Transcript Topics

INTERNATIONAL COMPLIANCE
October 21, 2014
Washington, DC
WILLIAM J. YONGE
Morgan, Lewis & Bockius
Condor House, 5-10 St. Paul's Churchyard | London EC4M 8AL United Kingdom
Direct: +44.20.3201.5646 | [email protected]
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MARTHA MATTHEWS
Hudson Advisors LLC
Direct 214.515.6831 | [email protected]
80815238.2
Topics
• ANTI-CORRUPTION
– The U.S. Foreign Corrupt Practices Act (“FCPA”)
– The UK Bribery Act (“Bribery Act”)
– Anti-Corruption Compliance Best Practice
• REGULATORY FRAMEWORK
– UK Financial Services Regulatory Architecture
– UK Authorised Businesses and Approved Individuals
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EU DIRECTIVE – AIFMD
– EU AIFMD – Impact on U.S. AIFMs Marketing AIFs in the EU
– Some other European Developments
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80815238.2
THE FOREIGN CORRUPT PRACTICES ACT OF 1977
(FCPA)
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Where is bribery a problem?
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Transparencyinternational.org/corruptionindexmap
Anti-Corruption Trends
Harmonization of global anti-corruption standards and common
investigative practices
Information sharing and cross-debarment (particularly in banking)
Increased Global Enforcement Trends
Increased Cooperation Between Countries
Increased Enforcement – the U.S. is the most active regulator
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RISKS
• Key Risk Categories:
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Country Risk
Sector Risk
Transactional Risk
Business Opportunity Risk
Business Partnership Risk
• High Risk Considerations:
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Gifts and hospitality
Use of Company Assets
Charitable and Political donations
Sponsorships
What is the FCPA?
The Foreign Corrupt Practices Act of 1977 as amended, makes it
unlawful for certain persons and entities to make payments to influence
foreign government officials for the purposes of obtaining, retaining or
directing business to any person.
The FCPA applies to all U.S. persons and certain foreign issuers of
securities.
In 1998 the FCPA was amended to apply to foreign firms and persons
who cause, directly or through agents, an act in furtherance of such a
corrupt payment to take place within the U.S. territories.
Applies to public and private companies.
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Critical Elements of the FCPA
Key elements:
• Anti-bribery prohibitions prohibiting the giving or offering money,
gifts or anything of value to a foreign government official to obtain or
retain business. Enforced by the Securities and Exchange
Commission (civil) and Department of Justice (criminal). The SEC
has a specialized unit for enforcement of the FCPA.
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• The FCPA also requires companies whose securities are listed in
the U.S. to meet its accounting provisions requiring covered
corporations to maintain adequate internal accounting controls and
to keep accurate books and records reflecting transactions of the
corporation. These controls seek to prevent accounting practices
designed to hide corrupt payments.
How can I or my company be held liable
under the FCPA?
• Extraterritorial reach
• The following are subject to the FCPA:
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US individuals, wherever located
US companies
Foreign subsidiaries of US companies
Foreign companies registered with the Securities &
Exchange Commission (“SEC”), and the companies’
officers, directors, employees and agents
– Foreign individuals committing any act in furtherance
of a violation in the US or aiding and abetting a
violation
What are the consequences
of an FCPA conviction for businesses?
• Anti-Bribery:
– Civil penalties: disgorgement of profits and fines
of up to $500,000
– Criminal penalties: $2 million fine per violation or
twice the gain/loss, or disgorgement of profits
• Accounting Provisions:
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– Civil penalties: $10,000 or disgorgement of gross
gain
– Criminal penalties: $25 million fine per violation or
twice the gain/loss
What are the consequences
of an FCPA conviction for individuals?
• Anti-bribery:
– Civil penalties: Up to $100,000
– Criminal penalties: Up to 5 years imprisonment and $250,000
fine
• Accounting Provisions:
– Civil penalties: Up to $10,000 or gross gain
– Criminal penalties: 20 years imprisonment and/or $5 million fine
• Employers cannot indemnify employees
• Recent Trends:
– Senior management, General Counsel, VPs and CEOs
(financial services in the top 3)
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Collateral Consequences
– Debarment
– Civil lawsuits
– Expense intense, legal fees
– Business disruption, possible loss of D&O
– Negative press, loss of investors
– Violation of ethics and other policies,
breach of side letter arrangements
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What are the elements of an
Anti-Bribery violation?
• It is unlawful for
– an issuer, domestic concern or anyone acting
within the jurisdiction of the United States
– with “corrupt intent”
– directly or indirectly
– to offer, pay, promise to pay, or authorize
payment
– of “anything of value”
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1 Cash; Cash equivalents; Employment; Meals; Gifts; Entertainment; Forgiveness of debt; Discounts; Golf; Travel; Free product
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What are the elements of an
Anti-Bribery violation? (2)
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– to a “foreign official”2 for the purpose of
obtaining or retaining business or securing
any improper business advantage
– workers at state-owned or state controlled
businesses considered to be a foreign official
– do not have to be an owner, applies if the
government is deemed to exercise control
over the state controlled entity
What is “corrupt intent”?
• The element that turns “anything of value” into a
bribe
• Intent to induce the recipient to misuse his/her
official position
• Conscious avoidance, i.e., knowledge of the
high probability of a violation and steps taken to
ensure that actual knowledge is not acquired
• Failure to investigate red flags
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What does “directly
or indirectly” mean?
