Swiss Regulator Opens Consultation on Fully Revised Circular "Market Conduct Rules"

The Swiss Financial Market Supervisory Authority FINMA can now take action against all persons who use insider information or engage in market manipulation. Following the revision of the Stock Exchange Act and the Stock Exchange Ordinance, FINMA is fully revising Circular 08/38 on "Market conduct rules". Together with the section on general market supervision, the full revision also includes the part on specific organisational provisions for FINMA-supervised institutions. The consultation runs until 13 May 2013.

The revision of the Stock Exchange Act and the Stock Exchange Ordinance with respect to market offences and market abuse provides, for the first time at supervisory law level, specific statutory provisions that prohibits all natural persons and legal entities from engaging in insider trading and market manipulation. This means that Switzerland is moving closer to international standards. Prior to this, FINMA and its predecessor, the Swiss Federal Banking Commission (SFBC), could only enforce market conduct rules against supervised market participants. FINMA is implementing these new provisions as part of its full revision of Circular 08/38.

Clear definition of prohibition standards

The first part (Sections III-V) of the Circular details the general rules on preventing insider information and market manipulation. These rules apply to all natural persons and legal entities active on the financial market. The list provided includes abusive practices such as scalping, spoofing, wash trades, banging the close, etc. and is not conclusive. Moreover, a conceptual change has been made to the Circular: the rules on market conduct have been unbundled from those on the duty of loyalty as prescribed in Article 11 SESTA. The Circular on ‘Market conduct rules’ will thus focus on market supervision in the traditional sense.

Market abuse on the primary market, with foreign securities and in other markets

In order to assess the proper business conduct of an institution under prudential supervision, the Circular prescribes that not only securities dealing on Swiss stock exchanges is relevant; it now states more precisely what has been in practice for many years, i.e. that securities dealing in the primary market, on a foreign stock exchange and business activities such as the commodities and foreign exchange markets are also of importance when assessing proper business conduct (Section VI).

Revised organisational requirements

Section VII of the Circular that focuses on organisational requirements has also been revised. Here in particular recent experience and, where possible, international standards are taken into consideration; the target group has also been extended. In the revised Circular, organisational requirements are no longer directed exclusively at securities dealers, but also at all institutions under prudential supervision. The requirements specified however, are not the same for every supervised institution: depending on its business activities, size and structure, they are applied on an individual basis. The organisational measures necessary must be defined according to a risk assessment that is conducted regularly.

Legislative framework of the Circular

The revised Stock Exchange Act and Stock Exchange Ordinance are scheduled to come into force on 1 May 2013. The new rules in the Stock Exchange Act provide standards in criminal and supervisory law that capture market abuse on a broader basis and take account of international regulations. In particular, the insider criminal law provision has been newly regulated, the offence for price manipulation defined and universally valid elements for the prudential definition of improper market conduct provided. The Stock Exchange Ordinance sets out behaviour that is allowed in terms of "safe harbours".

Consultation Paper by Swiss Regulator on Circular "Distribution of collective investment schemes"

The Swiss Financial Market Supervisory Authority "FINMA" is fully revising FINMA Circular 2008/8 on "Public advertising – collective investment schemes" and is opening a consultation to this purpose. The new Circular will now be entitled "Distribution of collective investment schemes" and will take account of the revised Collective Investment Schemes Act (CISA) and the Collective Investment Schemes Ordinance (CISO) that came into force on 1 March 2013. The consultation will run until 3 June 2013.

In its current circular (FINMA-Circ. 2008/8), FINMA defines the term "public advertising" and sets out what cases qualify as public advertising when offering or distributing collective investment schemes in or from Switzerland.

In the revised Collective Investment Schemes Act (CISA) and the Collective Investment Schemes Ordinance (CISO) that came into force on 1 March 2013, the term "public advertising" has been removed and replaced by the term "distribution". Therefore, since one of the key criteria, i.e. the term "public" is no longer relevant following the revision of the CISA and CISO, it is necessary to fully revise the current circular. The new Circular will replace FINMA Circular 2008/8.

