrate that the tippees knew their friend or relative would receive an explicit, specific, consequential gift or benefit as a direct result of receiving the confidential information.

If the US Supreme Court rules in favor of Mr. Salman, or declines to elaborate on what constitutes a personal benefit, it may essentially be sanctioning the sharing of inside information among friends and relatives. Certainly such a result will make it even more difficult for the Justice Department to prosecute alleged insider trading violations.

News from the Americas

United States

Supreme Court will hear appeal on insider trading conviction. The US Supreme Court granted certiorari to hear an appeal of the Ninth Circuit’s affirmation of the insider trading conviction of Bassam Yacoub Salman. Salman is asking the Court to consider his conviction in light of a split in the circuits that resulted from the Second Circuit’s earlier decision in United States v. Newman, and determine whether there needs to be an exchange of significant personal benefit for the government to prevail in insider trading cases involving tippers and tippees. (1/19/2016) Salman v. United States.


OSC publishes changes to companion policy 45-501CP. The Ontario Securities Commission (OSC) published changes to Companion Policy 45-501CP – to OSC Rule 45-501 Ontario Prospectus and Registration Exemptions. (1/14/2016) OSC rules and policies.

OSC publishes staff notice on non-GAAP financial measures. The OSC published staff notice 52-306 – Non-GAAP Financial Measures to provide guidance to an issuer that discloses non-GAAP financial measures, which may mislead investors if they are not accompanied by the appropriate disclosure. The guidance applies both to an issuer that uses International Financial Reporting Standards (IFRS) as well as to an issuer that uses accounting principles other than IFRS. (1/14/2016) OSC staff notice.

OSC publishes Notice of Ministerial Approval of Multilateral Instrument 45-108 Crowdfunding. The OSC published the Notice of Ministerial Approval of Multilateral Instrument 45-108 Crowdfunding and Consequential Amendments. (1/14/2016) OSC press release. Risk Acknowledgement form. Notice of Specified Key Events form.

OSC releases YouTube video on the purpose and focus of Ontario’s new Investor Office. The OSC released Financial Success is a Marathon, Not a Sprint, which is the second in a trilogy of YouTube videos that highlight the purpose and focus of Ontario’s new Investor Office. This video follows the first in the series, which was entitled Behind Every Statistic is a Person. (1/12/2016)OSC press release.

US Securities and Exchange Commission Developments

Interim Final Rules and Requests for Comment

SEC adopts FAST Act revisions to financial reporting forms for emerging growth and smaller reporting companies. The Securities and Exchange Commission (SEC) approved interim final rules that amend two financial reporting forms for emerging growth companies and smaller reporting companies as mandated by the Fixing America’s Surface Transportation (FAST) Act. The interim final rules became effective on January 19, 2016. The SEC also requested comment on whether the rules should be extended to other registrants or forms. Comments are due on or before February 18, 2016. (1/13/2016) SEC press release.

Proposed Rules

SEC reopens comment period on proposed requirements for security-based swap data repositories. The SEC has reopened the comment period on proposed rules that would require security-based swap data repositories to make data available to regulators and other authorities. The SEC decided to reopen the comment period in response to the elimination of the indemnification requirement for security-based swap data repositories by the recently enacted Surface Transportation Reauthorization and Reform Act. Comments are due within 30 days of publication in the Federal Register. (1/15/2016) SEC Release. No. 34-76922.


Money Market Fund Reform FAQs. The SEC’s Division of Investment Management updated information in its Money Market Fund Reform Frequently Asked Questions regarding required disclosures on Form N-CR, website disclosures, money market fund advertisements, and government money market funds. (1/13/2016) Money Market Fund Reform FAQs.

Prepaid tuition programs request interpretive guidance on their treatment as qualified institutional buyers and accredited Investors. The SEC’s Division of Corporation Finance issued a no-action letter in response to a request by the College Savings Plans Network in which it indicated that eleven state-operated, prepaid tuition programs may be treated as qualified institutional buyers under Rule 144A and as accredited investors under Rule 501(a)(3) of Regulation D, as long as they satisfy the other requirements of these definitions under the respective rules. (1/12/2016) SEC no-action letter.

