Compliance Updater - May 2022
A summary of key compliance stories around the globe in May.
- US regulator looking at retail sales practices for “complex products”.
- Wirecard administrator chasing recovery of dividends and tax.
- Allianz settles for $5.8bn over US securities fraud.
- ECB demands big investment banks address “empty shell” desk issue.
- BNY Mellon fined by SEC for greenwashing.
- UK audit regulation plans diluted.
- UK FCA proposes changes to the listing regime.
The US Financial Industry Regulatory Authority (Finra) has asked for feedback on sales practices for “complex products”, worried that investors may not fully understand the risks. Finra describes a “complex product” as “a product with features that may make it difficult for a retail investor to understand the essential characteristics of the product and its risks” and gives examples including defined-outcome exchange-traded funds, funds holding cryptocurrency futures, leveraged and inverse exchange traded products, and volatility and oil-linked exchange-traded products. The regulator is understood to be considering the need for enhanced account approval for investors to get involved in complex products such as completing training and passing a “knowledge check”.
The administrator for collapsed payment processor Wirecard has received a German court ruling that the group’s last two years of financial statements were invalid. The ruling will make it possible for the administrator to recover dividends paid over the two years of €47m and €15m of corporate tax paid.
Allianz settled with the US Securities and Exchange Commission (SEC) and the US Department of Justice with a total bill of $5.8bn and pleaded guilty to securities fraud in its investment arm. The US authorities said Allianz had “engaged in a scheme to defraud investors” over its Structured Alpha funds alleging that fund managers “repeatedly failed to purchase the hedging positions that investors were promised” and “fraudulently altered” data requested by investors to understate investment risks. Three managers at Allianz, including the former CIO, face charges and have been dismissed by the German insurer.
The European Central Bank has told the big UK and US investment banks that they should bulk up their empty shell trading desks set up in the Eurozone after Brexit. The head of supervision at the ECB said, “empty shell structures… are a very real concern” and that “we want to ensure that incoming legal entities have onshore governance and risk management arrangements… commensurate with the risk they originate”. Far fewer jobs have shifted from the City of London to the EU than the tens of thousands initially expected.
BNY Mellon’s investment advisor division was fined $1.5m by the US SEC for allegedly misstating and omitting information about environmental, social and governance (ESG) considerations for the mutual funds it managed. It appears that BNY Mellon did not always perform the ESG quality review that it disclosed as part of its investment selection process.
Plans to significantly increase the number of “public interest entities” that are subject to more stringent audits in the UK and an aspiration for Sarbanes-Oxley style internal control directors’ liability have been diluted. Only private unlisted companies with more than seven-hundred and fifty employees and £750m annual turnover will be in scope (around six-hundred companies) and plans to make directors personally liable for internal controls over financial reporting will be dropped. The changes will see the current regulator of audits, the Financial Reporting Council, replaced with a new, more powerful Audit, Reporting and Governance Authority (ARGA).
The UK’s Financial Conduct Authority (FCA) proposed changes to the UK’s listing regime aimed at attracting more fast-growing tech groups and start-ups. Rather than the current two-tiered structure that splits companies between the “premium” and “standard” segments, the FCA proposes putting in place a single set of criteria, and then allowing companies to choose to opt into a further set of criteria. The hope is that this will remove the stigma of the “standard” listing compared to the “premium” segment.