The new Circular will implement the changes made to the revised CISA and CISO with respect to the distribution of collective investment schemes. In particular, it will define the term "distribution" and explain what activities qualify as distribution, as well as setting out the legal consequences entailed.

Key Points

1. In the partly revised Collective Investment Schemes Act (CISA) and the Collective Investment Schemes Ordinance (CISO) that came into force on 1 March 2013, the term ‘public advertising’ has been replaced by the broader term ‘distribution’ (Art. 3 CISA; Art. 3 CISO).
2. Following the revision of the CISA and the CISO, there is no longer a distinction made between ‘public’ and ‘non-public’ advertising. It is therefore necessary to fully revise FINMA Circular 2008/8 ‘Public advertising – collective investment schemes’.
3. Within the meaning of Article 3 CISA, any form of offering and advertising collective investment schemes is, in principle, considered as distribution of collective investment schemes where (i) it is not directed exclusively at investors under Article 10 para 3 lets a and b CISA and (ii) it is not in- cluded in the exemption clause under Article 3 para. 2 CISA.
4. The term ‘distribution’ within the meaning of Article 3 para. 1 CISA in particular excludes offering and advertising collective investment schemes that are aimed solely at qualified investors as prescribed in Article 10 para. 3 let. a (supervised financial intermediaries) and let. b (supervised insurance companies). Other exceptions include execution-only transactions and asset management advisory services.
5. The purpose of the revised circular is to define the term ‘distribution of collective investment schemes’ and explain what activities qualify as distribution. Moreover, the legal consequences entailed where a certain activity qualifies as distribution are set out.

Collective Investment Schemes Bankruptcy Ordinance comes into force in Switzerland

The Swiss Financial Market Supervisory Authority FINMA will put the FINMA Collective Investment Schemes Bankruptcy Ordinance into effect on 1 March 2013 (In German Language). The new ordinance details the provisions of the Collective Investment Schemes Act under bankruptcy law and sets out the procedure for bankruptcy proceedings. It renders the courses of action adopted by FINMA and the procedural steps it takes during the bankruptcy process transparent.

The consultation on the FINMA Collective Investment Schemes Bankruptcy Ordinance (CISBO-FINMA) stirred relatively little interest, and the consultation draft was favourably received. By adjusting the draft document appropriately, account has been taken of the few suggestions made for improvement. Hardly any material changes were made, however, to the draft document. The proposed adjustments concerned the revision of the Collective Investment Schemes Act, which, in the meantime, had been completed and treated in the definitive version of the CISBO-FINMA.

Background

Since 1 September 2011, FINMA has been responsible for opening and conducting bankruptcy proceedings over licence holders of collective investment schemes. By putting the current ordinance into effect, FINMA has invoked its powers to issue specific implementing provisions in this area. The new ordinance is a fully coherent and comprehensive regulatory framework: it includes general provisions under bankruptcy law as well as specific regulations for the various categories of licence holders. This in turn renders the regulatory process transparent and enhances creditor and investor protection.

Opening New Opportunities of Investment Between India and Pakistan

Relationship between India and Pakistan has always been looked into Political terms and controversies around the policy. However, Indian Regulator issued new guidelines of Foreign Direct Investment related to India and Pakistan and certaily this initiatation may lead to more economic consolidation process of SAARC.

Reserve Bank of India (RBI) under  RBI/2012-13/198 A. P. (DIR Series) Circular No. 25 and  RBI/2012-13/173 A. P. (DIR Series) Circular No. 16 allowed "Overseas Investment by Indian Parties in Pakistan"and  "Foreign Direct Investment by citizen / entity incorporated in Pakistan".

In process of  Overseas Investment by Indian Parties in Pakistan, In terms of Regulation 6 (2) of the Notification ibid, “Notwithstanding anything contained in these Regulations, investment in Pakistan shall not be permitted.” It has now been decided that the overseas direct investment by Indian Parties in Pakistan shall henceforth be considered under the approval route under Regulation 9 of the Notification, ibid.

