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Ireland
On 31 October 2023, the Screening of Third Country Transactions Act 2023 (the “Act”), which establishes a new foreign direct investment ("FDI") screening regime in Ireland, was enacted.
Developments and market trends in North America
Global | Publication | September 2018
Author: Michael Bunn and Matthew Lau
On June 14, 2018, the Canadian Securities Administrators (CSA), made up of Canada’s provincial and territorial securities regulators, published the Proposed National Instrument 93-101 Derivatives: Business Conduct and the Proposed Companion Policy 93-101 Derivatives: Business Conduct (collectively, the ‘Proposed Instrument’) for a 95-day comment period, expiring on September 17, 2018. This is the second comment period for the Proposed Instrument, which has been revised and republished following the first comment period and can be considered together with the recently published Proposed National Instrument 93-102 Derivatives: Registration and the Proposed Companion Policy 93-102 Derivatives: Registration (collectively, the Proposed Registration Instrument).
The Proposed Instrument, together with the Proposed Registration Instrument, are intended to implement a comprehensive regime for the regulation of persons or companies that are in the business of trading or advising on derivatives. They will help protect participants in the over-the-counter (OTC) derivatives markets from unfair, improper or fraudulent practices and foster confidence in the Canadian derivatives markets.
The Proposed Instrument in particular is intended to help protect investors, reduce risk, improve transparency, increase accountability and promote responsible business conduct in the OTC derivatives markets.
The Proposed Instrument applies to a person or company that meets the definition of “derivatives adviser” or “derivatives dealer” regardless of whether it is registered or exempted from the requirement to be registered in a particular jurisdiction. Generally, this includes a person or company who is engaging in or holding himself, herself or itself out as engaging in the business of advising others in respect of derivatives or trading in derivatives as principal or agent. A “business trigger” test is used to determine if the person or company is in the business of trading or advising in OTC derivatives in a relevant Canadian jurisdiction.
Exemptions from requirements in the Proposed Instrument may be available for certain derivatives end-users (e.g., entities that trade derivatives for their own account for commercial purposes), investment dealers regulated by the Investment Industry Regulatory Organization of Canada (IIROC), Canadian financial institutions, and persons who provide general advice in relation to derivatives.
The Proposed Instrument includes requirements relating to the following
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Many of these requirements are similar to existing market conduct requirements applicable to registered securities dealers and advisers under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103).
The Proposed Instrument takes a two-tiered approach as follows
The requirements will not apply to unexpired derivatives that were entered into before the effective date of the Proposed Instrument other than certain requirements relating to fair dealing, daily reporting, and derivatives party statements. In this regard, transition provisions will be included.
Author: Steven Howard
On April 18, 2018, the U.S. Securities and Exchange Commission (SEC) proposed a package of rules and interpretations intended to improve brokers’ standards of conduct for retail investors. The proposed rules and interpretations would
The SEC noted that the proposed rules and interpretations are the culmination of years of study by its staff of previously gathered data related to the provision of investment advice to retail investors. The SEC also noted that these proposals generally draw from the principles underlying the Department of Labor’s best interest standard which will not become law because of the recent Court of Appeals decision (see below).
The SEC’s proposals, if adopted, could impact the distribution and servicing arrangements for mutual fund shares. For example, the SEC highlighted mutual fund shares class selection as an area that may require particular consideration under the new best interest obligation in light of different cost structures and conflicts of interest associated with sub-transfer agency and other similar fees often paid to broker-dealers.
Importantly, the SEC’s proposals also include Federal licensing and continuing education requirements for personnel of investment advisers, delivery of account statements to clients with advisory fee and expense disclosures, and financial responsibility requirements for advisers, including fidelity bonds.
On March 15, 2018, the Court of Appeals for the Fifth Circuit, in Chamber of Commerce v. US Department of Labor, vacated the fiduciary rule of the Department of Labor (DOL), together with the related exemptions thereunder (collectively, Fiduciary Rule). The court invalidated the Fiduciary Rule in its entirety.
There were multiple bases for the Fifth Circuit’s holding
Various attempts to revive the Fiduciary Rule have failed and neither the DOL nor the Department of Justice have appealed the decision to the Supreme Court.
On May 17, 2018, the U.S. District Court for the Central District of California denied a motion to compel production of mutual fund independent trustees’ attorney-client privileged documents, in connection with the Section 36(b) lawsuit, Kermis v. Metropolitan West Asset Management, LLC.
The court concluded that the fiduciary exception courts have recognized in contexts such as ERISA litigation does not extend to the attorney-client privileged communications made between the fund’s independent trustees and their independent counsel.
On May 2, 2018, the SEC voted unanimously to propose amendments to Rule 2-01 (c)( 1 )(ii)(A) under Regulation S-X - the so-called “Loan Provision” (Proposal). Generally, the Loan Provision, as currently in force, provides that an audit firm will not be considered independent from an audit client under Regulation S-X if the audit firm or certain personnel of the audit firm has a lending relationship with a person that owns, beneficially or of record, more than 10per cent of the equity securities of the audit client. “Audit client” is defined to include affiliates of the audit client, which, for a mutual fund, includes all entities within the “investment company complex,” regardless of whether the audit firm actually provides audit services to those other entities. The 10per cent equity ownership threshold would be replaced with a more subjective “significant influence” test that will provide relief for audit firms.