• No protection from liability for your agents’
violations if red flags existed.
• Agents include: distributors, consultants,
attorneys, business partners, joint venture
partners, etc.
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What is considered a “business advantage”?
• To gain or retain a business advantage, e.g.:
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To influence a license or permit determination
To influence a public tender
To influence a customs clearance decision
To gain a tax advantage
To influence a sale
• Result is irrelevant
• Existence of payment is irrelevant – an offer
alone confers liability
What are Red Flags?
For example, Red Flags exist where your
agent:
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– Performs services in a high-risk country
– Demands to be paid in cash
– Cannot provide documentation to substantiate
services and expenses
– Can “get things done” that others cannot, or in a
way that cannot be explained
– Has a close relationship with a government
official with whom you do business
What are Risk Flags?
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Third party risk can arise from the use of intermediaries
Lack of transparency in business dealings
Lack of effective democratic institutions
Lack of independent media
A culture that tends to encourage circumvention of rules,
nepotism and similar distortions to an open market
• Pressure to conform to cultural norms
• The prevalence of requests to make facilitation
payments to expedite processes
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What are the FCPA Accounting Provisions?
• Require:
1. the maintenance of complete accurate books and
records
2. the establishment and maintenance of a system of
internal controls sufficient to provide reasonable
assurance that:
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a. Transactions are executed in accordance with
management’s general/specific authorization;
b. Transactions are recorded as necessary to permit
preparation of financial statements that conform with
generally accepted accounting principles and to
maintain accountability for assets;
What are the FCPA Accounting Provisions? (2)
c. Access to assets is permitted only in accordance
with management’s general/specific
authorization; and
d. Recorded accountability for assets is compared
with existing assets at reasonable intervals, and
appropriate action is taken to address
differences.
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Are there any defenses to the FCPA?
1. Bona fide promotional expenditures
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Payments directly related to product demonstration
or promotion
Must be reasonable
2. Written local law
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Are there any exceptions to the FCPA?
•
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Facilitating payments – intended to expedite
routine, non-discretionary actions
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Extremely narrow defense
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Facilitating payments are illegal under other laws
Facilitation Payments
Australia
The Criminal Code defines a facilitation payment to be a
payment which is of nominal value (the term is not defined in
the Code); paid to a foreign official for the sole purpose of
expediting a routine action; documented as soon as possible.
Canada
Toughened laws in 2013. Similar to the UK, facilitation
payments are considered small bribes and are on the same
footing as other unlawful payments.
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Facilitation Payments (2)
United States
As defined by the FCPA of 1977 and clarified in amendments,
only payments to a foreign official, political party or party official
for routine government action such as processing payments,
papers, permits, or to expedite performance of nondiscretionary duties performed in a normal course of business.
United Kingdom
The United Kingdom’s Bribery Act 2010 provides in clear terms
that it is a crime for any individual or company with a UK
presence to bribe a public official. This includes “facilitation
payments” – money or goods given to a public official to
perform, or speed up the performance of, an existing duty.
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RELATED LAWS
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Conspiracy
Racketeering
Mail and Wire Fraud
Travel Act
Money Laundering
Certification and Reporting Violations
Tax Violations
THE UK BRIBERY ACT
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What is the Bribery Act?
UK law became effective in 2011 that criminalizes:
1. Public official bribery
2. Commercial bribery
3. Failing to prevent bribery on your organization’s
behalf
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Why is Bribery Act compliance important?
• Bribery requests are common in many countries
• The consequences of Bribery Act violations can
be severe
• The Bribery Act has strict liability provisions
• Applies to broad array of corrupt conduct
• Applies to bribery in and outside of the UK, and
in some cases, to activity with no connection to
the UK
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What are the consequences of a
Bribery Act violation?
• Corporate Penalties: Unlimited fines
• Individual Penalties: Up to 10 years
imprisonment
• Potential confiscation of the proceeds of the
crime
• Potential public procurement ban
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How can I or my company be held liable
under the Bribery Act?
• Extremely broad jurisdiction
– UK companies (wherever they do business)
– Non-UK companies that “carry on” business in the UK
– Liability for “associated persons” (e.g., employees,
agents, subsidiaries), even where the acts occur
outside of the UK
– No facilitating payments exception
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Can my corporation be held liable?
• YES – if it carries on business in the UK, for failing
to prevent bribes that are made on its behalf by
associated persons, even if the conduct occurs
outside of the UK
• Strict Liability Offense
• Example:
– Russian company sells widgets in the UK, Russia &
Kazakhstan. Company’s attorney in Kazakhstan bribes a
Kazakh official to obtain a business license for the
Company’s Kazakh operations. Company can be held
liable for a Bribery Act violation for failing to prevent the
bribery, even if it did not know or approve of it
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Are there any defenses?
• Yes
• Full defense if the organization can provide it
had adequate procedures designed to prevent
associated persons from engaging in bribery.
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ANTI-CORRUPTION COMPLIANCE –
BEST PRACTICES
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What can I do to mitigate FCPA and Bribery
Act liability?
• Establish and maintain an effective anticorruption compliance program
• Compliance programs:
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Can prevent bribery
Can detect bribery
Are expected by US and UK authorities
Can provide a defense to violations
What are the components of an effective
anti-corruption compliance program?