Foreign Direct Investment by citizen / entity incorporated in Pakistan, In terms of sub-regulation (1) of Regulation 5 of the Notification ibid, a person resident outside India who is a citizen of Pakistan or an entity incorporated outside India in Pakistan, is not allowed to purchase shares or convertible debentures of an Indian company under Foreign Direct Investment Scheme. It has now been decided that notwithstanding anything contained in sub-regulation (1) of Regulation 5 of the Notification No.FEMA. 20, a person who is a citizen of Pakistan or an entity incorporated in Pakistan may, with the prior approval of the Foreign Investment Promotion Board of the Government of India, purchase shares and convertible debentures of an Indian company under Foreign Direct Investment Scheme, subject to the terms and conditions specified in Schedule 1 of the Notification, ibid, provided further that notwithstanding anything contained in Schedule 1 of the Notification,  ibid, the Indian company, receiving such foreign direct investment, is not engaged or shall not engage in sectors / activities pertaining to defence, space and atomic energy and sectors/ activities prohibited for foreign investment.

Above Circular certainly consider as beginning of opening investment market between two countries and  same must lead to more equal opportunities of growth of business society of related country.

Singapore Implements Enhanced Regulatory Regime for Fund Management Companies

The Monetary Authority of Singapore (MAS) has announced that the implementation of an enhanced regulatory regime for fund management companies (FMCs) will take effect from tomorrow, 7 August 2012.  Amendments have been made to the Securities and Futures (Licensing and Conduct of Business) Regulations, Securities and Futures (Financial and Margin Requirements) Regulations and Financial Advisers Regulations. 

Under the enhanced regulatory regime, all FMCs will have to meet enhanced business conduct and capital requirements. These include rules requiring independent custody and valuation of investor assets, as well as requirements for FMCs to undergo independent annual audits by external auditors and having an adequate risk management framework commensurate with the type and size of investments managed by the FMCs. 

A new category of Registered Fund Management Companies (RFMC) will replace the current Exempt Fund Manager (EFM) regime. RFMCs may serve up to 30 Qualified Investors and manage up to S$250 million in assets under management.  All other FMCs will have to apply for a license.

To facilitate a smooth transition for EFMs and FMCs to apply for a license or to register with MAS, MAS has put in place the following measures:

• Current EFMs will have six months to apply for a licence or to register with MAS under the new RFMC regime.
• FMCs can submit their licence applications or register online via the Corporate e-Lodgment system. This new online system will also allow FMCs to submit their regulatory returns.

New Financial Requirements for Issuers of Over-the-Counter Derivatives

Australian Securities & Investments Commission (ASIC) released new financial requirements for Australian financial services licensees who issue over-the-counter (OTC) derivatives to retail clients, including contracts for difference and margin foreign exchange.

The changes aim to ensure these AFS licensees have adequate financial resources to operate their business in compliance with the Corporations Act and to carry out supervisory arrangements.

ASIC Commissioner, Greg Tanzer said the new requirements had been developed to help ensure licensees have the financial resources to more adequately manage their operational risks in this growing area and followed a lengthy consultation process with industry.

‘Considering the complex and risky nature of retail OTC derivative businesses, issuers should be subject to enhanced financial requirements’, Mr Tanzer said.

‘In our review of this sector, we have found that poorly resourced issuers of retail OTC derivatives are less likely to carry out adequate supervisory arrangements and are more likely to encounter compliance breaches.

‘We need to raise the bar higher to ensure licensees have adequate financial resources to properly oversee and manage the operational risks inherent in the OTC derivatives market. Ultimately, this goes to our strategic priority of promoting the confident participation of retail investors in financial markets.

‘The increase to the minimum financial requirements for retail OTC derivative issuers also brings Australia in line with comparable jurisdictions, such as the United Kingdom and Singapore’, Mr Tanzer added.