Division of Investment Management addresses mischaracterization of mutual fund sub-accounting fees. The SEC Division of Investment Management published guidance addressing the mischaracterization of sub-accounting fees by mutual funds as not related to distribution. The Division claimed in the guidance that this practice may result in the inappropriate use of fund assets to pay for distribution-related activities and may mislead investors about investor returns. (1/6/2016) IM Guidance Update 2016-01.

Selected Enforcement Actions

Investment adviser that failed to disclose 12b-1 fees violated best execution duty and compliance requirements. The SEC brought charges against an investment adviser and its co-owners in a settled administrative proceeding for failing to follow best execution requirements and failing to disclose conflicts of interest by investing certain advisory accounts in shares that charged 12b-1 fees. As Chief Compliance Officers, the co-owners also failed to conduct annual compliance reviews for several years and made inadequate disclosures of the 12b-1 fees. Without admitting or denying the allegations, the respondents agreed to settle the charges by consenting to the entry of cease and desist and censure orders and the payment of US$201,985.66 in disgorgement and US$23,422.66 in prejudgment interest on a joint and several basis. The Adviser and the co-owners each agreed to pay civil monetary penalties of US$80,000, US$40,000, and US$20,000. The Adviser also agreed to enlist the services of an independent compliance consultant. (1/14/2016) In the Matter of Everhart Financial Group, Inc., Richard Scott Everhart, and Matthew James Romeo, SEC Release No. 34-76897.

Other Developments

SEC announces public meeting of its Equity Market Structure Advisory Committee. The SEC’s Equity Market Structure Advisory Committee will hold a public meeting on February 2, 2016. Written statements should be received on or before January 27, 2016. (1/13/2016) SEC Commission Notice 34-76883.

SEC awards whistleblower claim to outsider who provided analytical information regarding potential securities law violations. The SEC approved a whistleblower award claim totaling over US$700,000 to an individual who provided an independent, detailed analysis to the SEC that led to a successful enforcement action. (1/15/2016) SEC press release.

Division of Investment Management publishes private fund statistics. The SEC’s Division of Investment Management released Private Fund Statistics for 2015 Q1, 2015 Q2, and revised statistics for 2014 Q4. (1/14/2016)

SEC 2016 examination priorities. The SEC’s Office of Compliance Inspections and Examinations (OCIE) announced its 2016 examination priorities. OCIE emphasized new areas of focus, including liquidity controls, public pension advisers, product promotion, exchange-traded funds, and variable annuities. (1/11/2016) SEC press release.

Staff announcements. The SEC announced the departure of Julie M. Riewe, Co-Chief of the Enforcement Division’s Asset Management Unit, who will leave the agency in February. (1/11/2016) SEC press release.

Fee Rate Advisory announces increase in securities transaction fee rates. The SEC announced that beginning on February 16, 2016, the fee rate applied to most securities transactions will be set at $21.80 per million dollars. The assessment on security futures transactions will remain unchanged at $0.0042 for each round turn transaction. (1/7/2016) SEC press release.

US Commodity Futures Trading Commission Developments

Final Rules

CFTC adopts regulations on margin requirements for uncleared swaps for swap dealers and major swap participants. The US Commodity Futures Trading Commission adopted regulations to implement a provision of the Commodity Exchange Act added by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The provision requires the CFTC to adopt initial and variation margin requirements for certain swap dealers and major swap participants. The final rules will become effective April 1, 2016. The CFTC also adopted and invited comment on an interim final rule that will exempt certain uncleared swaps with certain counterparties from these margin requirements. This interim final rule implements Title III of the Terrorism Risk Insurance Program Reauthorization Act of 2015, which exempts from the margin rules for uncleared swaps, certain swaps for which a counterparty qualifies for an exemption or exception from clearing under the Dodd-Frank Act. Comments on the interim final rule must be received on or before February 5, 2016. (1/6/2016) CFTC Rule.

No-Action Relief

No-action relief extended on masking certain reportable identifying information. The CFTC announced that its Division of Market Oversight (DMO) has issued a letter providing a conditional, time-limited extension of the relief provided in CFTC Letter 13-41 regarding masking of certain identifying information required to be reported. (1/15/2016) CFTC press release.

