MiFID II: Broker-Dealers Still Vexed re Unbundling Research

MiFID II, Broker-Dealer,

As the Jan 2018 deadline for full implementation of MiFID II approaches, US broker-dealers and their EU counterparts remain vexed by looming regulations that seek to parse buy-side client payment for research content and commission payments tied to actual trade execution.  In an effort to distill the confusion, ESMA, the UK regulator has provided a recent update to the new regulatory scheme, including a highlight of topics such as how/where global macroeconomic research, FICC markets corporate access, RPA and CSA arrangements and the distinction between ‘free research’ and paid-for research.

Courtesy of insight from Rebecca Healey of Liquidnet, the equities trading platform that connects buyside and sell-side traders from across the globe, “the latest FCA summary, published on March 3, 2017, highlights just how far the UK regulator believes firms are falling short of expectations in unbundling research and execution services. The regulator’s opinion is that poor market practice remains commonplace despite rules that have been in place for more than a decade. In particular, firms are still failing to adequately assess and budget for substantive research that is of value to their end clients’ investments.” Ms. Healey’s coverage is excerpted below, with a link to her recent posting in Tabb Forum.

Corporate Access

ESMA is of the view that arranging a meeting itself is not providing material or services which “explicitly or implicitly recommend or suggest an investment strategy and provide a substantiated opinion as to the present or future value or price of such instruments or assets.” (Recital 28) As such, Corporate Access is not to be considered “research” but as a separate service to be paid for commercially.

However, ESMA notes that it is important that the Corporate Access provider prices services at commercial levels and any access provided is not linked to or dependent on payments for research or execution services. Under Article 13(9), each benefit or service an investment firm provides must be “subject to a separately identifiable charge.”

ESMA is of the view that corporate access such as arranging meetings or field trips could involve the allocation of valuable resources by the provider and could influence the recipient’s behavior (Article 12(3)). As such, ESMA expects firms to assess whether corporate access services facilitated by an investment firm are material or of minor non-monetary benefit, and therefore, whether these services can be accepted. If the investor “road show” is freely and publicly open to analysts from investment firms and other investors, it could be considered acceptable minor non-monetary benefits under Article 12(3).

However, to avoid any conflict of interest, an investment firm wishing to meet a corporate issuer can approach the firm directly and/or pay for a third-party corporate access service provider that does not provide other MiFID investment services.

Macro-Economic Research

In ESMA’s opinion whether macro-economic analysis can be considered research should be weighed against the criteria set out in Recital 28. In particular, whether the research in question “informs views on financial instruments, assets or issuers within that sector or market” and whether “this material or service explicitly or implicitly recommends or suggests an investment strategy … could be used to inform an investment strategy.”

In ESMA’s view most macro-economic analysis is likely to suggest an investment strategy, unless it is sufficiently general to fall outside the definition of research. If it is considered research, it is then capable of being received (and paid for) by an investment firm, under Article 13.

If not, it does not automatically classify as a minor non-monetary benefit, and portfolio managers and independent advisors would need to make a commercial decision either to pay for this or not accept the service.

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No Carve Out for FICC

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Advisers Blast New SEC Policy re Accredited Investor Rule

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(InvestmentNews.com)-Financial advisers rejected a recommendation Friday from the acting chairman of the SEC that will loosen the accredited investor definition (aka QIB) and increase investor access to private and exotic investment strategies that are usually reserved for rich people.

“I think this is an awful idea, as awful as ideas come,” said Scot Stark, owner of Stark Strategic Capital Management.

Reacting to comments made on Friday by acting Securities and Exchange Commissioner Michael Piwowar, which recommended allowing more retail-class investors access to investments currently restricted to people with a net worth of at least $1 million, a lot of advisers didn’t see the logic.

“Any guidelines that help to protect the investor consumer is a positive,” said Mark Germain, chief executive of Beacon Wealth Management.

“As an adviser, it is easy to see that many clients do not understand the investments that some may offer to them,” he added. “The accredited investor rule puts an onus on the adviser to be sure the investor understands the risk and is willing to take the risk.”

During his speech Friday, Mr. Piwowar referenced the “forgotten investor” and said the current accreditation rules limit access to types of investments that could increase portfolio performance and diversification.

