Risk management presentation April 15 2013


Published on

International Association of Risk and Compliance Professionals (IARCP)

Every Monday
Top 10 risk and compliance management related news stories and world events
Do you want to receive (at not cost) every Monday the Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week's agenda, and what is next?
You can register at:

Receive the New Member Orientation Newsletters
You will have the opportunity to learn (at not cost) what members registered before you have already learned. Understand better risk and compliance management, projects, careers, challenges and opportunities.
You can register at:

Published in: Business
  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Risk management presentation April 15 2013

  1. 1. P a g e | 1International Association of Risk and ComplianceProfessionals (IARCP)1200 G Street NW Suite 800 Washington, DC 20005-6705 USATel: 202-449-9750 www.risk-compliance-association.comTop 10 risk and compliance management related news storiesand world events that (for better or for worse) shaped theweeks agenda, and what is nextDear Member,―Fed speechesare not like Hollywood movies.‖Whosaid that?John C. Williams,President and CEO, Federal Reserve Bank of SanFrancisco, during hispresentation toTownHall LosAngeles, CaliforniaWhydid hesayso?He explained:―That‘sbecauseI‘ll tell you howit endsright hereat thebeginning.‖John doesnot look happywithEurope:―EverytimeEurope‘scauldronof woesseemstobecooling abit, somethingnewhappensto makeit boil over again.‖He continued:―Thesituationwefind ourselvesin todayis like driving a car up along, steep hill.Tokeepthe carmoving at a reasonablespeed, the Fed is pushingdownhard on theaccelerator.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  2. 2. P a g e | 2As the road getsflatter—asthefactorsholdingback therecoverywane—we‘ll need tolightenup on theaccelerator a bit.And, eventually, if wefind ourselvespickingup too much speed, wemayneed to applythe brakes.‖[The moral of the story: If you can drive a car, you understand the Fed‘spolicies.]Read moreat Number 8below.Another interestingspeech:Mr Anselmo Teng, Chairman of theMonetaryAuthority of Macao, spokeat the MacauAssociation of Banks(ABM) Spring Festival LuncheonGathering, Macao.His introduction is simplygreat:―In the Chinese tradition, the New Year carries a special connotation; firecrackers bid farewell tothe past year while the old coupletsare replaced togreet new things.We seetheYear of the Dragon off and greet thenewYear of the Snake.On behalf ofAMCM, I wouldlike to take this opportunityof greetingthenewYear of theSnake, towishthe MSAR a harmoniouscommunity, prosperousbusiness.‖What I remember now…About 6 yearsago, I gave a presentationtothis area of the world… At thefirst break a young ladyapproachedme and said:―Lookat thespring.Aren‘t theflowersbeautiful?Isn‘t theweathernice?Ihopeyou enjoythespring and theflowers…‖International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  3. 3. P a g e | 3Tocontinue:―I did not understand your presentation!‖Ah, thesetraditional nice and politeintroductionsin the Pacific Rim… Ilovethem.Read more(about thespeech, not thelady) at Number 10below.Welcometo the Top 10list.BestRegards,GeorgeLekatisPresident of the IARCPGeneral Manager, ComplianceLLC1200 G Street NW Suite800, Washington DC20005, USA Tel: (202) 449-9750Email: lekatis@risk-compliance-association.comWeb: www.risk-compliance-association.comHQ: 1220N. Market Street Suite804,Wilmington DE 19801,USATel: (302) 342-8828International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  4. 4. P a g e | 4Progressreport on implementation of theBasel regulatory frameworkApril 2013This updated Progressreport onimplementationof the Basel regulatory framework providesahigh-level view of Basel Committeemembersprogressin adopting Basel II, Basel 2.5 and BaselIII, asof end March2013.IOSCO to progressreformagenda under new leadershipMr. Greg Medcraft, chair of theAustralian Securities andInvestmentsCommission, took over aschair of theInternationalOrganizationofSecuritiesCommissions(IOSCO) Board at itsmeetinginSydney on 21- 22 March.Prudential RegulationAuthority (PRA)On 1April 2013,thenew regulatory regime for financial servicesin theUnitedKingdom came intoeffect.ThePrudential RegulationAuthority (PRA) hasbecome theUnitedKingdom‘sprudential regulator of deposit-takers,insurersand majorinvestment firms.