1. Senior management commitment
2. Business model review
3. Due diligence, evaluation and impact
assessments
4. Proportionate policies and procedures
5. Communication / Training
6. Monitoring and review
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What should the
policies and procedures do?
• Establish a clear message that the company has
a zero tolerance policy for bribery
• Establish guidelines for promotional
expenditures and expense reimbursements
• Set forth steps for performing due diligence of
and contracting with business partners
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Cultivate a Culture of Compliance Amongst
Employees
• Train all employees
• Special focus on employees with contacts with
government officials
• Consider training business partners
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What is oversight and monitoring?
• Written contracts with all business partners
– Contracts with anti-corruption certifications
– Contracts with audit rights
• Due diligence:
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– Do research on your employees and business partners
– Understand how your business partners were identified or
recommended
– Understand the services to be provided and how the
payment will be made
– Conduct a red flags analysis
– Know your exposure to, or contacts with, government
officials
Why do I need financial controls?
• They detect bribery and mitigate bribery risk
• FCPA has Accounting provisions that require
issuers to maintain a system of financial controls
designed to prevent bribery and the falsification
of books and records
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• Bribery Act guidance encourages the adoption
and maintenance of financial and commercial
controls to mitigate bribery risk
Do I have to audit all of my business units
and all of my business expenditures and
partners?
• Consider a risk-based approach
– Periodic audit of expenses involving government
officials
– Periodic visits to/meetings with business partners in
high risk regions
– Assessment of select high risk transactions
• Document all audits and reviews
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How do I respond to alleged violations?
• Conduct a prompt and effective internal
investigation effectively using internal and
external resources
• Remediate
– Ensure the misconduct is stopped
– Address lapses, if any, in controls and implement
improvements
– Consider appropriate disciplinary measures
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How do I respond to alleged violations? (2)
– Terminate business relationships with relevant agents
– Conduct corrective training
– Consider disclosure to appropriate authorities
– Outside auditors
– Financial statements/regulatory filings
– US or foreign authorities
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Overview Europe-wide vs US
EU features mainly civil law, codified jurisdictions
save for UK common law
National legal codes and processes differ across
EU
• Italy: it is a defence that a bribe was paid in response to
extortion
• Parts of Spain do not prohibit deduction of bribes for
computing tax liabilities
• France forbids French companies from giving
information to foreign enforcement agencies
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Overview Europe-wide vs US (2)
• No private sector whistle-blowing protections in Germany,
France, Italy and Spain
• Since 2002 US has pursued twice as many formal bribery
actions as rest of world.
1997-2013 – number of formal foreign bribery actions:
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US – 316
UK – 46
Germany – 20
Denmark – 15
Netherlands – 11
France – 10
Overview Europe-wide vs US (3)
Extractive industries sector has been subject to
more foreign and domestic bribery enforcement
actions than any other sector followed by
manufacturing/service provider;
aerospace/defence/security; and health care
sectors.
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US themes
• Prosecutions of and enforcement against individuals a top
priority
• DoJ and SEC continue to examine closely travel and
entertainment expense claims
• Use of bargaining tools, NPAs, to reward
companies/individuals for self-reporting cooperating and
remedial actions
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Recent Cases
• JP Morgan Chase hiring practices - “the sons and daughters
case”. Exchange of investment banking business in exchange
for hiring government official’s relatives through “fast tracking”.
This was a whistleblower case. Parallel investigation SEC/DOJ.
Public disclosure required. Spreadsheets include about 30
employees with ties to state-owned companies or party officials.
The U.S. authorities now investigating at least 5 other Wall
Street banks that have business ties in China.
• Morgan Stanley - exchange of investment management
business and acquiring real estate for self and official. Morgan
Stanley received declination to prosecute because its
compliance policies and monitoring uncovered the actions. The
individuals relinquished $3.4 million in real estate, a personal
fine of $250K and permanently barred from securities industry
(bad actor label).
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UK themes
DPAs are deals entered into between corporations
(not individuals) and prosecutors where prosecution
can be avoided by fulfillment of conditions.
The power to use DPAs came into force in UK in
2014.