CFTC’s Division of Clearing and Risk delivers no-action relief to small bank holding companies and Community Development Financial Institutions. The CFTC’s Division of Clearing and Risk (DCO) issued no-action relief from the swap clearing requirement to small bank holding companies and savings and loan holding companies having consolidated assets of $10 billion or less, as well as Community Development Financial Institutions that have received a certification from the US Department of the Treasury (CDFIs). (1/8/2016) CFTC press release.

CFTC Enforcement

Federal court orders approximately US$500 million in sanctions for global commodity futures and options fraud. The CFTC announced that the US District Court for the Northern District of Illinois entered a default judgment against Nikolai S. Battoo and his three companies. Pursuant to the order, Battoo and his companies must pay restitution in the amount of US$294,246,741.63 to the victims of their fraud, as well as a US$147 million civil monetary penalty, and also must disgorge US$49 million that Battoo received as ill-gotten gains. The order stems from a 2012 CFTC complaint charging the defendants with making fraudulent misrepresentations and omissions in connection with significant losses sustained by commodity pools through periodic account statements and asset verification documents, as well as through telephone calls and letters to pool participants. (1/13/2016) CFTC press release.

Other Developments

CFTC delegates to NFA responsibilities related to notices of swap valuation disputes. The CFTC issued an order delegating to the National Futures Association (NFA) particular responsibilities that are related to notices of swap valuation disputes filed by swap dealers and major swap participants pursuant to CFTC Regulation 23.502(c). (1/14/2016) CFTC press release.

Technology Advisory Committee to meet. The CFTC announced that its Technology Advisory Committee (TAC) will be holding a public meeting at its Washington, DC headquarters on Tuesday, January 26, 2016 from 9:45am to 3:45pm. The TAC will discuss the CFTC’s proposed Regulation Automated Trading (Reg AT), swap data standardization and harmonization, and blockchain and the potential application of distributed ledger technology to the derivatives market. (1/13/2016)CFTC press release.

US Banking and Treasury Department Developments

Federal Reserve

FRB announces income and expense data and transfers to the Treasury for 2015. The Federal Reserve Board (FRB) announced preliminary results indicating that the Reserve Banks provided for payments of roughly US$97.7 billion of their estimated 2015 net income to the US Treasury. In addition, the Federal Reserve transferred to the Treasury US$19.3 billion from Reserve Bank capital surplus on December 28, 2015, the amount necessary to reduce aggregate Reserve Bank surplus to the US$10 billion surplus limitation in the Fixing America’s Surface Transportation Act (FAST Act). The 2015 audited Reserve Bank financial statements, which are expected to be published in March, may include adjustments to these initial unaudited results. (1/11/2016) FRB press release.

FRB releases guidance to its examiners and banking institutions consolidating capital planning expectations for large financial institutions. The FRB released guidance to its examiners and banking institutions that consolidates the capital planning expectations for all large financial institutions and explains the differences in those expectations based on firm size and complexity. (12/21/2015) FRB press release.

FRB seeks comment on a proposed policy statement that details the framework it would follow in setting the Countercyclical Capital Buffer. The FRB announced that it is seeking public comment on a proposed policy statement detailing the framework that it would follow in setting the Countercyclical Capital Buffer. Comments on the proposed policy statement must be received by February 19, 2016. Appendix A.

Treasury Department

US Treasury launches an investigation into the Treasury market. Reuters reported that the US Treasury launched an investigation into the workings of the Treasuries market following the “flash crash” on October 15, 2014, when the market was hit with severe instability. Referencing it as the most comprehensive review of the market in decades, the Treasury Department noted that its report will also be looking into gathering data on Treasury cash securities as well as whether the public would benefit from additional information about transactions. Treasury is seeking public comment on the evolving structure of the US Treasury market. (1/19/2016) Reuters. US Treasury press release.

US Judicial Developments

Second Circuit affirms securities fraud defendant’s 40-year sentence. James Nicholson was convicted of defrauding more than 250 people, which caused losses of more than US$100,000,000. On appeal, Nicholson contended that his counsel failed to advise him that double jeopardy barred consecutive prison sentences for mail and securities fraud based on the same conduct, and that his 40-year sentence was unreasonable. The Second Circuit affirmed the conviction, determining that some of Nicholson’s fraudulent mailings reached beyond the purchase or sale of securities, and that a sentence of less than 40 years “would send the wrong message” to others who might be tempted to engage in similar acts. (1/7/2016) Nicholson.