Recently, the SEC proposed to eliminate or modify certain disclosure requirements relating to mutual funds' liquidity risk management. Rule 22e-4 (the Liquidity Rule) under the Investment Company Act of 1940 requires a fund to classify each of its investments into one of four liquidity “buckets.” Reporting requirements scheduled to take effect in 2019 for “large” fund groups (and 2020 for “small” fund groups) require funds to publicly report on Form N- PORT the aggregate percentage of their portfolio investments allocated to each of the four liquidity buckets. The proposal would eliminate this public reporting requirement, and replace it with a new requirement to include a narrative-style discussion in a fund's annual shareholder report about the “operation and effectiveness” of the fund's liquidity risk management program during the period covered by the report.
Although the SEC has not prescribed specific information to be included in the discussion, the SEC has noted that the new discussion “should provide investors with enough detail to appreciate the manner in which a fund manages its liquidity risk,” and suggests as examples that a fund may “opt to discuss the particular liquidity risks that it faced over the year, such as significant redemptions, changes in the overall market liquidity of the investments the fund holds, or other liquidity risks, and explain how those risks were managed and addressed, and whether those risks affected fund performance.” The proposal would also add a new reporting requirement to Form N-PORT, requiring a fund to report its cash holdings and certain cash equivalents.
Recently, Altaba, formerly known as Yahoo, entered into a settlement with the SEC, pursuant to which Altaba agreed to pay $35 million to resolve allegations that Yahoo violated federal securities laws in connection with the disclosure of a 2014 data breach of its user database. The case represents the first time a public company has been charged by the SEC for failing to adequately disclose a cyber breach, an area that is expected to face continued heightened scrutiny as enforcement authorities and the public are increasingly focused on the actions taken by companies in response to such incidents. Altaba’s settlement with the SEC, coming on the heels of its agreement to pay $80 million to civil class action plaintiffs alleging similar disclosure violations, underscores the increasing potential legal exposure for companies based on failing to properly disclose cybersecurity risks and incidents.
On June 1, 2018, the SEC issued a press release announcing settlements for $75,000 each with 13 private fund advisors for violating their disclosure obligations under Rule 204(b)-1 under the Investment Advisers Act of 1940. Rule 204(b)-1, adopted to increase transparency and requires that SEC-registered investment advisers with at least $150 million in private fund assets under management file Form PF with the SEC. According to the SEC, many private fund investment advisers routinely fail to file Form PF annually.
In June, the U.S. Supreme Court granted a writ of certiorari in Lorenzo v. SEC, a case where Francis Lorenzo, a registered representative of a broker-dealer allegedly emailed false and misleading statements to investors that were originally drafted by his boss. After SEC findings of liability, a divided panel of the D.C. Circuit determined that, while Lorenzo was not the “maker” of the statements, he did use them to deceive investors, and thereby violated the so-called scheme liability provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. As described in the petitioner’s motion seeking certiorari, the case presents the question whether, under the Court’s 2011 Janus Capital Group, Inc. v. First Derivative Traders decision, the scheme liability provisions of Rule 10b-5 may be used to find liability in connection with false or misleading statements by persons who are not themselves the maker of those statements, and thus, not liable under the false-and-misleading statements provision of Rule 10b-5. The answer to this question could have implications for the SEC’s Enforcement Division, as well as potentially significant implications for private securities litigants who principally rely on Section 10(b) to bring private causes of action based on fraud.
The SEC announced on August 27, 2018 that Legg Mason Inc. will pay over $34 million to resolve an SEC charge that the company violated the Foreign Corrupt Practices Act (FCPA) in a scheme to bribe Libyan government officials.
According to the SEC’s order, between 2004 and 2010, a former Legg Mason asset management subsidiary, Permal Group Inc., partnered with a French financial services company to solicit investment business from Libyan state-owned financial institutions. These entities engaged in a scheme to pay bribes to Libyan government officials through a Libyan middleman in order to secure investments. As a result of the corrupt scheme, Legg Mason, through its Permal subsidiary, was awarded business tied to $1 billion of investments for the Libyan financial institutions, earning net revenues of approximately $31.6 million.
The SEC’s order finds that Legg Mason violated the internal accounting controls provision of the Securities Exchange Act of 1934. Legg Mason agreed to disgorge approximately $27.6 million of ill- gotten gains plus $6.9 million in prejudgment interest to settle the SEC’s case. Legg Mason had also previously agreed to pay $33 million to the U.S. Department of Justice in sanctions resulting from the firm’s involvement in the Libyan bribery scheme.
The SEC announced charges against four Transamerica entities for misconduct involving faulty investment models and ordered the entities to refund $97 million to misled retail investors.