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Conditions will generally include a combination of
financial penalty reparation to victims and obligation
to implement a compliance program
UK themes (2)
FCA reviews have found:
• inadequate systems and controls for assessing
bribery/corruption risk re monitoring third-party
relationships, such as those with agents or introducers
• anti-bribery training programs often fail to identify and then
focus on risks specific to their business
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UK FINANCIAL SERVICES
REGULATORY ARCHITECTURE
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UK Financial Services
Regulatory Architecture
• Predecessor tripartite architecture responsible
for financial stability in UK: HM Treasury, Bank
of England and FSA
• Abolished in 2013 due to failure in 2007/2008
financial crisis
• FSA ceased to exist
• Three new regulators
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UK Financial Services
Regulatory Architecture (2)
The new regulators
• Financial Policy Committee (FPC) – responsible for
macro-prudential regulation
• Prudential Regulation Authority (PRA) – responsible for
micro-prudential regulation of systemically important
firms
• Financial Conduct Authority (FCA) – to inherit the
majority of FSA’s existing roles and functions
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UK Financial Services
Regulatory Architecture (3)
FCA is:
• responsible for the conduct of business regulation of all
firms, including those regulated for prudential matters by
PRA
• responsible for the prudential regulation of firms not
regulated by PRA
• responsible for FSA’s market conduct regulatory
functions save for systemically important infrastructure
which was transferred to Bank of England
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UK Financial Services
Regulatory Architecture (4)
• The Financial Services Act 2012 contains the core
provisions for the government’s structural reforms. The
original Bill was published on 27 January 2012 and after
Parliamentary scrutiny received Royal Assent on 19
December 2012
• The Act largely amends existing legislation making
extensive changes to the Financial Services and
Markets Act 2000, as well as to Bank of England Act
1998 and Banking Act 2009
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Roles of FPC, FCA and PRA in New Regulatory Architecture
Bank of England
Protecting and enhancing the stability of the financial system
of the United Kingdom, aiming to work with other relevant
bodies including the Treasury, the PRA and the FCA. The
Bank’s Special Resolution Unit is responsible for resolving
failing banks using the special resolution regime
Subsidiary
FPC powers of recommendation and direction to address
systemic risk
PRA
Enhancing financial stability by promoting the
safety and soundness of PRA-authorised
persons, including minimising the impact of
their failure
Prudential regulation
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Prudential regulation
Systemic infrastructure – central
counterparties, settlement systems and
payment systems
Source: HM Treasury, A New Approach to
Financial Regulation: Building a Stronger System
(February 2011)
FPC
Contributing to the Bank’s objective to protect and enhance
financial stability through identifying and taking action to
remove or reduce systemic risks, with a view to protecting
and enhancing the resilience of the UK financial system
FCA
Enhancing confidence in the UK financial system by facilitating
efficiency and choice in services, securing an appropriate degree of
consumer protection, and protecting and enhancing the integrity of the
UK financial system
Conduct regulation
Prudentially significant firms – deposit
takers, insurance, some investment
firms
Prudential & conduct
regulation
Investment firms & exchanges, other
financial services providers – including
IFAs, investment exchanges,
insurance brokers and fund managers
FCA – Regulated Only Firms
FCA – regulated only firms number about 24,500
covering personal investment firms, insurance
intermediaries, mortgage intermediaries, investment
managers, non-deposit taking lenders, corporate
finance, wholesale firms, custodians, professional
firms, markets, collective investment schemes,
other brokers, managing agents, most investment
firms and others (e.g., travel insurance only and
media firms)
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Dually Regulated Firms
Dually regulated firms number about 2,150 covering
banks, building societies, investment banks, credit
unions, friendly societies, life insurers, general
insurers, wholesale insurers, commercial insurers
and reinsurers, Lloyd’s and Lloyd’s Agents and a
small number of “significant” investment firms
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UK: Authorised Businesses and Approved
Individuals
• In UK:
•
•
financial services businesses must not only become authorised
by FCA/PRA to conduct regulated activities
they must also not allow individuals to perform controlled
functions on their behalf without the prior approval of FCA/PRA
• Controlled functions cover, for example, director, CEO, nonexecutive director, compliance officer, chief risk officer, head
of division, advising, trading, managing investments
• Approved persons are subject to Statements of Principle for
Approved Persons and a Code of Practice for Approved
Persons
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UK: Authorised Businesses and Approved
Individuals (2)
• The consequences of becoming an approved person are farreaching. Once a person has become an approved person,
they are effectively individually regulated by the FCA or the
PRA (or both) and are therefore personally accountable to the
regulator in question. This has implications for the standards
of conduct approved persons are expected to maintain and
the disciplinary action that the regulators can take against
them.
• Approved persons are required to satisfy standards of
conduct that are appropriate to the role they perform and, in
particular, must comply with the Statements of Principle and
Codes of Practice issued by the FCA and the PRA
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UK: Authorised Businesses and Approved
Individuals (3)
• Those Statements and Codes provide the main basis for
sanctions against approved persons. If approved persons'
behaviour fails below the requisite standards of conduct, they
may face disciplinary action, which can result in penalties,
ranging from a public censure to being banned from the
financial services industry
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FCA
FCA has:
• a single strategic objective to ensure that markets for
financial services work well
• three operational objectives
– securing an appropriate degree of protection for consumers
– protecting and enhancing integrity of UK financial system
– promoting effective competition in consumer interest
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• a duty to promote effective competition in consumer
interest
FCA (2)
FCA is responsible for:
• regulating standards of conduct in retail and wholesale
markets
• supervising trading infrastructures that support these
markets
• prudential supervision of firms that are not PRA-regulated
• UKLA
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FCA’s New Powers
FCA’s new powers to ban:
• products that pose unacceptable risks to consumers,