US Exchanges and Self-Regulatory Organizations

NFA announces annual meeting. The National Futures Association will hold its annual members meeting on February 18, 2016. (1/15/2016) NFA press release.

NFA assists members in complying with rules requiring CPOs and CTAs to affirm registration exemptions. The NFA notified members that they will not violate NFA by-laws if they transact customer business between January 1 and March 31, 2016, with a previously exempt commodity pool operator (CPO) or commodity trading advisor (CTA) who fails to file an affirmation of their registration exemption or to register with the NFA by February 29, 2016, as long as members take reasonable steps to determine the registration and membership status of the CPO or CTA. (1/14/2016) NFA Notice I-16-03.

NFA revises CPO Form PQR. The NFA announced that it has made enhancements to CPO Form PQR. An updated schema is also available in the XML Documentation section of EasyFile for CPO PQR XML filers. (1/13/2016) NFA Notice I-16-02.

MSRB releases 2015 Annual Report and audited financial statements. The Municipal Securities Rulemaking Board published its 2015 Annual Report, which highlights its work on key initiatives during Fiscal Year 2015. The MSRB also made available audited financial statements to accompany the report’s overview of the organization’s 2015 financial highlights. (1/11/2016) MSRB press release.

FINRA revises the Series 9/10 Examination Program. The Financial Industry Regulatory Authority has modified the content of the General Securities Sales Supervisor (Series 9/10) examination program. The revisions will apply to examinations administered on or after March 7, 2016. (1/11/2016) FINRA Regulatory Notice 16-02.

MSRB proposal seeks to modernize close-out procedures for inter-dealer transactions. The MSRB proposed amendments to its rules related to the close-out of open inter-dealer transactions that would require dealers to close out open municipal securities transactions no later than 30 days after the settlement date, among other things. Comments are due on or before March 6, 2016. (1/6/2016) MSRB press release.

NFA eliminates the requirement for revised documentation in response to 4s submission feedback. The NFA announced that it will now require swap dealers and major swap participants to submit an attestation confirming they have revised their policies and procedures to address NFA feedback regarding the documentation they submit demonstrating their ability to comply with CFTC Regulations Implementing Section 4s of the Commodity Exchange Act. (1/6/2016) NFA press release.

News from Asia and the Pacific


MAS publishes consultation paper on proposed amendments to the securities and futures regulations. The Monetary Authority of Singapore published a Consultation paper on Proposed Amendments to the Securities & Futures (Reporting of Derivatives Contracts) Regulations. (1/18/2016) Consultation Paper. Annex B.

News from Europe

FCA consults on proposed guidance on redress schemes for anti-competitive behavior. The UK Financial Conduct Authority (FCA) published proposed guidance regarding its approach to approving and enforcing redress schemes related to violations of the prohibitions on anti-competitive behavior under the Competition Act 1998. Comments on the prosed guidance are due on or before February 15, 2016. (1/19/2016) FCA press release.

ECB publishes results of December 2015 SESFOD survey. The European Central Bank (ECB) published the results of its December 2015 survey regarding credit terms and conditions in euro-denominated securities financing and OTC derivatives markets. Key findings of the survey include less favorable credit terms for counterparties in all securities financing and OTC derivatives transactions; the deterioration of liquidity and functioning of markets for several types of euro-denominated collateral; and a reduction in market-making activities by banks that is expected to continue in 2016. (1/19/2016) ECB press release.

ECB euro bank lending survey. The ECB published the results of its January 2016 euro area bank lending survey, which found an increase in demand for loans across categories, improved borrowing conditions, and the strengthening of banks’ capital positions. (1/19/2016) ECB press release.

EC requests additional input from ESMA on AIFMD passport. The European Securities and Markets Authority (ESMA) released a letter it received from the European Commission regarding ESMA’s advice on the application of the Alternative Investment Fund Managers Directive (AIFMD) passport to non-EU alternative investment funds and managers. The EC requested that ESMA produce another opinion on the functioning of the passport and national private placement regimes after the AIFMD has been implemented throughout the EU. (1/19 2016) ESMA press release.

