Global Regulatory Brief: Trading and markets, May edition
The Global Regulatory Brief provides monthly insights on the latest risk and regulatory developments. This brief was written by Bloomberg’s Regulatory Affairs Specialists.
Trading and markets regulatory developments
Regulatory authorities continue to advance initiatives to improve the efficiency and sophistication of global securities markets. From investment research in the UK to surveillance in Malaysia, the following global developments in trading and markets from the past month stand out:
- Australia: ASX consults on T+1 settlement cycle
- US: SEC adopts reforms relating to investment advisers operating exclusively through the internet
- UK: FCA consults on new approach to investment research
- Qatar: QFMA consults on new rules for securities issuance, offering and listing
- UK: Government announces move to T+1 by end-2027
- US: SEC charges advisory firm with recordkeeping and other failures
- Malaysia: SC issues new conduct rules for capital market intermediaries
- Singapore: MAS proposes AML checks on organized market investors
- US: SEC charges investment advisers for marketing rule violations
Australian Securities Exchange consults on T+1 settlement cycle
The Australian Securities Exchange (ASX) published a whitepaper on shortening the settlement cycle in Australia to trade date plus one business day (T+1).
International context: The whitepaper comes in response to the global push for shorter settlement cycles with the U.S., Canada and Mexico transitioning to T+1 in late May 2024 and with India operating on T+1 from 2023.
In parallel, other markets – including the UK and the EU – are actively exploring and seeking insights on the feasibility and implications of shortening their settlement cycles.
Specifics of Australian market: Despite similarities with other global financial market intermediaries and marketplaces, the paper highlights key differences that require specific consideration of the risks, benefits and costs of transitioning to T+1 in Australia.
For example:
- Time-zone: ASX, based in Sydney, operates during hours that overlap with most major Asian exchanges. However, there is less overlap with North America and Europe. Time-zones have implications for intermediaries and investors, including foreign exchange and securities lending
- Size: Despite being a top 20 global market, ASX is relatively small compared to most North American, some European, and large Asian markets. Market size relative to the cost of industry transition is an important factor in assessing the economic benefit of shorter settlement cycles
- Dematerialized and highly efficient central securities depository (CSD): ASX Settlement operates a dematerialized CSD and pioneered ‘name on register’ digital holdings in the 1990s with the launch of CHESS
- Investment flows: Approximately one third of funds invested in Australian cash equities come from overseas and the majority of foreign investment originates from North America, Europe and the UK
- Retail vs institutional trading activity: ASX estimates that retail investors make up around 13% of total trading activity, institutional investors around 83%, and proprietary traders/ market makers around 4%, based on traded values. Given that retail trading activity tends to be pre-funded, markets with a high proportion of retail trading activity may face fewer impacts in shortening settlement cycles
- Current settlement timetable: The daily CHESS batch settlement cycle cut-off is 11:30 am, effectively meaning that Australia currently operates on a T+1.5 settlement cycle. For North American investors, this is effectively T+1 already
Options: The decision to move (or not) to T+1 has several dimensions including the timing and nature of change, and the interplay with the CHESS replacement project. A decision is unlikely to be a binary “yes/no” and may include:
- Move to T+1 as soon as possible
- Move to T+1 in the medium term and prioritize work to enable transition and phase-in T+1
- Delay T+1 adoption.
Looking ahead: The response period closes on June 18, 2024 and then in August the ASX will publish a summary of feedback received and include detail on next steps. The aim is to arrive at a decision on a possible transition to T+1 by November, 2024.
U.S. SEC adopts reforms relating to investment advisers operating exclusively through the internet
The U.S. Securities and Exchange Commission (SEC) has adopted amendments to its rule permitting certain internet investment advisers to register with the Commission (the “internet adviser exemption”).
In more detail: The amendments require advisers relying on the internet adviser exemption to have at all times an operational interactive website through which the adviser provides its services to one or more clients.
- The amendments also eliminate the current rule’s de minimis exception for non-internet clients, thus requiring an internet adviser to provide advice to all of its clients exclusively through an operational interactive website
- The amendments are an attempt to modernize the rule, first adopted in 2002 and intended to be narrow in scope, to better reflect advances in technology and current adviser practices
Looking ahead: The amendments will become effective 90 days after publication in the Federal Register. An adviser relying on the internet adviser exemption must comply with the rule, including the requirement to amend their Form ADV to include a representation that the adviser is eligible to register with the Commission under the internet adviser exemption, by March 31, 2025.
FCA puts forward plans for a new way to pay for investment research
The UK Financial Conduct Authority (FCA) published proposals to give asset managers greater freedom in how they pay for research.
In summary: The proposals would allow a new option for firms to ‘bundle’ payments for third-party research and trade execution services, provided that the firm meets various requirements. This option would exist alongside those already available, such as payment from an asset manager’s own resources or from a dedicated account.
Conditions attached to new option: The requirements on firms in relation to this new option include:
- Establishing a formal policy on use of the approach
- A budget for the amount of third-party research to be purchased
- Ongoing assessments of research value and price
- An approach to the allocation of costs across their clients
- A structure for the allocation of payments across research providers
- Operational procedures for the administration of accounts to purchase research
- Disclosures to clients on the firm’s approach to bundled payments, their most significant research providers and costs incurred
Challenges with the current regime: The FCA’s engagement with the industry indicates that investors are largely getting the research they need under the current rules; however the current options available to UK asset managers are either operationally complex or may favor larger firms.
The current regime can also impede UK asset managers’ ability to purchase investment research produced outside the UK.
Wider context: The original rules preventing the bundling of payments were introduced in 2018 following concern that the practice led to less disciplined spending on duplicative or low-quality research, inappropriate influence of research procurement considerations on trade-allocation decisions, and opaque charging structures.