subject to a consultation process
• such products without consultation for up to 12 months
where prompt intervention required
• misleading financial promotions, without resort to
enforcement process
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FCA’s New Powers (2)
FCA’s certain other new powers:
• to announce publicly fact of disciplinary action vs a firm or
individual
• to regulate and sanction investment exchanges, sponsors
and primary information providers, as FSA currently has
regarding investment firms
• took responsibility for consumer credit in 2014
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FCA’s Supervisory Approach
Four conduct supervision categories based on risks posed to
customers and the market:
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C1
broadly, banking and insurance groups with a very
large number of retail customers and
universal/investment banks with very large client
assets and trading operations
C2
broadly, firms across all sectors with a substantial
number of retail customers and/or large wholesale
firms
C3
broadly, firms across all sectors with retail customers
and/or a significant wholesale presence
FCA’s Supervisory Approach (2)
C4 broadly, smaller firms, including almost all intermediaries
• C1 and C2 firms will have a nominated supervisor
• C3 and C4 firms will not and instead be supervised by a
team of sector specialists
Three prudential supervision categories for FCA-only firms:
CP1 (prudentially critical)
CP2 (prudentially significant)
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FCA’s Supervisory Approach (3)
CP3 (prudentially insignificant)
Under FCA, supervision will be more judgementbased, starting at the firm’s business model and
strategy and leading to early intervention on basis of
assessment of conduct risk rather than crystallised
issues
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PRA
PRA has two objectives:
• to promote the safety and soundness of all firms it
regulates, focusing primarily on the harm firms can cause
to stability of UK financial system
• specifically for insurers, to contribute to securing an
appropriate degree of protection for those who are, or may
become, policy holders
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PRA (2)
PRA is responsible for:
• authorisation of banks, building societies, insurers and
certain designated investment firms, in conjunction with
FCA
• prudential supervision of same
PRA’s powers did not change significantly from
FSA’s
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EU AIFMD – IMPACT ON U.S. AIFMS
MARKETING AIFS IN THE EU
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EU AIFMD – Impact on U.S. AIFMs
Marketing AIFs in the EU
•
•
•
•
•
•
AIFMD transposition heatmap
Application of AIFMD to U.S. AIFMs
Key exemptions
Private Placement Overlay
Variable Private Placement Geometry
Key Points:
– Annual Report
– Disclosure to Investors
– Annex IV Reporting to Regulators
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• Private Equity Requirements
• Summary of routes to EU investors
EU AIFMD – Impact on U.S. AIFMs
Marketing AIFs in the EU (2)
• Practical steps for U.S. access to UK investors
• Other impacts of AIFMD on US investment
advisers
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AIFMD Transposition Heat Map
as at 22 July 2014
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Application of AIFMD to U.S. AIFMs
• U.S. (and other non-EU) AIFMs which market1 AIFs2 to
EU3 professional investors4
• U.S. AIFMs5 which manage6 EU AIFs7 (from 2015)
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1 “Marketing” means “a direct or indirect offering or placement at the initiative of the AIFM or on behalf of the AIFM of units or shares of
an AIF it manages to or with investors domiciled or with a registered office in the Union”
2 An “AIF” is a collective investment undertaking including investment compartments thereof which raises capital from a number of
investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors and is not a UCITS
3 In this presentation “EU” refers to the 28 member states of the European Union. Iceland, Liechtenstein and Norway are expected to
agree to “sign up” to AIFMD but have not yet done so. The formal name for the EU in combination with those three countries is the
European Economic Area. Switzerland does not participate in the EEA
4 A professional investor is an investor which is considered to be a professional client or may, on request, be treated as a professional
client within the meaning of Annex II to Directive 2004/39/EC (“MiFID”)
5 “AIFMs” means legal persons whose regular business is managing one or more AIFs.
6 “Managing AIFs” means performing at least portfolio management or risk management functions
7 EU AIFs are AIFs which are either (a) authorised or registered in a member state or have their registered office and/or head office in
a member state
Application of AIFMD to U.S. AIFMs (2)
• U.S. AIFMs may be given a passport to market AIFs to EU
professional investors in late 2015. If so, a U.S. AIFM who
wishes to use the passport will require to be authorised under
AIFMD in its chosen member state of reference and comply
fully with AIFMD re EU business
• U.S. AIFMs managing a non-EU AIF and not marketing it in
EU are not subject to AIFMD at all
• NPPRs may be abolished in 2018, leaving only the AIFMD passport
route to marketing AIFs to EU professional investors for all AIFMs,
both EU and U.S.
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Key Exemptions
• Small AIFMs8 (still subject to local notification and
disclosure requirements - member states may impose
stricter requirements)
• Reverse solicitation, whereby a professional investor
established in EU may invest in AIFs on its own initiative.
This has been labelled “reverse solicitation”
– When relying on reverse solicitation, non-EU AIFMs should:
• check local law of member state for restrictions on reverse
solicitation
• ensure they have appropriate policies and procedures in place to
create an audit trail for each investor
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8 broadly, AIFMs who manage portfolios of “Small” AIFs whose total assets across all the AIFs that they manage (a) including any
acquired through use of leverage do not exceed EUR100 million or (b) do not exceed EUR500 million where the portfolio is
unleveraged and no redemption rights are exercisable for 5 years from date of initial investment in the AIF
Key Exemptions (2)
• Under UK AIFMD Regulations, the marketing restrictions
do not apply to an offering or placement of an AIF to an
investor made at the initiative of that investor
• UK FCA guidance reads:
– “A confirmation from the investor that the offering or
placement of units or shares of the AIF was made at its
initiative, should normally be sufficient to demonstrate that
this is the case, provided this is obtained before the offer or
placement takes place. However, AIFMs should not be able
to rely upon such confirmation if this has been obtained to
circumvent the requirements of AIFMD.”
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Private Placement Overlay
U.S. AIFMs may continue to market AIFs in EU under national private
placement regimes (“NPPRs”) to at least 2018 provided target member
state permits that locally, the AIFMD private placement overlay (“PPO”)
is satisfied and any local requirements are met.
