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Regulatory Newsletter April 2020 © Robert Quinn Consulting

Robert Quinn Consulting Quarterly Regulatory Newsletter

April 2020

Introduction

Welcome to our Q1, 2020 newsletter. This is part of a series that aims to provide you with

a quarterly update of key regulatory issues affecting the UK/EU and the USA.

One topic dominates this edition – the response of firms, regulators and other industry

participants to the spread of Covid-19 and its ramifications. We present a snapshot of

developments at the time of writing, recognising that the situation is very fluid and

additional near-term regulatory developments are highly likely.

We also contemplate the longer term implications of this crisis, including the legislative

and regulatory response – caused not only by the impact of the virus itself, but also the

potential economic fall-out to follow.

The newsletter is not exclusively Covid-19 focussed. As usual we present a variety of

regulatory developments, news items and enforcement cases. However, the spectre of

Covid-19 looms over many of these. Regulatory initiatives might be revised, postponed

or cancelled altogether. Among other things, stated timeframes for the implementation

of a new requirement might be put back. Where the initiative emanates from the EU,

there might be additional certainties for UK firms due to Brexit.

Amongst everything else going on, we hope that you enjoy reading our newsletter and

that you find it helpful. If you have any feedback please share it with your consultant.

ONGOING DEVELOPMENTS

REGULATORY NEWS

ENFORCEMENTENFORCEMENT REGULATORY NEWS


UK/EU UK/EU UK/EU USA USA USA


UK/EU ENFORCEMENTFCA Warning Notice – Market Manipulation 14

USA ONGOING DEVELOPEMENTSCoronavirus – the regulatory response 15

NFA’s Swaps Proficiency Requirements 16

CFTC brings relief from CTA-PR filing requirement for CTAs that solely direct trading of pools for which

the firm operates as a registered or exempt CPO 17

USA REGULATORY NEWSOCIE observations on cybersecurity and operational resiliency practices 18

SEC OCIE 2020 Examination Priorities 19

USA ENFORCEMENTAmendment for NFA Whistle-blowers 21

Conflicts of Interest 21

NFA permanently bars former Chicago CPO and CTA Elkhorn Investments LLC from membership 22

Contents Page

UK/EU ONGOING DEVELOPMENTSB-word gives way to C-word: regulatory compliance in unexpected times 3

SFTR – Coronavirus impact on timing; clarification of non-EU AIF status 6

ESMA Consults on new MiFIR and MiFID II regimes for third-country firms 7

FCA takes on cryptoasset supervisory responsibilities 7

UK/EU REGULATORY NEWSESMA consults on standardised information to facilitate cross-border funds distribution 9

JMLSG: Proposed amendments to Guidance 9

DP20/1: Transforming culture in financial services – driving purposeful cultures 9

The European Banking Authority (“EBA”) notes enhanced consistency on institutions’ Pillar

3 disclosures but calls for improvements to reinforce market discipline 9

FRC announces review of climate change assessment by companies and auditors 10

European Systemic Risk Board publishes report on Systemic Cyber Risk 10

FCA publishes the number of STORs received in 2019 11

FCA - Asset management firms: prepare now for the end of LIBOR 11

FCA Publishes its Sector Views 12

FCA’s Asset Management Letters Should Not Be Viewed In Isolation 12

ESG: ESMA Publishes Strategy on Sustainable Finance 12

Annual update of ‘Firm Details’ on CONNECT 13

Asset management portfolio tools 13


REGULATORY NEWS





expectations to help regulated firms apply the Senior Managers

and Certification Regime (“SMCR”). For ‘solo-regulated’ firms

(firms that are not dual regulated by the FCA and the Prudential

Regulation Authority) this includes:

• Encouraging senior managers to consider where the current

situation might lead to emerging risks, and how it might

affect existing risks; and

• Recognising that where temporary arrangements are made

to personnel performing senior management functions, or

where there are changes to senior manager’s responsibilities,

certain procedural aspects of SMCR might be overly

burdensome. As a result, the FCA advises that:

In February, we published an article on what firms could do to

prepare for (what was at the time) a range of potential outcomes.

As the crisis enveloped, FCA communications became more

frequent. We published a second article in March setting out the

FCA’s views on continuity planning, including the arrangements

that firms could put in place where they are temporarily unable

to enact certain trading related requirements, such as telephone

recording and transaction reporting.

Some recent developments The situation is fast moving. We shall continue to monitor FCA

communications, and encourage regulated firms to do likewise.

By way of example - at the end of March, the European Securities

and Markets Authority (“ESMA”) recommended that EEA national

regulators consider changing the deadline for ‘best execution

disclosure reports’ (also known as ‘RTS27’ and ‘RTS28’ reports).

This includes moving the deadline for a firm publishing the

report for the calendar year 2019 on its website from 30 April

2020 to 30 June 2020. This deadline deferral was echoed by the

FCA in a ‘Dear CEO’ letter to firms providing services to retail

investors. It could be contended that – implicitly - this can also

be extended to firms providing services to non-retail investors.

At the start of April, the FCA issued statements setting out its

UK/EU ONGOING DEVELOPMENTS

B-word gives way to C-word: regulatory compliance in unexpected timesAs the bells of Big Ben chimed at Midnight at the start of

January, we welcomed in a new year that we envisaged would

be very much defined by Brexit. The departure of the UK from

the European Union on 31 January. The subsequent negotiations

that would pave the way for a future relationship with our

European neighbours. How this might shape the UK’s regulatory

environment in years to come.

How quickly times change.