The requirements, implemented through Class Order [CO 12/752] Adequate financial resources for financial services licensees that issue OTC derivatives to retail clients and outlined in Regulatory Guide 239 Retail OTC derivative issuers: Financial requirements (RG 239) build on the general guidance in Regulatory Guide 166 Licensing: Financial requirements (RG 166), by addressing the particular operational risks and characteristics of the retail OTC derivatives sector.

Under the changes, retail OTC derivatives issuers must meet a net tangible asset (NTA) requirement, which will require them to hold NTA the greater of:

From 31 January 2013:	$500,000, or 5% of average revenue
From 31 January 2014:	$1,000,000, or 10% of average revenue.

Issuers will also be required to, each quarter, prepare projections of cash flows over at least a 12 month period based on their reasonable estimate of revenues and expenses over that term. These projections must be certified as reasonable by the issuer’s directors.

To ensure financial resources can be used effectively to meet unexpected losses and expenses as they arise, there is also an NTA liquidity requirement. Under this requirement, issuers must hold 50% of the required NTA in cash or cash equivalents and 50% in liquid assets.

Financial trigger point reporting obligations will also be modified to enable issuers to temporarily draw down on the required NTA to meet unanticipated costs and contingencies. However, if issuers hold inadequate NTA for more than two months, they will be required to report this to clients. If NTA falls too low, issuers will be forbidden from taking on new client liabilities.

ASIC released Consultation Paper 156 Retail OTC derivative issuers: Financial requirements (CP 156) in 2011 to seek feedback on the financial requirements for issuers of OTC derivatives to retail investors.

The new financial requirements for retail OTC derivative issuers follow ASIC’s enhancement of the financial requirements for responsible entities of managed investment schemes (see Appendix 1 to Report 259 Response to submissions on CP 140 Responsible entities: Financial requirements (REP 259)).

"Crowd Funding": New Challenges for Regulator

Australian Securities & Investments Commission (ASIC) has issued guidance to promoters of ‘crowd funding’ to clarify arrangements which may be regulated by ASIC under the Corporations Act 2001 (Corporations Act) and Australian Securities and Investments Commission Act 2001 (ASIC Act).

ASIC has also highlighted some risks for operators of crowd funding websites and people considering participating in crowd funding projects.

‘Crowd funding’ involves the use of the internet and social media to raise funds in support of a specific project or business idea. Project sponsors or pledgers typically receive some reward in return for their funds. In some cases, the reward expected may be of minor value and is merely incidental rather than the purpose of the contribution.

ASIC Commissioner, Greg Tanzer, said ASIC has been monitoring increasing use of crowd funding for investment purposes to identify any arrangements, or aspects of those arrangements, that may be regulated by ASIC.

‘Crowd funding, as a discrete activity, is not prohibited in Australia nor is it generally regulated by ASIC’, Mr Tanzer said.

‘However, depending on the particular crowd funding arrangement, ASIC's view is that some types of crowd funding could involve offering or advertising a financial product, providing a financial service or fundraising through securities requiring a complying disclosure document. These activities are regulated by ASIC under the Corporations Act and ASIC Act and may impose legal obligations on operators of crowd funding sites and on people using those sites to raise funds.

‘We want to make sure anyone involved in crowd funding is aware of these obligations to ensure they operate within the law and don’t potentially expose themselves to penalties under the Corporations Act or ASIC Act’, Mr Tanzer said.

Along with other factors, depending on the type of ‘reward’ offered by the project creator to those giving funding, crowd funding could involve a managed investment scheme under Chapter 5C of the Corporations Act, provision of a financial services requiring an Australian financial services (AFS) licence or a fundraising under Chapter 6D of the Corporations Act.

There are also advertising and publicity restrictions that apply to advertising and publicising an offer of financial products or securities, in certain circumstances.

ASIC has written to a number of Australian-based operators of crowd funding websites outlining its views on crowd funding and the circumstances that may impose legal obligations.