The PPO obliges AIFMs to comply with:
•
transparency requirements for annual reports, pre-investment and
ongoing disclosure to investors and reporting to regulators
• private equity requirements, where they acquire major holdings in EU
non-listed companies or “control” of an EU company (whether or not
listed)
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Private Placement Overlay (2)
The PPO also requires:
• cooperation agreements for systemic risk oversight between the
regulators of the states in which marketing is to occur, the third country
of non-EU AIFM and the third country of non-EU AIF
• neither the third country of the non-EU AIFM nor AIF is listed as “noncooperative” by Financial Action Task Force (“FATF”)
• agreements exist between each of U.S. CFTC, SEC, OCC and
Federal Reserve and almost all EU member state regulators.
Bermuda, BVI, Cayman and Channel Islands also covered.
• AIFMD allows member states to impose locally stricter requirements
for private placement, additional to those mandated under AIFMD10
10 For example, the appointment of a depositary to a non-EU AIF to be marketed into Denmark or Germany will be required under Danish
and German implementation respectively, subject to the local transitional provision.
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Private Placement Overlay (3)
Locally, most member states have a notification or registration
requirement
• some (e.g., UK) require a simple notification after which marketing can
commence immediately
• some (e.g., Denmark and Germany) require a substantive, lengthy
registration process
81
Variable Private Placement Geometry
• Marketing in the UK straightforward, subject to FCA notification
requirements
• Germany – requirement for a depositary “lite” function to be
undertaken in addition to registration with BaFin
• Denmark – similar to Germany
• Austria, Italy, Spain and France – marketing not allowed
• Netherlands, Sweden – marketing generally allowed, subject to
notification
82
Annual Report: Key Points
• U.S. AIFMs must produce an annual report for each AIF they market
in the EU making it available to the regulator in each target member
state and to EU investors on request
• Made available no later than six months from the end of the financial
year
• The annual report must not only include typical financial information
about the AIF but also:
– total amount of remuneration for the financial year, split into fixed and
variable remuneration, paid by the AIFM to its staff and the number of
beneficiaries including, where relevant, carried interest paid by the AIF
83
Annual Report: Key Points (2)
– the aggregate amount of remuneration broken down by senior
management and members of staff of the AIFM whose actions
have a material impact on the risk profile of the AIF (e.g., portfolio
managers, traders, sales; and heads of finance, legal, HR, risk and
compliance)
– an overview of its remuneration policy
– an allocation or breakdown of remuneration information re: each
AIF
– The accounting information must be prepared in accordance with
the accounting statements of the country where the AIF is
established and be audited. The auditor’s report must be
reproduced. The audit must meet international accounting
standards in force in the country of the AIF’s registered office
84
Disclosure To Investors: Key Points
Laundry list of itemised pre-sale requirements, including, notably:
• AIF’s valuation procedure and pricing methodology
• AIF’s liquidity risk management, including redemption rights in both
normal and exceptional circumstances, and existing redemption
arrangements
• how fair treatment of investors is ensured (including, potentially,
detailed side letter disclosures)
Review PPMs to ensure all required AIFMD disclosures made;
potentially produce an AIFMD wrapper
Note requirements for ongoing post-sale disclosures to investors
85
“Annex IV” Reporting to Regulators: Key
Points
86
Who needs to report?
• The AIFM
To whom must reports be made?
• Authority in AIFM’s home member state
• In case of U.S. AIFM marketing in EU, authority in each member state
where fund marketed
Starting when?
• Date of marketing notification/registration in relevant member state
Reporting level
• Aggregated reporting at AIFM level
• Detailed reporting for each AIF managed and each AIF marketed in the
EU
Reporting period
• Reporting periods ending on the last day of March, June, September
and December
Reporting frequency
• Depends on volume of AIFs’ AUM and investment policy (frequencies
are quarterly, half yearly and annually)
Reporting deadline
• “As soon as possible”, not later than one month after the end of the
reporting period
• Extended period of 15 days for funds of funds
Form of reporting
• Annex IV report to be filed electronically using solely the XML reporting
template published by ESMA
• In UK report must be sent electronically to: [email protected]
“Annex IV” Reporting to Regulators: Key
Points (2)
Reporting frequencies re Art. 24(1) and (2)
87
Frequency
Qualifying criteria
1. Annual for that AIF
Re each unleveraged AIF they manage invested in non-listed companies to acquire
control (e.g., PE funds)
2. Half-Yearly for all AIFs
AIFM managing AIFs whose AUM <€1 billion, but above the Small AIFM threshold,
other than each AIF with total AUM >€500 million and PE funds
3. Quarterly for that AIF
AIFM within 2. above report for each AIF whose AUM (including leverage) >€500
million
4. Quarterly for all AIFs
AIFM managing AIFs whose total AUM >€1 billion, other than PE funds
“Annex IV” Reporting to Regulators: Key
Points (3)
Art. 24(1) – AIFM specific
Art. 24(1) – AIF specific
Art. 24(2) – further AIF specific
Art. 24(4) - leverage
AIFM shall regularly report to the
competent authorities of its home
Member State
AIFM shall regularly report to the
competent authorities of its home
Member State
An AIFM shall, on request, for each
AIF it manages and each AIF it
markets in the EU report the
following to the competent
authorities of its home Member
State
An AIFM managing AIFs employing
leverage on a substantial basis11
shall make available to the
competent authorities of its home
Member State information about the
overall level of leverage employed
by each one
•
main instruments in which it is
trading
•
• % of the assets subject to
special arrangements arising
from their illiquid nature
•
break-down between leverage
arising from borrowing of cash
or securities
•
on markets of which it is a
member or where it actively
trades
•
new arrangements for managing
the liquidity of the AIF
•
leverage embedded in financial
derivatives
•
risk profile of the AIF and the risk
management systems
•
extent to which the AIF’s assets
have been reused under
leveraging arrangements
•
information on the main
categories of assets
•
re: EU AIFMs only, results of its
stress tests on each AIF’s
investment and liquidity risks
NB: for a non-EU AIFM,
information at the level of the
AIFM should only cover the AIFs
marketed in the EU.