- In this consultation the FCA is looking to introduce guardrails to protect investors to ensure sufficient discipline around budgets for research spending, fair allocation of costs to clients, value assessment, price benchmarking and cost transparency
- The FCA considers the new plans to be compatible with rules governing research payments in other major jurisdictions which should make it easier for asset managers to buy research in the same way across borders
- These proposals follow the Government-commissioned independent research review, chaired by Rachel Kent, which recognises that high quality, easily available investment research supports deep capital markets, listed companies and economic growth
Looking ahead: The consultation runs until June 5, 2024 and the FCA hopes to produce final rules following in the first half of 2024.
Qatar Financial Markets Authority consults on draft offering and listing rules
The Qatar Financial Markets Authority (QFMA) announced new draft rules for offering, listing and ongoing operations are open for comments for a period of a month.
In more detail: The new draft rules of offering, listing and ongoing operations have been prepared based on a standard study compared with similar legislation in the international financial markets. They have also been drafted in light of current legislative changes affecting companies listed in the financial markets, including:
- Issuance, offering and listing of securities
- Rights issue trading operations
- Acquisitions and mergers
- The company’s purchase of own shares
- The rules of corporate conversion into a public shareholding company for the purpose of listing on the Qatari financial markets
UK announces move to T+1 by end-2027
The UK Treasury has announced that the UK intends to move to T+1 by end-2027 at the latest following the publication of a report commissioned to examine whether the UK could and should move to a ‘T+1’ standard settlement period.
International considerations: In terms of international considerations, the report also proposes that the UK should engage with other European jurisdictions to explore whether coordinating a move to T+1 is possible.
- If this can be done within a suitable time frame then the UK could align its timetable for the transition to T+1
- The UK Government will engage with the EU and Switzerland to see if they can align their work on this
Technical group: The UK Government is establishing a Technical Group to take forward the implementation of the UK move to T+1 to develop the technical and operational changes necessary for the UK to transition to T+1.
The group will also determine the appropriate timing for mandating these changes, which should be a date in 2025, and the overall ‘go-live’ date for T+1.
SEC charges advisory firm with recordkeeping and other failures
The SEC’s off-channel communication sweep continues with a $6.5 million fine against registered investment advisory firm Senvest Management “for widespread and longstanding failures to maintain and preserve certain electronic communication.” The firm was also charged with failing to enforce its code of ethics.
- The charges are the first against a registered investment adviser without a broker-dealer component
- More than $1 billion in fines have been levied against registered broker-dealers or dual registrants since the enforcement sweep began
- The SEC’s order found that “employees at various levels of authority communicated about company business internally and externally using personal texting platforms and other non-Senvest messaging applications in violation of the firm’s policies and procedures.”
- It also found that three senior employees had communicated through a method in which messages would be automatically deleted after 30 days
- Finally, the order found that certain employees failed to adhere to the firm’s code of ethics relating to securities transactions in their personal accounts
Securities Commission Malaysia raises conduct rules for capital market intermediaries
The Securities Commission (SC) Malaysia issued revised Guidelines on Conduct for Capital Market Intermediaries (CMIs), with the objective to elevate standards of professionalism and integrity of CMIs.
Key revisions: Board and senior management of CMIs should inculcate a culture where clients’ interests are prioritized and it should be the duty of CMIs to act honestly, fairly to avoid misrepresentation and mis-selling.
- New chapters are also included to address areas such as identification and treatment of vulnerable clients, as well as provision of advice and capital market-related services through online platforms
- A series of FAQs in relation to the revised Guidelines were also provided
Timeline for implementation: The revised Guidelines will come into effect from October 1, 2024.
MAS proposes requiring Approved Exchanges and Recognised Market Operators to conduct AML/CFT checks
The Monetary Authority of Singapore (MAS) issued a consultation paper proposing to introduce a new Notice that will require Approved Exchanges (AEs) and Recognised Market Operators (RMOs) to perform AML/CFT checks on certain types of investors.
Summary: Capital market intermediaries have traditionally facilitated access to investors seeking to trade on organized markets.
- These intermediaries are responsible to conduct AML/CFT checks on such clients, and organized market operators have therefore not been required to conduct AML/CFT checks on the same clients
- Due to the increasing trend of organized market operators allowing investors to trade directly on their organized market, MAS is proposing to introduce an AML/CFT Notice for organized market operators to perform AML/CFT checks on market participants that are not financial institutions, and that trade directly on their organized markets without facilitation by a capital-market intermediary
Feedback sought: The consultation paper is seeking feedback on the scope of the proposed AML/CFT Notice and the requirements imposed on AEs and RMOs. The consultation paper is open for feedback until April 29, 2024.
SEC charges investment advisers for marketing rule violations
The SEC announced settled charges against five registered investment advisers.
In more detail: The firms have agreed to pay $200,000 in combined penalties. The orders found that the five firms advertised hypothetical performance to the general public on their websites without adopting and implementing policies and procedures reasonably designed to ensure that the hypothetical performance was relevant to the likely financial situation and investment objectives of each advertisement’s intended audience.
- One firm also violated other regulatory requirements, including by making false and misleading statements in advertisements, advertising misleading model performance, being unable to substantiate performance shown in its advertisements, and failing to enter into written agreements with people it compensated for endorsements
- Importantly, the SEC found that this firm’s misleading statements were included in a registered investment company’s prospectus filed with the Commission
Wider context: This is the second set of cases that the Commission has brought as part of an ongoing targeted sweep concerning Marketing Rule violations after charging nine advisory firms in September, 2023.
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