Compliance Updater - April 2018

A summary of key compliance stories around the globe in April.

Regulatory and compliance news in brief

Spotify becomes the largest direct listing on record.
Spotify, the world’s largest music streaming service, became the world’s largest ever direct listing when it listed on the New York Stock Exchange without raising any money. It also became the first direct listing on the NYSE, after the exchange altered it rules earlier in 2018. The direct listing enables early stage investors and staff to sell in the public markets for the first time. At the end of the first day of trading, Spotify’s shares closed at around $149, with a market capitalisation of $26.5bn. Spotify is yet to make a profit.

Slip up in the FTSE Russell index – LongFin in, then out.
LongFin, a Nasdaq-listed trade finance company with a blockchain subsidiary, was included in FTSE Russell’s Russell 2,000 and 3,000 indices on March 22nd. The impact of index trackers helped push LongFin’s shares from $32 up to above $71. FTSE Russell did not realise that LongFin failed to meet the minimum 5% free float requirement for index inclusion. LongFin has less than 2% free float. LongFin was removed from the indices on 28th March and its share price collapsed to around $14.

FCA reveals first set of rules after asset management market study.
Following its asset management market study published last year, the UK’s Financial Conduct Authority (FCA) revealed proposed rules aimed at reducing its concerns. The rules include the need to improve governance on fund boards with a minimum of two independent directors and to move investors into cheaper versions of their funds. Other proposals include improving disclosures of fund objectives and tackling so-called ‘closet tracking’. Moving investors into cheaper versions of their funds applies immediately whilst the other rules apply either in 12 or 18 months’ time.

US reveals tough sanctions on seven high profile Russian businessmen.
The US Treasury introduced sanctions that froze the US assets and stopped seven named Russian individuals from US finance, trade and investment. The seven are all high-profile businessmen and included prominent oligarch Oleg Deripaska and the husband of one of Vladimer Putin’s daughters. The sanctions were linked to Russia’s actions in Crimea, Syria and Ukraine and interference in the West, including cyber activities.

Deripaska’s sanctions release plan?
UK-based Russian oligarch Oleg Deripaska controls an aluminium business that is headed by a UK-listed entity called EN+ in which he has a 70% stake. Mr Deripaska is one of a number of individuals named in a US sanctions list due to his close links with Russia and Vladimir Putin. As the US sanctions bite on EN+, Mr Deripaska is planning to reduce his 70% to below 50% in an effort to move EN+ from the crippling US sanctions it currently faces.

UK tax authority plans clampdown on avoidance. 
Her Majesty’s Revenue and Customs (HMRC), the UK tax authority, has proposed rules to enable UK individuals to be taxed on their offshore income if the individual ‘deliberately set out to reduce UK tax by allocating excess profits to an offshore entity’. Fund management is one of the activities that are highlighted by the HMRC as having avoidance schemes that may be targeted.

UK Financial Reporting Council following the financial services regulatory lead.
The Financial Reporting Council, the watchdog for the accounting firms including auditors, is planning on taking a leaf out of the financial services regulatory approach by vetting the suitability of senior appointments at the big accounting firms.

South Korea’s Samsung Securities in massive ‘fat finger’ error.
An error by an employee of broker Samsung Securities in South Korea saw it mistakenly issue 2.8bn shares to staff (theoretically worth $100bn) when the employee intended to pay dividends worth Won2.8bn ($2.6m) under a share ownership plan.

Key person risk revealed?
Martin Sorrell, the architect and chief executive of the £15bn advertising group WPP, resigned his role over allegations of misconduct that he denies involving the misuse of corporate funds. Mr Sorrell has run the group for 33 years and owns 2% of the UK-listed entity’s shares. He leaves a complex web of companies that may be difficult to manage without a break-up. Meanwhile, Mark Zuckerberg, owner of 4% of the equity and 60% of the votes at Facebook, faced a grilling from US politicians about the social networking group. After allegations that personal data belonging to 87m of its users was leaked and misused, Mr Zuckerberg faced two days of difficult questions from US congress.

Whitbread forced into a demerger.
UK-listed Whitbread succumbed to pressure to demerge into two main business lines – Costa Coffee and Travel Inns – to release value for shareholders. Particular pressure came from Eliott Advisors, the activist US equity fund that had built up a 6% stake in Whitbread.

Commonwealth Bank of Australia charges fees to the deceased for years.
A banking royal commission investigation into Commonwealth Bank of Australia (CBA) including it financial planning activities found that a number of financial planners were charging customers fees after they had died, in some cases for more than a decade. CBA has since refunded the inappropriate fees, with interest, to the families of the affected customers.

Facebook avoiding the GDPR?
Social networking giant Facebook looks to be taking steps to avoid the European Union’s General Data Protection Regulation (GDPR) by moving the data held for around 1.5bn persons from its Irish subsidiary (Facebook Ireland) to Facebook Inc. The data relates to the users of the social networking site outside of Europe, the US and Canada that has to date been handled through the Facebook Ireland.

WhatsApp raises minimum user age as GDPR approaches.
In a move described as minimising the risk of falling foul of the new European data protection rules, Facebook’s messaging app WhatsApp raised the minimum age of its users to 16. The General Data Protection Regulation (GDPR) comes into force in late May and will ban the processing of personal information of children under 16 without parental consent.

Hiring changes in fund management firms.
Hiring patterns show that European asset managers are responding to regulatory changes. Data from LinkedIn shows increases in hiring in Paris and Luxembourg and cuts in London as Brexit contingency plans kick in. MiFID II is also having an impact with fund managers hiring their own corporate access staff as an alternative to using brokers. Since the introduction of the second iteration of the EU’s Markets in Financial Instruments Directive (MiFID II), brokers arranging access to corporate boards could be considered inducements unless they are separately charged for. Many asset managers are clearly concluding that it would be more cost effective to arrange access without the assistance of the brokers.

New legislation on pay ratios proposed in UK.
The UK government is tabling legislation to require companies to publish their chief executive’s pay as a ratio of the average worker’s salary, and to disclose the impact of future share price rises on executive pay. The proposed changes are part of the government’s attempts to address public perception of unacceptable business behaviour.

Is Jes Staley’s penalty too soft?
Jes Staley, chief executive of Barclays, was fined by the UK regulator the Financial Conduct Authority (FCA) rather than banned after trying to uncover the identity of an anonymous whistleblower. The FCA decided to take no action against Barclays and to fine Jes Staley an unspecified amount. The decision has been widely criticised as being too soft.

US regulators impose $1bn penalty on Wells Fargo.
After mis-selling a variety of products to customers, two US regulators (the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency) each decided to fine Wells Fargo $500m. Wells Fargo is also expected to compensate the hundreds of thousands of customers affected.