“I question the notion that non-accredited investors are truly protected by regulations that prevent them from investing in high-risk, high-return securities available only to the Davos jet-set,” he said.

But most financial advisers are questioning the logic of increasing access to products and strategies that typically come with higher fees, less liquidity, and less regulatory oversight.

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Breaking News: Fiduciary Duty Rule NOT Deleted by Trump

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Were the reports profiling Trump’s ‘executive order’ that repealed the long-planned Dept of Labor implementation of a new fiduciary rule for investment advisors fake news?? Apparently Mr. Trump, along with whoever on his staff is drafting his first 100 days edicts in rapid fire fashion, as well as financial news media wonks and likely a whole bunch of other folks who thought that Trump was trumping the introduction of more regulations on the financial industry were all wrong. According to Michael Kitces of industry publication Bank Investment Consultant, it turns out that  The Fiduciary Rule was NOT Deleted by President Trump.

(Bank Investment Consultant) Feb 5 2017–Once President Trump won the election, it was widely believed it would be a matter of time before he issued an executive order to delay April’s rollout of the Department of Labor’s fiduciary rule.

Yet, the final version of the memorandum that the president signed on Friday did not match the originally circulated draft and it did not actually include a provision to delay the regulation after all, despite wide reporting to the contrary.

In fact, the final issuance was not an executive order at all, but a presidential memorandum. The key difference was that the section that would have proclaimed a 180-day delay for the fiduciary rule was eliminated, along with any direct guidance to the Department of Labor about seeking a stay to the rule given the ongoing lawsuit.

You can see the text here: Presidential Memorandum on Fiduciary Duty Rule..

WHAT IT SAYS (AND DOESN’T SAY)
Notably, nothing in the final version of this memorandum actually delays the fiduciary rule. (It appears that the original plan to seek a delay had been to rely on the authority of 5 USC 705 to postpone the effective date of the rule. However, the final rule already went effective last year, technically on June 7th of 2016, after the requisite 60-day review period under the Congressional Review Act had closed.)

The looming April 10 date is merely the applicability date on which key provisions of the rule will be enforced. There is no legal authority to delay.

Instead, the memorandum actually directs the Labor secretary to undertake a new “economic and legal analysis” to evaluate whether the looming applicability date of the fiduciary rule has harmed investors through to a reduction of Americans’ access to retirement products and advice, whether it has resulted in dislocations of the retirement services industry (that may adversely affect investors), or whether the rule is likely to cause an increase in litigation and the prices that investors must pay to gain access to retirement services.

To the extent that the new analysis reveals problems, the Labor secretary is directed to “publish for notice and comment a [new] proposed rule rescinding or revising the rule.”

In other words, all President Trump has actually done is to direct the Labor secretary to begin a new rulemaking process.

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Prospectus.com team of capital markets experts and international securities lawyers specialize in preliminary offering prospectus, secondary offering prospectus and full menu of financial offering memorandum document preparation.

More information re capital raising and related investor offering documentation services via this link

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Prospectus.com team of capital markets experts and international securities lawyers specialize in preliminary offering prospectus, secondary offering prospectus and full menu of financial offering memorandum document preparation.

More information re capital raising and related investor offering documentation services via this link

- See more at: http://brokerdealer.com/blog/#sthash.NOZS1bKT.dpuf

YET ANOTHER RULE TO COME?
The reality is that conducting such an analysis, and issuing a new proposal, and running a notice-and-comment period, is no small feat.

Bear in mind that the DoL issued its proposed rule in April of 2015, and took almost exactly a full year to complete the notice and comment period, gather the feedback and issue a final rule.

Also, bear in mind it took 4.5 years to develop that proposed rule, from the original proposed rule in the fall of 2010 (which in turn had its own notice and comment period).

It took the DoL about 5.5 years to issue a final rule. Yet, in this case, the DoL has almost exactly two months.

In other words, it took the DoL about 5.5 years, across multiple phases, to issue a final rule.

Yet, in this case, the DoL has almost exactly two months. And President Trump’s Labor secretary nominee, Andrew Puzder, still hasn’t even been confirmed. The Wall Street Journal reports his confirmation hearing has been delayed “indefinitely” due to questions about his ethics and financial paperwork. At the same time, Anthony Scaramucci, who was advocating against the rule, may not get the top role advising President Trump as was previously expected. That means, the timeline is not only very tight, but it may not even be clear who’s leading the charge.