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  5. 5. P a g e | 5Interview with Gabriel Bernardino, Chairman ofEIOPAconducted by Christoph Baltzer, VersicherungsWirtschaft(Germany)―Insurersseem tobethevictimsof ascenario of financialrepression, especiallywithlowinterest rates. What wouldbetheconsequencesof thepolicy of cheap moneyforinsurers?We seethis in some countriesin the EU wherea lowinterest rateenvironment startsbeinga big challengefor some types ofproducts,especiallywhenyou have got long term guarantees.‖EU-US INSURANCE DIALOGUEAGREES HIGH LEVEL PROJECT PLANTheSteeringCommitteeof the EU-U.S. InsuranceDialogueProjecttoincreasemutual understandingandenhancecooperationmet in Basel, Switzerlandand agreed on a high level workplan from 2013to2017.Theparties achieved agreement on a prioritizationof objectivesand aschedulefor theimplementation of theinitiativespreviouslyagreed uponbytheSteering Committeeand described in the ―Way ForwardDocument‖ (December 2012).International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  6. 6. P a g e | 6Final ruleThe requirements for determiningwhen a company is predominantlyengaged in financial activitiesFor immediatereleaseTheFederal Reserve Board hasannounced approval of a final rule thatestablishesthe requirementsfor determiningwhena company is"predominantlyengagedin financial activities."Therequirementswill be used by the Financial StabilityOversightCouncil(FSOC) whenit considersthepotential designationof anonbankfinancial company for consolidated supervision by the Federal Reserve.AFew Observationsin the Private FundSpaceDavid W. Blass, Chief Counsel, Division ofTradingand Markets, U.S. SecuritiesandExchangeCommission, American BarAssociation, Tradingand MarketsSubcommittee, Washington, D.C.TheSecurities and ExchangeCommission, asa matter of policy,disclaimsresponsibilityfor anyprivatepublicationor statement by anyofitsemployees.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  7. 7. P a g e | 7Presentation to Town Hall LosAngelesLosAngeles, CaliforniaBy John C. Williams, President and CEO, FederalReserveBank of San FranciscoThe Economy and the Federal Reserve: RealProgress, but Too Soonto RelaxFinancial cooperationbetween China andSingaporeCongratulatoryremarksby Mr Ravi Menon, ManagingDirector of theMonetaryAuthority of Singapore, at the inaugurationof ICBC SingaporeRMB ClearingBank, SingaporeBrief overview of Macao‘seconomy in 2012Speechby Mr AnselmoTeng, Chairman of theMonetaryAuthorityof Macao, at theMacauAssociation of Banks(ABM) Spring Festival LuncheonGathering, Macao, 26February 2013.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  8. 8. P a g e | 8Progressreport on implementationof the Basel regulatory frameworkApril 2013This updated Progressreport onimplementation of theBasel regulatoryframeworkprovidesa high-levelview ofBasel Committeemembers progressinadoptingBaselII, Basel2.5and BaselIII, asof end March2013.It focuseson the statusof domesticrule-makingprocessestoensure that theCommitteescapitalstandardsaretransformedintonational law orregulation accordingto the internationallyagreedtimeframes.TheCommitteebelievesthat disclosurewill provideadditional incentivefor memberstofullycomplywith the international agreements.This report updatesthe CommitteesOctober 2012report toG20 FinanceMinistersand Central Bank Governors on implementationof the Baselregulatoryframework.Progressreport on implementation of the Basel regulatoryframework, April 2013IntroductionThis report providesthe adoption statusof Basel II, Basel2.5 and BaselIII regulationsfor each Basel Committee1member jurisdictionasofend-March2013.It updatesthe Committee‘sprevioussemi-annual progressreportspublishedin October 2011, April 2012and October 2012.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  9. 