88
on the investment strategies,
principal exposures and most
important concentrations of
each AIF it manages
11 Under Level 2 Regulation, the tipping point is when the exposure of an AIF calculated according to the commitment method exceeds 3 x its NAV.
“Annex IV” Reporting to Regulators: Key
Points (4)
• Annex IV Form12 the counterpart to SEC Form PF
– only 1/3 identical to Form PF
– remainder requires data to be processed differently from, or data not
required by, Form PF
– common set of reporting requirements for all AIFs regardless of AIF
type, with some questions for PE only; accordingly, entire form must be
completed for all AIFs, irrespective of strategy
– in contrast Form PF imposes different reporting obligations depending
on size of firm and type of strategy
– 38 questions at AIFM level of which 27 can be pre-populated
– over 300 questions at AIF level
89
12 Technically, “AIFMD Consolidated Reporting Template” in XML v1.1 and v1.2 comprising one tab at AIFM level and three tabs at AIF level
“Annex IV” Reporting to Regulators: Key
Points (5)
– develop internal systems and procedures to underpin Annex IV
– if Annex IV not being prepared internally, identify suitable service
providers such as administrators and software platforms
– Requirement to file triggered on date of marketing notification/
registration
When is the first report due?
Assuming annual reporting and AIFM notified/registered with relevant EU
regulator in July 2014, AIFM will report from the first day of the following
quarter until the end of the first annual period, i.e., report due for 1 October
– 31 December 2014, due by 1 February 2015. Thereafter, AIFM will
report annually.
90
“Annex IV” reporting to regulators: Key
Points (6)
Feeder AIFs
• Individual reports for feeder AIFs of same master AIF
• No look through to holdings of master AIF
Fund of funds
• No look through to the holdings of underlying funds
91
Non-EU Master AIF not marketed in EU with feeder
AIF marketed in EU
“Annex IV” reporting to regulators: Key
Points (7)
Non-EU Master AIF not marketed in EU with EU
feeder AIF
• requirement to report Art. 24(2) information on the non-EU
master if the master and feeder share the same AIFM
92
Private equity requirements
Notification of major holdings in EU non-listed
companies
• Competent authorities must be notified of the proportion of
voting rights in such companies held by the AIF when the
proportion reaches or crosses the thresholds of 10%, 20%,
30%, 50% and 75%
Disclosure in case of acquisition of control of EU
companies (whether or not listed)
93
Private equity requirements (2)
• When an AIF acquires, individually or jointly, control over a
non-listed or a listed EU company, the AIFM managing the
AIF must make specified disclosures to that company, its
shareholders and to regulators:
– control of a non-listed company refers to control of >50% of
its voting rights
– control of a listed company varies between EU countries. In
the UK, the threshold is 30% of voting rights
– ban on “asset stripping” for 24 months after acquisition of
control of a non-listed or listed EU company
94
Summary of routes to EU investors
95
• NPPRs: subject to PPO and dependent on
member state discretion and cooperation
arrangements
• Pre-marketing: even if outside AIFMD, may still
be subject to NPPRs
• Reverse solicitation
• Access the pan-EU marketing passport asap:
this will currently require the establishment of an
EU AIFM managing EU AIFs and full compliance
with AIFMD
Practical steps for US access to UK
investors
A US AIFM must give written notification to FCA
before marketing an AIF it manages
Notification must confirm:
96
• the AIFM is responsible for complying with the UK’s
AIFMD regime
• the AIFM complies with the requirements of AIFMD
regarding annual reports, disclosure to investors and
reporting to regulators
• if applicable, the AIFM complies with the Private Equity
Requirements
Practical steps for US access to UK
investors (2)
• appropriate cooperation arrangements are in place
between relevant regulators
• the country of the non-EU AIFM and any non-EU AIF is
not listed as Non-Cooperative by FATF
A US Small AIFM must give written notification to
FCA before marketing an AIF it manages
97
Notification must confirm:
• the AIFM is responsible for complying with the UK’s
AIFMD regime
• the AIFM is a third country Small AIFM
Practical steps for US access to UK
investors (3)
The US Small AIFM must provide FCA with
information on:
• the main instruments in which it trades
• the principal exposures and most important concentrations
of the AIFs that it manages
98
In both cases, simple notification process requiring
no waiting time for FCA approval
Practical steps for US access to UK
investors (4)
FCA may revoke entitlement to market subject to
due process
Pre-marketing in UK continues to be regulated by
the UK’s pre-AIFMD financial promotion regime
99
Sanctions for contravention of UK
regulations
• US AIFMs marketing non-EU AIFs into UK in
contravention of the UK AIFMD Regulations could face
imprisonment for a term not > 3 months and/or a fine
• Agreements entered into in contravention of the UK
AIFMD Regulations may, in certain circumstances, be
unenforceable by the US AIFM
100
Other impacts of AIFMD on US investment
advisers
US sub-adviser (discretionary) to EU AIFM
• an EU AIFM who wishes to delegate to a US sub-adviser
must satisfy the following conditions:
101
– the AIFM must justify the delegation objectively
– the delegation must take the form of a written agreement
– delegation of portfolio management or risk management
may only be conferred on authorised or registered advisers
and where that is not so, the AIFM’s regulator must consent
– where portfolio management or risk management is
delegated, there must be a cooperation arrangement
between regulator of EU AIFM and regulator of delegate.