In addition, as a result of its current monitoring of crowd funding, ASIC has identified some risks in crowd funding that website operators can help manage. These include:

• a risk of fraud being carried out through crowd funding websites. Website operators can help manage this risk by doing background and credentials checks on project creators to help minimise the opportunity for fraud.
• a risk that funded projects are not completed and the project sponsors do not receive the rewards promised. As well as background and credentials checks, the website operators can manage this risk by assessing the viability of the project before it is posted on their website, requiring the project creator to provide more information on how and when they complete the project and consider requiring the project creator to report periodically through the website on their progress in implementing the project.
• a risk that the money collected is lost due to the fraud or bankruptcy of the website operator before the money is passed on to the project creator. The website operator can manage this risk by holding all crowd funding money in a trust account separate from its own assets, avoiding excessive holding periods and implementing appropriate internal controls to ensure withdrawals are appropriate.

ASIC also recently published information on the MoneySmart website about things that people who are thinking of participating in a crowd funding project should consider before getting involved. More information is available from www.moneysmart.gov.au.

Background

Ventures funded by a crowd funding site could be a managed investment scheme if funds contributed are pooled or used in a common enterprise to produce financial benefits or benefits consisting of interests in property for the contributors. Interests in a managed investment scheme are generally financial products and regulated under the Corporations Act.

If the people providing the funds are making a donation or are only told they may receive some asset of nominal value which is not itself a financial product, regulation under the Corporations Act may not apply. These arrangements are not generally regulated by ASIC.

In some circumstances, crowd funding may also be considered as pre-purchase arrangement of a product or a service. In these circumstances, the activity would be regulated under the Competition and Consumer Act 2010, which incorporates the Australian Consumer Law. Amongst other things, the Australian Consumer Law, like the ASIC Act, prohibits businesses from making false or misleading representations to consumers. Consumers concerned that they may have been misled about a crowd funded product or service that is not financial product or service may wish to contact the Australian Competition and Consumer Commission or their local office of fair trading.

In the circumstances that crowd funding involves an offer that meets the definition of a financial product, the owner of Australian-based websites that facilitate this crowd funding may be legally considered as the person making an offer to arrange for the issue that financial product. In these circumstances, a person must meet certain requirements under the Corporations Act:

• hold or obtain an AFS licence with the appropriate licence authorisations or be an authorised representative of an AFS licence holder
• if offering to arrange for issue of a financial product to retail investors or inviting them to apply for a financial product, give a Product Disclosure Statement (PDS) for the offer to the client.

If there is an offer to issue securities such as shares or debentures in a company, or an invitation to apply for securities, then the issuer of those securities or equity may be required to lodge a prospectus or other complying disclosure document. If the offer is to issue an interest in a managed investment scheme, then the issuer of the interest may be required to give a PDS, and may be required to have the scheme registered by ASIC under Chapter 5C of the Corporations Act.

Offering a financial product or securities without meeting the relevant obligations under the Corporations Act may have a number of consequences, including fines or other penalties. For example, the maximum penalty for failing to register a managed investment scheme is 200 penalty units ($22,000), five years imprisonment or both.

The maximum penalty for carrying on a financial services business without an AFS licence is 200 penalty units ($22,000), two years imprisonment or both.

There are also advertising and publicity restrictions that apply to advertising and publicising an offer of financial products or securities which require a PDS or a prospectus or other complying disclosure document under the Corporations Act unless there are appropriate references to the relevant document.

There are various consequences for failing to comply with these requirements under the Corporations Act. In particular:

• a person may be liable to compensate another person contributing funds for loss or damage resulting from a contravention of the requirements in the Corporations Act; and
• a publisher (which would include the operator of a website that provides access to crowd funding projects) may commit an offence if they contravene the advertising and publicity restrictions in the Corporations Act.

The maximum penalty for contravening the restrictions on advertising and publicity for financial products is 25 penalty units ($11,000), two years imprisonment or both.