According to the SEC’s order, investors put billions of dollars into mutual funds and strategies using the faulty models developed by investment adviser, AEGON USA Investment Management LLC (AUIM). AUIM, its affiliated investment advisers, Transamerica Asset Management Inc. (TAM) and Transamerica Financial Advisors Inc., and its affiliated broker-dealer Transamerica Capital Inc., claimed that investment decisions would be based on AUlM’s quantitative models. The SEC’s order finds that the models, which were developed solely by an inexperienced, junior AUIM analyst, contained numerous errors, and did not work as promised. The SEC found that when AUIM and TAM learned about the errors, they stopped using the models without telling investors or disclosing the errors.
Without admitting or denying the SEC’s findings, the four Transamerica entities agreed to settle the SEC’s charges and pay nearly $53.3 million in disgorgement, $8 million in interest, and a $36.3 million penalty, and will create and administer a fair fund to distribute the entire $97.6 million to affected investors.
On June 21, 2018, Supreme Court issued a decision in Lucia v. SEC, Dkt. No. 17-130, holding that the SEC’s previous practice in hiring administrative law judges (ALJs) was unconstitutional—calling into question the validity of the proceedings and holdings of SEC ALJs that decide the vast majority of contested SEC enforcement actions. With this decision, the Court resolved an outstanding circuit split as to whether SEC ALJs are “officers” of the United States under the US Constitution subject to the requirement of the Appointments Clause that all such officers be appointed by the President, “courts of law,” or “heads of department.” The Court concluded that ALJs are “officers” who must be appointed pursuant to the Appointments Clause but, in doing so, declined to address a number of open questions that follow from this very important decision.
The decision in Lucia leaves a number of questions unanswered. First, the Court declined to address the question of how either the SEC or other prior litigants in front of its ALJs should proceed. The Court expressly declined to decide whether the SEC’s attempt to “ratify” the appointment of its ALJs in November of 2017 successfully cured the constitutional problem. As a result, it remains unclear whether the SEC’s current ALJs occupy those posts constitutionally, or whether additional remedial action by the SEC is necessary (for instance, the SEC could now formally appoint the current ALJs going forward, as opposed to the prior ratification). Separately, the Court also declined to decide what, if any, remedy is available to litigants who did not make a “timely challenge” to the constitutionality of their proceedings. For some litigants—including those who failed to raise the issue and have now exhausted the time for appeal—the Lucia decision likely offers little in the way of relief. For others—namely, those who properly raised a challenge prior to the SEC’s “ratification” and who still have a pending appeal—the decision may offer some relief, depending on whether and how the SEC is able to cure the constitutional issue. The SEC estimates that there are 106 cases for which an ALJ has already issued an initial decision at the time of the SEC ratification order—for whom the import of the Lucia decision is unclear.
Furthermore, it is not clear whether, or to what extent, the Lucia decision will affect the other 36 administrative agencies that use a comparable process to hire ALJs that are then vested with adjudicatory powers similar to those at issue in Lucia. There are about 1,400 ALJs in 36 federal administrative agencies who hear about 700,000 cases each year. Both the parties and the Court expressed sometimes-conflicting views as to the effect of the Lucia decision on other administrative agencies, and the opinion provides no insight as to the expected scope of the holding. These questions have the potential to generate substantial uncertainty for administrative proceedings in the near term.
Author: Steven Howard
Recently, international consulting firms, including The Boston Consulting Group and McKinsey & Co., released their annual surveys on global trends in asset management. This article reviews those trends.
The headlines
The consultants’ report that despite continued fee pressure and the on-going shift to lower-margin passive products, global asset managers’ profitability improved, in part because of an increase in managing retail assets. The consultants predict that traditional core-asset managers are likely to suffer shrinking market share and greater fee compression which in turn will create difficulties for those managers to retain top talent and invest in innovations for future growth.
Four key factors for higher asset manager multiples are identified by the consultants
The consultants advise asset managers to enhance growth by cutting costs now at a time when market conditions are generally positive.
The consultants agree that the largest global asset managers are exploring digital and analytical agendas, but they are far behind the world’s leaders in digital businesses, like Amazon, Apple, Alibaba, Baidu, Facebook and Google. Digital and analytical tools can provide global asset managers with the means to speed up product development and increase market share. The consultants predict that 2018 will be seen as “an inflection point in this digital transformation” for global asset managers.
Publication
On 31 October 2023, the Screening of Third Country Transactions Act 2023 (the “Act”), which establishes a new foreign direct investment ("FDI") screening regime in Ireland, was enacted.
Publication
The EU Foreign Subsidies Regulation, or FSR, is intended to prevent or remedy distortions of the EU internal market caused by “foreign” – meaning non-EU – subsidies benefitting companies active in the EU.
Publication
The conventional wisdom is that ‘securitisation caused the great financial crisis’ (GFC). A further piece of conventional wisdom is that this was due to the misalignment of incentives between securitisation originators and securitisation investors . This conventional wisdom in turn drove much of the regulation of securitisation we now have.
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