REMAINING OPTIONS TO DELAY
Notwithstanding this challenge, Acting Secretary of Labor Ed Hugler did issue a brief statement just hours after President Trump signed the official memorandum, stating that the DoL “will now consider its legal options to delay the applicability date.”

As it stands today, the rule still has not been delayed, and the White House appears to have directly acknowledged that it doesn’t have the authority to delay the rule at this point.

Still, as it stands today, the rule still has not been delayed, and the White House appears to have directly acknowledged that it doesn’t have the authority to delay the rule at this point, given its decision to remove the 180-day delay language from the final version the president signed.

There are still a few potential tactics that could result in at least a partial delay.

1) Invite a stay from the court on one of the pending lawsuits. The first option: The DoL, facing lawsuits, could invite the court to stay the case – and potentially the rule, ostensibly while it further formulates its legal defense and/or begins to go through the proposal and notice-and-comment periods. The end result might be at least a temporary delay in the applicability of the rule.

However, there is still debate about whether this could actually delay the applicability date (or just the legal proceedings up until the applicability date hits), and this legal tactic could not be used indefinitely. In some reasonably timely manner, the courts would still expect the case to resume. While the tactic might be attempted, it’s still unclear whether the stay could last long enough to actually undertake the requisite economic and legal analysis, to draft a new proposed rule, to complete the notice and comment period, and actually finalize a new alternative version of the rule (or rescind it altogether).

In addition, a ruling is expected in the coming week on what is arguably the biggest DoL fiduciary lawsuit, a consolidation of those filed by the U.S. Chamber of Commerce, SIFMA, ACLI, NAIFA, and more… and obviously, requesting a stay in the case is a moot point once the ruling is issued.

2) An expedited proposed rule that suspends/extends applicability date. The second option is that the Labor Department could try to hurry through its economic and legal analysis, and then quickly proposed a revised rule making perhaps just minor changes… including pushing back the applicability date. This would still appear to require the DoL to issue public notice and complete a comment period, and then get a final rule issued, all by April 10th, which may not be administratively feasible. Or at least, to complete its legal and economic analysis (perhaps focusing on the “easiest” point of contention, which is the third clause about the fiduciary rule causing an increase in litigation), issue a proposed rule for notice and comment, and then try to delay the applicability date of the old rule pending completion of the notice and comment period of the newly-proposed rule.

Overall, the biggest problem to delaying the rule remains that all of these strategies take time.

Pushing through a rule change so quickly, though, even if just for a change as minor as an adjustment to the applicability date, invites at least the potential of a legal challenge from the fiduciary advocates that the change was too hasty, arbitrary and capricious, and in violation of the Administrative Procedures Act; after all, many industry companies are suing the DoL claiming that its 5.5 year rulemaking process since 2010 was “too hasty”… so it would be more than a little ironic for the DoL to now complete a rule-change process (which includes a delay) in barely two months.

Expect a lot of people on both sides of the issue to be scrutinizing the Administrative Procedures Act, trying to figure out exactly how far into a new rulemaking process the DoL has to go in order to legitimately delay the applicability date of the already-effective rule.

3) A legislative fix from Congress. The only other viable option to entirely halt the rule would be an act of Congress. However, the Democrats still have enough votes in the Senate to filibuster the legislation. And with Sen. Elizabeth Warren issuing a letter to banks asking whether any have proceeded far enough in their fiduciary implementation that they’d like it to move forward without delay, and re-issuing its report cataloguing the “salacious” sales incentives/prizes offered to annuity agents selling into retirement accounts, it appears that the Democrats are still prepared to fight to keep this particular rule on the books (especially since there’s a clear endgame – they just have to make it to the April 10th applicability date, and then all firms will have had to comply, and legislation to delay the applicability date will be a moot point).

Overall, the biggest problem to delaying the rule remains that all of these strategies take time, and with the final applicability date just two months away, financial institutions have to continue to fully prepare for the possibility that the rule won’t actually be stopped.