US SEC and CFTC have entered into such arrangements
Other impacts of AIFMD on US investment
advisers (2)
– the AIFM must demonstrate delegate has sufficient
resources, relevant staff are of sufficiently good repute and
experience and is qualified and able to undertake functions
– the AIFM must ensure that delegate undertakes the
delegated functions effectively and in compliance with its
obligations as an AIFM under AIFMD
– the AIFM must comply with detailed obligations to monitor,
instruct and supervise the delegate
• US sub-advisers may be subjected contractually to
remuneration requirements
102
Other impacts of AIFMD on US investment
advisers (3)
• Under the regime, EU AIFMs may require their subadviser to separate functionally remuneration structures
between portfolio management, risk management and
valuation
• ESMA indicates in guidance that the remuneration
regime generally be extended to entities to which EU
AIFMs delegate portfolio or risk management
• The above regime will bite from the moment an EU AIFM
becomes authorised under AIFMD
103
Other impacts of AIFMD on US investment
advisers (4)
US advisers delegating to an EU sub-adviser
(discretionary)
• US managers of AIFs investing in Europe through an EU
sub-adviser must consider the issue carefully, with
particular reference to costs
104
– will the EU sub-adviser be classified as the AIFM of the nonEU AIF? If so, the sub-adviser will be subject to AIFMD
structural and operational constraints
– EU AIFMs of a non-EU AIF marketed in EU must ensure AIF
has appointed a depositary and comply with certain other
requirements
– a non-EU AIFM need only comply with the PPO
OTHER EUROPEAN DEVELOPMENTS
105
Matters MIFID 2
The new EU MIFID 2 directive and regulation were published in the
Summer. Member states have until July 2016 to adopt and publish
implementing measures and apply them from 3 January 2017.
MIFID 2 makes many modifications to MIFID. Notably, three
categories of entity will be bought into scope of MIFID regulation
for the first time:
• New Third Country Firm (“TCF”) Regime
• High Frequency Algorithmic Trading Technique Users
• Commodity and Commodity Derivative Dealers
106
Matters MIFID 2 (2)
New TCF Regime
EU branch requirement
Member states have discretion to require a TCF which intends to
provide investment services to retail and/or professional clients within
its territory to establish a local branch subject to authorisation and
supervision by the relevant EU regulator
Member states will not be permitted to impose the branch requirement
on TCFs which provide investment services at the “exclusive invitation
of the client” (aka reverse solicitation)
Should the UK decide to adopt the branch requirement, the current
useful and generous registration exemption for non-EU overseas
persons would likely be abrogated
107
Matters MIFID 2 (3)
EU cross-border services passport
TCFs may provide investment services on a cross-border basis to
eligible counterparties and professional clients EU-wide provided they
are registered with ESMA and, broadly, the TCF is based in an
equivalent regime
108
Other aspects
In connection with MiFID2, ESMA recently issued a consultation
document, featuring a proposal to ban the receipt of most investment
research in return for dealing commissions
In June 2014 FCA tightened its rules on use of dealing commission and
banned investment managers from paying for “corporate access
services” using dealing commissions
Matters MAR 2
The new EU Market Abuse Regulation (“MAR”) was published in the
Summer and will be directly applicable EU-wide from 3 July 2016
MAR will replace completely the current EU Market Abuse Directive
which was published in April 2004
MAR represents an attempt by the European Commission to introduce
a single European rulebook on market abuse
109
• expands the scope of the regime in terms of covered markets and
products
• introduces more stringent regulation
• introduces new procedures for market soundings
• designed to dovetail with MIFID 2
US AND EU FUND STRUCTURES
JURISDICTIONAL CONTRASTS
110
US and EU fund structures – jurisdictional
contrasts
The familiar master-feeder structure is largely
driven by US conditions.
In the EU that structure is not typical for funds that
have no taxable US investors.
111
Master Feeder Structure
Principals
Investment Manager
Admin
Services
Master Fund
(Cayman LP or Cayman Company that checks the
box to be treated as a partnership)
Non-US Feeder
Fund
(Cayman Company)
Non US
Investors
112
US Feeder Fund
(Delaware LP or Cayman Company
that checks the box to be treated
as a partnership)
US Tax
Exempt
Investors
US Taxable
Investors
Prime
Broker
Single Entity Fund Structure
Principals
Investment Manager
Administrator
Fund
(Company in Cayman, Ireland or other appropriate
non-US domicile)
Non-US Investors
113
US Tax Exempt Investors
Prime
Broker