Three months’ on and the world is a changed place. Continuity

plans and contingency arrangements have been put in place by

businesses and individuals alike. Firms have had to do business

in a way that they have never done before. Markets have

fluctuated. Operational, legal and compliance risks that were

previously considered to have a low probability of occurrence

have come to the fore.

https://www.fca.org.uk/news/statements/smcr-coronavirus-our-expectations-solo-regulated-firms

https://robertquinnconsulting.com/business-continuity-planning-and-coronavirus/

https://robertquinnconsulting.com/fca-publishes-advice-regarding-coronavirus-outbreak/


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compliance with the requirement will take valuable resource

away from a more important consideration.

So, in the absence of definitive guidance from the regulator, what

should a firm do in this situation?

One approach would be to consider the FCA’s operational

objectives of protecting consumers, ensuring market integrity,

and promoting effective competition. For many firms this boils

down to: consider what needs to be prioritised to ensure that

the firm’s clients are looked after, whilst being mindful of the

importance of well-functioning markets.

Another approach is to frame compliance obligations in the

context of the FCA’s Principles for Business. These effectively

establish a ‘code of conduct’ for firms. Firm that are perceived

as ‘doing the right thing’ vis-à-vis this code might be those that

benefit the most.

That is not to say that firms should be ambivalent. Where a

decision is taken to prioritise one regulatory requirement

over another, this should be well reasoned and documented.

Where a regulatory obligation cannot be fulfilled, it may be

individual is not a Senior Manager;

(v) Unless a furloughed Senior Manager is permanently

leaving their post, the individual will not need to be re-

approved by the FCA upon their return to work. The firm remains

responsible for ensuring the Senior Manager is fit and proper

during this period; and

(vi) Individuals performing required functions, such as

Compliance Oversight and the Money Laundering Reporting

Officer, should only be furloughed as a last resort.

Regulatory forbearance

As demonstrated above, there are certain instances where

the regulatory requirements have been revised, or guidance

has been provided. However, this does not cover the entire

regulatory framework. Albeit not a point explicitly made in its

communications, the FCA appears to be contemplating the

extent to which ‘regulatory forbearance’ would be available in

the event of a firm not meeting a ‘letter of the law’ requirement.

FCA regulated firms are subject to a detailed and complex set

of rules and guidance. The current crisis demonstrates that it is

not always viable to adhere to all the requirements, even with

the changes that have been made. This might be because it is

impossible to comply with a particular requirement, or because

(i) There is not a requirement to update Statements of

Responsibilities if the change is Coronavirus-related and is

temporary in nature (however any re-allocations should be

internally documented);

(ii) Firms are not required to notify the FCA of these temporary

arrangements;

(iii) Modifying the ’12 week rule’, which allows an individual

to cover for a Senior Manager without being approved for up

to 12 weeks. If firms notify the FCA that they consent to this

modification, this period can be extended to 36 weeks;

(iv) Per this modification, Prescribed Responsibilities can be

assigned to the replacement individual, even if the replacement


REGULATORY NEWS




appropriate to do the next best thing. If home telephones cannot be recorded, for example, a note

summarising the telephone conversation can be maintained.

It could also be argued that regulatory failures caused by having poor business continuity

arrangements would be less favourably viewed by the regulator.

Managing altered regulatory risks

Firms should be mindful of altered regulatory risks. This includes financial resilience. In a

communication dated 26 March 2020, the FCA advised that firms should be planning ahead and

ensuring the sound management of their financial resources. If a firm needs to exit the market,

planning should consider how this can be done in an orderly way while taking steps to reduce the

harm to consumers and the markets. If a firm is concerned it will not be able to meet its capital

requirements, or its debts as they fall due, they should contact their FCA supervisor with its plan

for the immediate period ahead.

The FCA (alongside the Prudential Regulation Authority and the Financial Reporting Council)

has acknowledged that in the current climate many firms will be unable to complete their audit

in the required timeframe. Thus far, this has focussed on listed companies, which have been

granted temporary relief regarding the timing of their financial statements. Some FCA regulated

firms are required to submit its audited financial statements to the FCA (via GABRIEL) within 80

business days of year-end. Although the FCA has not, at the time of writing, explicitly stated that

this deadline can be extended, in our view it is highly likely that the regulator will take no action

against firms that are unable to meet this deadline, and instead (i) notify the FCA of this in advance

of the deadline and (ii) submit the statements as soon as possible post-deadline.


https://www.fca.org.uk/news/statements/fca-expectations-financial-resilience-fca-solo-regulated-firms

https://www.fca.org.uk/news/statements/delaying-annual-company-accounts-coronavirus


REGULATORY NEWS




In addition, the FCA has made it clear that market abuse

deterrence measures should be prioritised. It could be argued

that market abuse risk increases in volatile and uncertain market

conditions, for example, due to a rise in public announcements

that might affect a company’s share price (e.g. profit warnings or

restructurings), or opportunities to manipulate the market.

What next?

Moving away from near-term compliance considerations, the

crisis might prompt a reconsideration of certain aspects of the

regulatory environment. After the financial crisis of 2008, the

regulatory response was to introduce additional regulation

– AIFMD in Europe and Dodd-Frank in the USA, for example.

Regulators and legislators will need to think long and hard as to

whether this would be the correct approach this time round.

Spare a thought, too, for the FCA. Having spent the last few years

firefighting Brexit, they now have this to contend with. The FCA

cannot proactively keep tabs on all 59,000 entities under their

supervision at the best of times. The onus very much falls upon

firms to self-manage their regulatory risk, and at a time when

accountability at all levels is brought to the fore by the wide-

scale introduction of SMCR.