FCA, PRA joint consultation on 2016/17 MELL. The FCA and the Prudential Regulation Authority (PRA) requested comment on a joint consultation that sets the 2016/17 management expenses levy limit (MELL), which is the maximum amount the Financial Services Compensation Scheme can levy to fulfil its obligations under FCA and PRA rules. Comments are due on or before February 15, 2016. (1/18/2016) FCA press release.

EBA public hearing on proposed standards for the separation of payment card schemes and processing entities. The European Banking Authority (EBA) will hold a public hearing on February 19, 2016, on its draft technical standards on the separation of payment card schemes and processing entities. (1/14/2016) EBA press release.

EBA revises final draft technical standards and Guidelines on methodology and disclosure for global systemically important institutions. The EBA has revised its final draft technical standards and Guidelines on the specification of the indicators of global systemic importance and their disclosure in response to changes made by the Basel Committee on Banking Supervision for the identification of global systemically important banks (G-SIBs). The revisions clarify that other large institutions with an overall exposure of more than EUR 200 billion and which are potentially systemically relevant will also be subject to the disclosure requirements under the Guidelines. (1/13/2016) EBA press release.

BOE proposal on buy-outs of variable remuneration. The Bank of England (BOE) and the PRA proposed new rules to strengthen the remuneration requirements on buy-outs of variable remuneration. The proposal, which is set out in a PRA consultation paper, would allow an employer to apply a clawback to any bonus awards they buy-out from the previous employer of a new employee if the previous employer determines the employee was guilty of misconduct or risk management failings. Comments are due on or before April 13, 2016. (1/13/2016) BOE press release.

ESMA signs cooperation agreements with Canadian and Swiss regulators on CCPs. ESMA announced it has entered into three Memoranda of Understanding with the Alberta Securities Commission, the Manitoba Securities Commission, the Ontario Securities Commission, the Swiss Financial Market Authority, and the Swiss National Bank to facilitate cooperation and the exchange of information regarding Central Counterparties (CCPs). (1/7/2016) ESMA press release.

FCA releases retirement income market data. The FCA published data from retirement income providers regarding assets in contract-based pensions during the period from July to September 2015. (1/6/2016) FCA press release.

FCA consults on technical rule changes to the Senior Managers & Certification Regime. The FCA published a consultation paper that proposes technical changes to rules and forms resulting from changes to the Senior Managers & Certification Regime, including the removal of the requirement that firms report to the FCA known and suspected violations of FCA Rules of Conduct. Comments are due on or before February 5, 2016. (1/6/2016) FCA press release.

PRA consultation paper on rule and form amendments related to Senior Manger & Certification Regime changes. The PRA requested comment on a consultation paper that proposes amendments to rules and forms related to proposed changes to remove from the Senior Manager & Certification Regime the requirement that relevant authorized persons notify regulators if an individual performing a Senior Management Function failed to comply with regulators’ conduct rules. Comments are due on February 8, 2016. The PRA published an updatedsupervisory statement alongside the consultation paper. (1/6/2016)

Global Regulators

Basel Committee releases revised minimum capital requirements for market risk. The Basel Committee on Banking Supervision has modified its market risk framework to revise the minimum capital requirements. The framework includes a revised boundary between the trading book and banking book; revised internal models and standardized approaches for market risk; a shift from value-at-risk to an expected shortfall measure of risk under stress; and the incorporation of the risk of market illiquidity. The revised framework will become effective on January 1, 2019. (1/14/2016) BIS press release.

FSB releases public responses to consultation on resolution strategies for systemically important insurers. The Financial Stability Board (FSB) has published the responses it received to its consultation document “Developing Effective Resolution Strategies and Plans for Systemically Important Insurers.” (1/13/2016) FSB press release.

ISDA expands board and revises mission and strategy statement. The International Swaps and Derivatives Association (ISDA) announced that it has expanded the size of its board to 30 members and revised its mission and strategy statement. (1/12/2016) ISDA press release.

ISDA Determinations Committees propose rule changes to strengthen standards of conduct at DC member firms. ISDA’s Credit Derivatives Determinations Committees (DCs) approved changes to DC rules that would require DC member firms to establish written policies and procedures regarding the identification and management of any conflicts of interest arising from DC membership, the handling of any material non-public information obtained through the DC process, and the firm’s internal process of deciding how to vote.

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