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Trump Fires Fiduciary Rule: Back to Caveat Emptor for Retirees

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President Trump Issues First Dodd-Frank Unwind By Striking Down Fiduciary Rule; Goldman’s Gary Cohn to be Feted by Industry Peers for Influencing Trump Regime’s “Walk Back to Wild West..Let The Good Times Roll, Again!”

As evidenced by President Trump’s executive order signed today Feb 3, it appears it doesn’t matter to him or his new regime that the US DOJ aggressively defended the new fiduciary standards proposed for financial product brokers–which among other things sought to protect elderly investors from sleezy sales people and unsavory broker-dealers who prey on clients by gauging them with egregious fees and putting those less-educated and retiree investors into inappropriate financial products. Former Goldman Sachs Honcho Gary Cohn, who upon his recent appointment as chief economic advisor to President Trump along with new role as Director of the United States National Economic Council (and who cashed in $285 million of Goldman stocks to take the government job) is credited with the walk back to wild west practices in the banking industry and is being feted tonight by the heads of top investment firms at a special dinner at …Mar-a-Lago Club in Palm Beach. According to event planners, the theme song for the dinner will be “Let The Good Times Roll, Again.” Attn: investors: CAVEAT EMPTOR.

WASHINGTON—President Donald Trump on Friday plans to sign an executive action that establishes a framework for scaling back the 2010 Dodd-Frank financial-overhaul law, part of a sweeping plan to dismantle much of the regulatory system put in place after the financial crisis.

Mr. Trump also plans another executive action aimed at rolling back a controversial regulation scheduled to take effect in April that critics have said would upend the retirement-account advisory business.

“Americans are going to have better choices and Americans are going to have better products because we’re not going to burden the banks with literally hundreds of billions of dollars of regulatory costs every year,” White House National Economic Council Director Gary Cohn said in an interview with The Wall Street Journal. “The banks are going to be able to price product more efficiently and more effectively to consumers.”

The fiduciary rule, unveiled last spring and set to go into effect in April, would restrict how brokers can provide retirement advice by forcing them to work in the best interest of their clients and generally avoid conflicts, which can come about with commission-based compensation. It stands to affect about $3 trillion of retirement assets in the U.S., according to research firm Morningstar Inc.

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Mr. Cohn said to comply with the rule, companies would be forced to offer retirement products with the lowest fees even if it isn’t best for their client.

See more coverage via WSJ https://www.wsj.com/articles/trump-moves-to-undo-dodd-frank-law-1486101602/

 

Retrial Starts for Jefferies’ Former Bond Trader

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U.S. Federal Prosecutors Hope that Second Time is Charm in Case Against Bond Trader Alleged to Have Deceived Savvy Clients

(Reuters) Jan 3 – A former Jefferies Group Inc bond trader is going back on trial in federal court in Connecticut over whether he lied to customers about mortgage bond prices to boost profit. (Photo/Douglas Healey for Bloomberg)

The retrial of Jesse Litvak, with jury selection set for Wednesday and opening arguments for Thursday, comes 13 months after a federal appeals court voided his original conviction and two-year prison sentence.

But it gives U.S. prosecutors a fresh chance to crack down on alleged deceptive Wall Street sales tactics in the bond market, and could bolster cases against several other traders.

“The retrial will clear the air over whether bond traders can increase margins by falsely representing prices, which can distort trading and capital formation,” said James Cox, a Duke University law professor. “Whether someone relied on the information is irrelevant to prosecutions; it’s all about whether the underlying conduct is condemnable.”

C.J. Mahoney, a lawyer for Litvak, declined to comment, as did a spokesman for U.S. Attorney Deirdre Daly in Connecticut.

Litvak, who worked for Jefferies in Stamford, Connecticut, was charged in January 2013 with misleading customers about bond prices from 2009 to 2011.

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This allegedly boosted the Leucadia National Corp unit’s profit by about $2.25 million, and his own pay.

Litvak has said his customers were sophisticated investors who were “inherently skeptical” of what counterparties tell them, and would have known if he were cheating them.

Convicted in March 2014, Litvak won a reprieve from the 2nd U.S. Circuit Court of Appeals in December 2015.

That court threw out fraud accusations related to the federal bailout known as the Troubled Asset Relief Program, and said Chief Judge Janet Hall, who oversaw the trial, wrongly excluded expert testimony for the defense.

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