In this context, the manner in which good decision making from

above permeates throughout a firm could be a key factor in the

firm’s ability to appropriately manage its regulatory risk as this

crisis runs its course.

SFTR – Coronavirus impact on timing; clarification of non-EU AIF status

Coronavirus

The ‘reporting obligation’ of the Securities Financing

Transactions Regulation (“SFTR”) is scheduled to take effect in

2020.

Details of a securities financing transaction (“SFT”) concluded

by a ‘counterparty’ to such a transaction, must be reported to a

registered trade repository on a T+1 basis.

The obligation takes effect for certain counterparties, including

MiFID investment firms on 11 April 2020.

However, on 13 March 2020, the European Securities and Markets

Authority (“ESMA”) published a public statement acknowledging

the difficulties that entities are experiencing in meeting this

deadline, in light of the disruptions to business activities due to

the Coronavirus outbreak.

ESMA therefore expects competent authorities not to prioritise

their supervisory actions in respect of the reporting obligations

until 13 July 2020, and to generally apply their risk-based

approach in the exercise of supervisory powers in their day-

to-day enforcement of applicable legislation in this area in a

proportionate manner.

This effectively provides relevant entities with additional time to

establish their reporting arrangements.

Due to the fluidity of the situation, there may be further

pronouncements from ESMA on this matter.

Clarification of non-EU AIF status

In response to enquiries by the Alternative Investment

Management Association (“AIMA”), ESMA and the European

Commission have clarified that the SFTR reporting obligation

does not apply to non-EU Alternative Investment Funds (“AIFs”),

even where the AIF is managed by an AIFM that is domiciled in


https://www.esma.europa.eu/sites/default/files/library/esma80-191-995_public_statement.pdf

https://www.isla.co.uk/wp-content/uploads/2020/02/Response_ESMA_AIMA_sftr_scope.pdf

https://www.isla.co.uk/wp-content/uploads/2020/02/Response_EC_AIMA_sftr_scope.pdf

https://www.isla.co.uk/wp-content/uploads/2020/02/Response_EC_AIMA_sftr_scope.pdf


REGULATORY NEWS





for the activities of the firm in the EEA.

FCA takes on cryptoasset supervisory responsibilitiesOn 10 January 2020, the FCA became the anti-money laundering

and countering terrorist financing supervisor of UK cryptoasset

activities.

Any UK business conducting specific cryptoasset activities

falls within scope of the amended Money Laundering, Terrorist

Financing and Transfer of Funds Regulations 2017 (“MLR”) and

will need to comply with its requirements.

Amongst other things, cryptoasset businesses will be required

to:

• Identify and assess the risks of money laundering and

terrorist financing which their business is subject;

• Have policies, systems and controls to mitigate the risk of the

business being used for the purposes of money laundering or

terrorist financing;

• Where appropriate to the size and nature of its business,

appoint an individual who is a member of the board or senior

management to be responsible for compliance with the MLR;

• Undertake customer due diligence when entering into a

an ‘equivalence’ decision having been made by the European

Commission with respect to the regulatory environment of any

given third-country. Therefore, this may be applicable to UK

investment firms, dependent upon Brexit developments.

Various changes to the regulatory framework for such third-

country firms will be implemented by the Investment Firms

Regulation and Directive, which takes effect on 26 June 2021.

Click here for a summary of this.) This includes new reporting

requirements to ESMA, and granting ESMA the power to ask

third-country firms to provide data related to all orders and

transactions in the EU, for a period of five years.

The information requirements include:

• The scale and scope of the services and activities carried out

by them in the EEA, including the geographical distribution

across Member States;

• The turnover and the aggregated value of the assets

corresponding to the services and activities referenced above;

• Whether investor protection arrangements have been taken,

and a detailed description thereof;

• The risk management policy and arrangements applied by

the firm to the carrying out of the services and activities

referenced above; and

• The governance arrangements, including key function holders

the EEA.

The exception is where the AIF has a branch in the EEA, and the

SFT is conducted via that branch.

AIFs that are subject to the reporting obligation will be required

– per current scheduling - to report from 11 October 2020

(financial counterparties) and 11 January 2021 (non-financial

counterparties).

Click here for a summary of SFTR:

ESMA Consults on new MiFIR and MiFID II regimes for third-country firmsn 31 January 2020, the European Securities and Markets Authority

(“ESMA”) launched a consultation on draft technical standards

on the provision of investment services in the EU by third-

country firms under MiFIR and MiFID II.

Per MiFIR, third-country firms, i.e. firms not domiciled in the EEA,

can provide MiFID investment services (and ancillary services)

to professional clients and eligible counterparties established

in the EEA. This is subject to a number of conditions, including

https://robertquinnconsulting.com/regulatory-capital-changes/

https://robertquinnconsulting.com/securities-financing-transactions-regulation-reporting-obligations-to-take-effect-in-2020/

https://www.esma.europa.eu/press-news/esma-news/esma-consults-new-mifir-and-mifid-ii-regimes-third-country-firms


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ENFORCEMENTENFORCEMENT



REGULATORY NEWS


business relationship or occasional transactions;

• Apply more intrusive due diligence, known as enhanced due diligence, when dealing with

customers who may present a higher money laundering / terrorist finance risk. This includes

customers who meet the definition of a politically exposed person; and

• Undertake ongoing monitoring of all customers to ensure that transactions are consistent with

the business’s knowledge of the customer and the customer’s business and risk profile.

UK businesses undertaking cryptoasset must register with the FCA:

• New businesses carrying out cryptoasset activity in scope of the MLR must be registered with

the FCA before conducting businesses – registration forms are available on Connect;

• Existing businesses already conducting cryptoasset activity before 10 January 2020 may

continue their business but will need to ensure their compliance with the MLRs with immediate

effect;

• All existing businesses undertaking cryptoasset activities must be registered by January 2021.

To ensure this deadline is met, these businesses must submit a completed application for

registration via Connect by June 2020; and

• Existing Financial Services and Markets Act firms, e-money institutions or payment services

businesses undertaking cryptoasset activity will also be required to apply for registration.


REGULATORY NEWS

ENFORCEMENTENFORCEMENT ONGOING DEVELOPMENTS



provide a range of insights and highlight the importance of this

topic.

There will be no feedback required in response to this discussion

paper but firms should consider whether there are essays of

particular interest or importance. The Discussion Paper can be

accessed here.

The European Banking Authority (“EBA”) notes enhanced consistency on institutions’ Pillar 3 disclosures but calls for improvements to reinforce market discipline 02/03/2020The EBA has published its Report assessing institutions’ Pillar 3

disclosures. The EBA has observed that there has been progress

in the development of these prudential disclosures, but there

is further room for improvement. In particular, the following

findings may hamper the ability of users to access, understand

and compare the information:

• Omission of information without any indication of the

reasons;

The consultation period lasts to 30 June 2020.

JMLSG: Proposed amendments to Guidance 17/03/2020The Joint Money Laundering Steering Group (“JMLSG”) has set

out proposed amendments to its Guidance. The amendments

take account of the Money Laundering and Terrorist Financing

(Amendment) Regulations 2019 which came into force on 10

January 2020.

JMLSG has also published – in draft – a new section which

provides sector specific guidance for cryptoasset exchanges and

custodian wallet providers.

DP20/1: Transforming culture in financial services – driving purposeful cultures 05/03/2020The FCA has published a collection of essays, from industry

leaders, professional bodies and culture experts exploring the

role of purpose in driving a healthy, sustainable culture. Whilst

this discussion paper does not represent the FCA’s view, it does

UK/EU REGULATORY NEWSESMA consults on standardised information to facilitate cross-border funds distribution31/03/2020The European Securities and Markets Regulator (“ESMA”) the EU’s

securities regulator, launched a consultation on the standard

forms, templates, and procedures that EEA national regulators

should use to publish information on their websites to facilitate

cross-border distribution of funds.

This includes:

• National laws, regulations and administrative provisions

governing marketing requirements for alternative investment

funds (AIFs) and UCITS and the summaries thereof; and

• Regulatory fees and charges they levy for carrying out their

duties in relation to the cross-border activities of fund

managers.

This initiative relates to the EU Regulation on facilitating cross-

border distribution of collective investment undertakings, of

June 2019. A majority of provisions are scheduled to take effect

in August 2021.

REGULATORY NEWS

https://www.fca.org.uk/publication/discussion/dp20-1.pdf

https://jmlsg.org.uk/latest-news/jmlsg-today-publishes-proposed-amendments-to-its-guidance/

https://jmlsg.org.uk/latest-news/jmlsg-today-publishes-proposed-amendments-to-its-guidance/

https://jmlsg.org.uk/consultations/consultation-part-ii-sector-22/


REGULATORY NEWS

ENFORCEMENTENFORCEMENT ONGOING DEVELOPMENTS



European Systemic Risk Board publishes report on Systemic Cyber Risk 28/02/2020

The European Systemic Risk Board (“ESRB”) has published a

report on Systemic Cyber Risk in the financial system.

The report highlights the interconnectedness of the financial

system today, and the vulnerabilities stemming from reliance on

sometimes legacy electronic systems. It also notes that cyber

risk is different from other operational risks, because of its

potential speed and scale of propagation throughout the system.

The report recognises that cyber risk in the financial services has

the potential to cripple the day-to-day life of everyone.

Regulatory and industry initiatives have however been

abundant, with reports, guidelines and international standards

being published and developed.

The report also details recent cyber-criminal activity, e.g. the

hacking of Bangladesh’s SWIFT payments, or the data breach

at Equifax. The cost of cyber-criminal activity is difficult to

report on the impact of climate change on their businesses. This

ties in with the updated Code, with its new emphasis on ESG

integration.

The FRC intends to review the quality of this information and

how it can be used to support decision making by investors

and stakeholders. The FRC will review a sample of company

reports and accounts across several industries, not just the

financial sector. The aim is to assess compliance with reporting

requirements regarding climate change.

A sample of auditors will be assessed, in order to understand

how they are ensuring that the firms they audit are adequately

reflecting the impact of climate change in their financial reports

and accounts.

Further, the updated Code requires signatories to issue a

report on how their firm has addressed the impact of ESG

considerations on their business. The FRC expects to see the

first reports at the beginning of 2021 and will use these reports

to understand how investors address this in light of their

investments.

• Unclear identification and location of Pillar 3 reports that

hinders the ability of users to find them;

• Lack of consistency in the structure of Pillar 3 reports and

of some of the information reported, particularly qualitative

information;

• Oversimplification of interim reports compared to end-of-

year reports; and

• Lack of reconciliation of quantitative information across

disclosure templates or inconsistent ways to calculate

quantitative flows of information.

Although relevant particularly for banks, it may be of interest

to other firms, particularly in comparing current disclosures

to those of larger institutions monitored by the EBA. Further

information on the EBA findings can be found in the Report.

FRC announces review of climate change assessment by companies and auditors28/02/2020The Financial Reporting Council (“FRC”), home of the newly

updated UK Stewardship Code (“the Code”), has announced a

review of companies and auditors, and how they assess and

REGULATORY NEWS

https://eba.europa.eu/sites/default/documents/files/document_library/Publications/Reports/2020/870112/Report on institutions%27 Pillar 3 disclosures.pdf

https://www.frc.org.uk/news/february-2020-(1)/frc-assesses-company-and-auditor-responses-to-clim

estimate, but industry estimates range from USD 45 billion

to USD 654 billion for the global economy in 2018. Accidental

failures are no less critical for e.g. payment systems and trading.

Coupled with the FCA, PRA and Bank of England publishing a

shared policy summary on building operation resilience, and the

FCA’s consultation paper CP19/32 covering the same topic, it is

likely the FCA might step up its operational resilience initiative.

FCA publishes the number of STORs received in 2019 28/02/2020The The FCA received a total of 5,455 suspicious transactions and

orders reports (“STORs”) in the calendar year 2019. A majority of

these (4,623) relate to insider dealing, with 822 relating to market

manipulation.

The volume of STORs has remained relatively constant since

the regime was implemented in July 2016. The figures are

significantly in excess of the volume of reports submitted under

the previous regime, which covered suspicious transactions but

not suspicious orders. The FCA sees the submission of STORs as

an important market abuse prevention tool.

FCA - Asset management firms: prepare now for the end of LIBOR 27/02/2020On 27 February 2020, the FCA issued a ‘Dear CEO’ letter to asset

management firms regarding the transition from LIBOR to other

benchmarks.

The FCA takes the view that 2020 is a key year for transition, and

that firms need to accelerate efforts to ensure they are prepared

for LIBOR cessation by end-2021

.

The letter sets out some of the ways in which asset managers

are impacted by this transition, including:

• Asset managers investing in LIBOR swaps are encouraged to

switch to SONIA (Sterling Overnight Indexed Average) swaps

for new positions where possible;

• New investments in GBP LIBOR based cash products maturing

beyond 2021 should cease by end of Q3, 2020;

• Consideration of funds and other products that have

benchmarks or performance fees linked to LIBOR;

• Putting a plan in place with LIBOR exposures or dependencies

in the portfolios;

• Consider whether new products with LIBOR exposure beyond

2021 comply with product governance requirements;

• Establishing appropriate governance and planning

arrangements; and

• Appropriately managing associated conflicts of interest.

FCA Publishes its Sector Views 18/02/2020On 18 February 2020, the FCA published its Sector Views. This

sets out the FCA’s annual analysis of the way the financial

environment is changing and the impact of these changes on


REGULATORY NEWS





https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/consultation-paper/2019/building-operational-resilience-impact-tolerances-for-important-business-services.pdf

https://www.fca.org.uk/publication/consultation/cp19-32.pdf

https://www.fca.org.uk/publication/corporate/sector-views-2020.pdf


REGULATORY NEWS




consumers and market effectiveness.

They provide an overall view of how each financial sector is

performing based on the data available and the FCA’s views at

mid-2019. They are part of the way they keep their priorities

under review and focus resources effectively for business

planning.

FCA’s Asset Management Letters Should Not Be Viewed In Isolation 28/02/2020Following a year occupied with Brexit confusion the FCA has

commemorated the start of a new decade with a release of ‘Dear

CEO’ letters, somewhat reminiscent of the US Securities and

Exchange Commission’s ‘examinations priorities’, which set out

key risks of harm that the regulator considers relevant to certain

sectors, including asset management.

Click here to read our full article.

ESG: ESMA Publishes Strategy on Sustainable Finance 06/02/2020

ESG: ESMA Publishes Strategy on Sustainable Finance

On 6 February 2020, the European Securities and Markets

Authority (ESMA) published its Strategy on Sustainable Finance

(the Strategy). This continues work initiated by the European

Commission (the Commission) concerning sustainable finance

and the incorporation of environmental, social and governance

(ESG) factors into European financial services.

In the Strategy, ESMA outlined the following “key priorities”:

• Develop the Sustainable Finance Platform (as mandated

by the Commission’s Action Plan on Financing Sustainable

Growth), and undertake other work mandated by the

Disclosure Regulation and Taxonomy Regulation. This will

allow for the incorporation of sustainability factors into

ESMA’s technical standards and advice, and ultimately

the integration of sustainability factors into the European

Banking Authority’s “single rulebook;”

• Assist the Commission with the fulfilment of the European

Green Deal, in particular by providing advice in relation to

“greenwashing;”

• Help national competent authorities incorporate ESG

factors into local supervisory practices by mapping current

requirements, building awareness, and developing tools and

advice;

• Develop technical advice to require greater transparency

regarding ESG factors from credit rating agencies, which are

directly supervised by ESMA;

• Use regulatory data to monitor ESG-related market

developments, with the longer-term goal of developing a

comprehensive analytical framework for ESG. This will include

a Dedicated ESG chapter in ESMA’s 2020 Report on Trends,

Risks and Vulnerabilities; and

• Generally assist the other institutions of the European

Union and international groups such as the International

Organization of Securities Commissions (IOSCO) in achieving

their sustainable finance goals.

The Strategy is available here.


https://robertquinnconsulting.com/fcas-asset-management-letters-should-not-be-viewed-in-isolation/

https://www.esma.europa.eu/sites/default/files/library/esma22-105-1052_sustainable_finance_strategy.pdf


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Annual update of ‘Firm Details’ on CONNECT 23/01/2020From 31 January 2020, firms that come under the reporting

requirements detailed in the FCA Handbook at SUP 16.10 have

to check, amend or confirm the accuracy of their Firm Details

annually, using the FCA’s Connect portal. They will need to do

this within 60 business days of their Accounting Reference Date

(ARD).

Even if your Firm Details have not changed from the previous

year, you will still need to log on to Connect and confirm that the

details are accurate and up to date.

A significant majority of FCA regulated firms are subject to this

requirement.

Asset management portfolio tools 13/01/2020On 13 January 2020, the FCA published its findings into a review

of how firms in the asset management sector selected and used

risk modelling and other portfolio management tools.

The FCA visited 10 firms in the asset management sector to see

how they selected and used risk modelling and other portfolio

management tools. The firms varied in terms of size, scale,

operating models and asset classes.

The FCA saw some good practice at most firms, but also

identified problems in firms’ processes and controls, particularly

in risk model oversight and contingency planning.

Rather ominously (and perhaps prophetically), the FCA

concludes as follows:

“We expect firms to ensure that their implementation, oversight

and contingency arrangements in respect of these tools enable

them to comply with our expectations as set out in the systems

and controls handbook and elsewhere. These include expecting a

firm’s arrangements will ‘ensure that it can continue to function

and meet its regulatory obligations in the event of unforeseen

interruption”.


https://www.handbook.fca.org.uk/handbook/SUP/16/10.html

https://www.handbook.fca.org.uk/handbook/SYSC/3/1.html

https://www.handbook.fca.org.uk/handbook/SYSC/3/1.html


REGULATORY NEWS

ENFORCEMENTONGOING DEVELOPMENTS



ENFORCEMENT

UK/EU ENFORCEMENT

FCA Warning Notice – Market Manipulation30/01/2020On 30 January 2020, the FCA gave an un-named individual a warning notice over allegations he

engaged in market manipulation.

The individual was a partner and portfolio manager at an investment fund. The FCA alleges that

he placed large orders for Contracts for Difference (related to UK listed securities) on a trading

platform that he did not intend to execute, on the opposite side of the order book to existing

smaller orders which he intended to execute.

The individuals intention was to falsely represent to the market an intention to buy or sell when

his true intention was the opposite, and thereby to facilitate the execution of the smaller orders

on more favourable terms (a better price or on a more timely basis).

The FCA considers this to constitute false and misleading signals as to the supply of or demand

for a financial instrument, which is a civil market manipulation offence per the Market Abuse

Regulation.

A warning notice is not the final decision of the FCA. The individual has the right to make

representations to the FCA’s Regulatory Decisions Committee, which will decide on the appropriate

action.

REGULATORY NEWS

https://www.fca.org.uk/publication/warning-notices/warning-notice-statement-20-1.pdf

REGULATORY NEWS

ENFORCEMENTONGOING DEVELOPMENTS



REGULATORY NEWS


To take advantage of this relief a private fund manager will have

to provide a statement stating that it is relying on the Order to

the SEC through a posting on its public website.

The manager must make the required filing or delivery as soon

as practicable but not later than 45 days after the original due

date.

While OCIE remains fully operational, it has moved to conducting

correspondence exams off-site. OCIE acknowledges that

registrants are now devoting significant time and attention to

maintain operations and is attempting to time their requests in a

manner that brings the least disruption.

In addition, OCIE communicated that a registrant’s reliance on

any SEC provided relief would not factor in its determination on

firms selected for examination.

• SEC regulatory relief for Form ADV and Form PF

On March 25, 2020, the SEC extended Orders of relief to

investment advisers that superseded the Commission’s original

Orders on March 13, 2020. While the new Orders still require

advisers to notify the SEC and investors of its intent to rely on

the relief, they no longer need to describe why they are relying

on the relief or provide an estimated date by which the required

action will occur.

This relief is limited solely to Form ADV and Form PF filing and

delivery obligations that would otherwise fall due between the

date of the Original Order and June 30, 2020, where the deadline

cannot be met “due to circumstances related to current or

potential effects of COVID-19.”

USA ONGOING DEVELOPMENTS

Coronavirus – the regulatory responseThe back end of the Q1 2020 news cycle has been completely

dominated by the Coronavirus (“COVID-19”) outbreak and its

impact on the global economy. In early March, it became evident

that firms would need to activate business continuity plans.

Whilst the development of robust business continuity plans has

been a focus for some time, the requirement to work from home

for all non-essential workers in major cities, like New York, has

provided new challenges for many firms.

As the spread of the virus has increased, US regulators have

stepped in to offer various forms of relief to assist asset

managers who may otherwise have difficulty with meeting

deadlines for regulatory filings.

Aside from the relief, the SEC’s Office of Compliance Inspections

and Examinations (“OCIE”) also released a statement on

operations and exams, emphasizing that health, safety, investor

protection and continued operations remain its priority.

ENFORCEMENT

REGULATORY NEWS





NFA’s Swaps Proficiency RequirementsEffective January 31, 2020, the NFA implemented its long-

awaited swaps proficiency requirements, whereby swap APs

are now required to take and pass a recently developed online

examination. The online exam was made available at the

beginning January 31, 2020, and swap APs must satisfy the

requirements by no later than January 31, 2021. Subsequent to

January 31, 2021, any individual who wants to engage in swaps

activity will need to satisfy the swaps proficiency requirements

prior to being approved as a swap AP.

Each Member firm must appoint a Swaps Proficiency

Administrator, who will facilitate the enrolment of individuals

into the appropriate training.

Swap APs at CPOs and CTAs will complete what is called the

“Short Track” of training.

The exams are administered online, and are comprised topical

modules, each of which includes both a learning and a testing

component. The NFA estimates the Short Track will take

The full CFTC no-action letter can be read here.

The NFA release can be read here.

• NFA – Branch Office Requirements

On 13 March 2020, the NFA issued Notice I-20-12 to provide relief

to NFA Members who were implementing business continuity

plans requiring employees to work from home. Under NFA

rules, any office where an Associated Person (“AP”) is working

is considered a branch office. Not only must branch offices

be listed on the Member Firm’s Form 7R, but they also require

supervision from a registered Branch Manager.

NFA made clear their understanding of this need due to COVID-19

and stated they would not pursue a disciplinary action against

a Member requiring APs to temporarily work from locations not

listed as a branch office and without a Branch Manager.

The relief is allowable only if such Member implements a plan

to adequately supervise these APs and their adherence to NFA

recordkeeping requirements.

• NFA regulatory relief for CPOs and CTAs

On 20 March 2020, the CFTC and NFA issued relief to commodity

pool operators (“CPOs”) and commodity trading advisors

(“CTAs”) in response to the COVID-19 pandemic. Small and mid-

size CPO-PQR filers have received an extension on their annual

filing until May 15, 2020 and those CPOs filing for Q1 2020 now

have until July 15, 2020. CTAs may file the Dec 31 NFA-PQR until

May 15, 2020 and the March 31 filing also received an extension

to July 15, 2020. The NFA-PR for March 31 must now be filed by

June 30, 2020. The relief also provides an additional 45 days to

file and deliver pool annual reports to investors.


https://protect-eu.mimecast.com/s/jtngCjZmYfY6N4FWAuMc?domain=cftc.gov

https://www.nfa.futures.org/news/newsNotice.asp?ArticleID=5218

approximately four hours to complete and there are no additional fees required to sit for the

proficiency requirements.

Further instructions on accessing and completing the Swaps Proficiency Requirements can be

found here.

CFTC brings relief from CTA-PR filing requirement for CTAs that solely direct trading of pools for which the firm operates as a registered or exempt CPOThe CFTC recently amended CFTC Regulation 4.27 to no longer require CTAs that solely direct

trading of pools for which the firm operates as a registered or exempt CPO to file the Form PR.

This relief was effective immediately and applied to the March 31, 2020 Form PR. This relief is self-

executing and CTAs are not required to file a notice of exemption to obtain it.

Firms are able to notify the NFA of their intention to take advantage of this relief by accessing the

CTA Annual Questionnaire and responding “No” to the question, “Does the firm currently direct any

trading of commodity interest accounts?”

Responding “No” will discontinue all future notifications to complete a Form PR.


REGULATORY NEWS





https://www.nfa.futures.org/registration-membership/how-to-register/swap-proficiency-requirements.html

REGULATORY NEWS






• Detective security i.e. implementing capabilities able to de-

tect threats on end points;

• Patch management program to cover all software;

• Maintenance of an inventory of hardware and software;

• Encryption and network segmentation;

• Insider threat monitoring to help identify and escalate per-

ceived threats; and

• Securing legacy systems and equipment.

Mobile SecurityMobile devices and applications may create additional and

unique vulnerabilities. The following measures were observed at

organizations using mobile applications:

• Formal policies and procedures;

• Managing the use of mobile devices e.g. using a mobile device

management (MDM) application;

• Implementing security measures; and

• Training employees.

that generally includes, among other things: (i) a risk assessment

to identify, analyze and prioritize cybersecurity risks to the or-

ganization; (ii) written cybersecurity policies and procedures to

address those risks; and (iii) the effective implementation and

enforcement of those policies and procedures.

Access Rights and ControlsAccess controls generally include: (i) understanding the location

of data, including client information, throughout an organiza-

tion; (ii) restricting access to systems and data to authorized

users; and (iii) establishing appropriate controls to prevent and

monitor for unauthorized access. OCIE observed strategies that

focused on user access, access management, and access moni-

toring.

Data Loss PreventionData loss prevention typically includes a set of tools and pro-

cesses an organization uses to ensure that sensitive data, in-

cluding client information, is not lost, misused, or accessed by

unauthorized users. The following data loss prevention meas-

ures were observed:

• Vulnerability scanning;

• Perimeter security e.g. firewalls, web proxy systems;

USA REGULATORY NEWS

OCIE observations on cybersecurity and operational resiliency practicesEarlier in the quarter, when daily life seemed far more “business

as usual”, OCIE issued examination observations related to

cybersecurity and operational resiliency practices taken by

market participants.

Cybersecurity has been a key element in OCIE’s examination

program over the past eight years. The result of thousands of

examinations, these observations highlight various practices

and approaches to managing cybersecurity risk. While

acknowledging that “one size does not fit all”, OCIE’s hope is that

the observations assist market participants when considering

the enhancement of cybersecurity preparedness and operational

resiliency.

Governance and Risk ManagementOCIE observed that a key element of effective programs is the

incorporation of a governance and risk management program

REGULATORY NEWS





well as provide insight into key areas of risk, both existing and

emerging, which it expects investment advisers to identify and

mitigate.

The OCIE 2020 examination priorities will focus on:

• Retail Investors, including seniors and those saving for

retirement – the protection of retail investors, paying

particular attention to the review of fee disclosures, expenses

and conflicts of interests by those who serve and interact

with retail investors or investments;

• Market infrastructure – entities (and the resiliency of their

systems) that provide services critical to the functioning of

diligence for vendor selection; (ii) monitoring and overseeing

vendors, and contract terms; (iii) assessing how vendor

relationships are considered as part of the organization’s

ongoing risk assessment process; and (iv) assessing how vendors

protect any accessible client information.

Observed practices included formal vendor management

programs requiring monitoring and testing.

Training and AwarenessTraining and awareness are key components of cybersecurity

programs. Training provides employees with information

concerning cyber risks and responsibilities and heightens

awareness of cyber threats. Policies and procedures were a

starting point and additional exercises were observed to assist

employees in identifying and responding to possible breaches.

The full OCIE release can be accessed here.

SEC OCIE 2020 Examination PrioritiesThe SEC’s OCIE has announced its 2020 examination priorities

to enhance the transparency of its examination program as

Incident Response and ResiliencyIncident response includes: (i) the timely detection and

appropriate disclosure of material information regarding

incidents; and (ii) assessing the appropriateness of corrective

actions taken in response to incidents.

An important component of an incident response plan includes

business continuity and resiliency (i.e., if an incident were to

occur, how quickly can the organization recover and again be

fully operational?).

Typical elements observed in incident response plans included:

• Risk-assessed policies and procedures;

• Federal and state reporting requirements;

• Roles designated to specific employees;

• Testing requirements;

• Inventories of core services and systems; and

• Consideration of additional safeguards e.g., cybersecurity

insurance.

Vendor ManagementPractices and controls related to vendor management generally

include policies and procedures related to: (i) conducting due


https://www.sec.gov/files/OCIE Cybersecurity and Resiliency Observations.pdf

REGULATORY NEWS






the capital markets, including clearing agencies, national securities exchanges, alternative

trading systems and transfer agents;

• Information Security – reviewing cyber and other information security risks across the entire

examination program;

• Focus Areas – risk-based examinations on investment advisers and will focus on firms that

have never been examined. OCIE will review investment advisers to private funds to assess

compliance risks, including controls to prevent the misuse of material, non-public information

and conflicts of interest, such as undisclosed or inadequately disclosed fees and expenses, and

the use of investment adviser affiliates to provide services to clients;

• Anti-Money Laundering Programs – compliance with applicable anti-money laundering

requirements and whether firms appropriately adapt these programs to their regulatory

obligations;

• FinTech and Innovation, including digital assets and electronic investment advice – identifying

and examinations firms engaged in the digital asset space as well as those that provide services

to clients through automated investment tools and platforms; and

• INRA and MSRB – the oversight of the operations of the Financial Industry Regulatory Authority

and Municipal Securities Rulemaking Board.

The OCIE press release can be accessed here and the 2020 Examination Priorities Memo can be

read here.

https://www.sec.gov/news/press-release/2020-4

https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2020.pdf






Chief of the SEC Enforcement Division’s Cyber Unit. “Celebrities

are not allowed to use their social media influence to tout

securities without appropriately disclosing their compensation.”

The SEC’s Office of Investor Education and Advocacy went on to

caution investors to be wary of celebrity endorsements and to

always independently research investment opportunities.

No money is taken or withheld from harmed investors to pay

whistle-blower awards.

Conflicts of InterestThe SEC announced settled charges against actor Steven Seagal

for failing to disclose payments he received for promoting

an investment in an initial coin offering (“ICO”) conducted by

Bitcoiin2Gen (“B2G”).

The SEC’s order finds that Seagal failed to disclose that he was

promised $250,000 in cash and $750,000 worth of B2G tokens in

exchange for his promotions, which included posts on his public

social media accounts.

The SEC has also advised that, in accordance with the anti-

touting provisions of the federal securities laws, any celebrity

or other individual who promotes a virtual token or coin that

is a security must disclose the nature, scope, and amount of

compensation received in exchange for the promotion.

“These investors were entitled to know about payments Seagal

received or was promised to endorse this investment so they

could decide whether he may be biased,” said Kristina Littman,

USA ENFORCEMENT

Amendment for NFA Whistle-blowersThe SEC announced an award of more than $7 million to a

whistle-blower whose information and assistance were critically

important to the success of an enforcement action. The whistle-

blower provided extensive and sustained assistance, such as

identifying witnesses.

Whistle-blowers may be eligible for an award when they

voluntarily provide the SEC with original, timely, and credible

information that leads to a successful enforcement action.

Whistle-blower awards can range from 10 percent to 30 percent

of the money collected when the monetary sanctions exceed $1

million.

Since issuing its first award in 2012, the SEC has awarded

approximately $396 million to 76 individuals. All payments

are made out of an investor protection fund established by

the United States Congress that is financed entirely through

monetary sanctions paid to the SEC by securities law violators.

REGULATORY NEWS


REGULATORY NEWS

ENFORCEMENT REGULATORY NEWS



ENFORCEMENT

NFA permanently bars former Chicago CPO and CTA Elkhorn Investments LLC from membership

During the past quarter, the NFA permanently barred Elkhorn

Investments LLC, a former NFA Member, commodity pool

operator and commodity trading advisor located in Chicago,

Illinois from membership.

The decision, issued by NFA’s Business Conduct Committee

(“BCC”) is based on a complaint issued by the BCC. The BCC

found that Elkhorn failed to file certified annual statements and

liquidation statements for its pools.

Thank you for taking time to read our quarterly regulatory briefing. If you have any feedback please share it with your consultant.


Robert Quinn Consulting www.robertquinnconsulting.com

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