9. P a g e | 9In 2012,the Basel Committeeadopted the Regulatory ConsistencyAssessment Programme (RCAP) tomonitor progressin introducingregulations,assesstheir consistencyand analyse regulatory outcomes.Regardingthe consistencyof implementation, theCommitteerecentlypublishedtheassessment report on Singapore‘simplementation of BaselIII basedcapitalregulations,followingasimilarassessment of Japan, andpreliminaryassessmentsof the European Union and the UnitedStates.Thereportsare availableat the websiteof the Bank for InternationalSettlements.Currently, assessmentsof China and Switzerlandare underway, andassessmentsofAustralia, Brazil and Canada will commence in 2013.Regarding the regulatory outcomes, the Committee published its firstanalysis on the measurement of risk-weighted assets for trading bookassetsin January 2013.Areport on risk-weightingof banking book assetsisexpectedto bepublishedin the coming months.Theattachedtablesfocus primarily on the statusof adoption of therisk-basedcapital requirementsbythe Committeemember jurisdictions.TheCommitteeintends,goingforward, to expand the adoptionmonitoring to other Basel III components, includingthe LiquidityCoverage Ratio, capital chargesfor global and domesticsystemicallyimportant banksand the leverageratio.For jurisdictionsthat arenot membersof theCommittee, theFinancialStabilityInstituteof the Bank for International Settlementspublished inJuly2012the resultsof itssurvey on Basel III‘sadoptionstatus.ScopeTheBasel III frameworkbuilds upon and enhancesthe regulatoryframeworkset out under BaselII and Basel2.5.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  10. 10. P a g e | 10Thetableshereinthereforereviewmembers‘regulatoryadoptionof BaselII, Basel2.5 and Basel III.•BaselII, whichimproved themeasurement of credit risk and includedcapture of operational risk, wasreleasedin 2004and wasduetobeimplemented from year-end 2006.TheFrameworkconsists of threepillars:Pillar 1containstheminimumcapital requirements; Pillar 2 setsout thesupervisoryreview processandPillar 3 correspondstomarket discipline.•Basel2.5, agreedin July2009, enhanced the measurementsof risksrelatedtosecuritisation and trading book exposures.Basel 2.5 wasduetobe implemented no later than 31December 2011.•In December 2010,the CommitteereleasedBaselIII, whichset higherlevelsfor capital requirementsand introduced anew global liquidityframework.9Committeemembersagreed to implement Basel III from 1January 2013,subject to transitional and phase-in arrangements.In November 2011, G20 Leadersat theCannesSummit calledonjurisdictionsto meet their commitment toimplement fullyandconsistentlyBasel II and Basel 2.5 by end 2011, and Basel III, starting in2013and completingby 1January 2019.In June 2012,G20 Leadersat the LosCabosSummit reaffirmed their callfor jurisdictionstomeet their commitments. This messagewasreiteratedin Moscowin February 2013by theG20FinanceMinistersand CentralBank Governors.MethodologyThedata contained in this report arebasedon responsesfrom BaselCommitteemember jurisdictions.Thefollowingclassificationis used for the statusof adoption of Baselregulatoryrules:International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  11. 11. P a g e | 111.Draft regulation not published:no draft law,regulation or other officialdocument hasbeen made public todetail the plannedcontent of thedomesticregulatory rules.This statusincludescaseswherea jurisdictionhascommunicatedhigh-levelinformationabout itsimplementationplansbut not detailedrules.2.Draft regulation published: a draft law, regulation or other officialdocument is alreadypublicly available, for examplefor publicconsultation or legislativedeliberations.Thecontent of thedocument hasto be specificenough to beimplemented whenadopted.3.Final rulepublished:the domestic legal or regulatory framework hasbeen finalisedand approved but isstill not applicableto banks.4.Final rulein force: thedomesticlegal and regulatory frameworkisalready applied to banks.In order tosupport and supplement the statusreported, summaryinformation about thenext stepsand theimplementation plansbeingconsideredby membersare alsoprovided for each jurisdiction.In additiontothe statusclassification, a colour code is used toindicatetheimplementationstatusof each jurisdiction.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  12. 12. P a g e | 12International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  13. 13. P a g e | 13International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  14. 14. P a g e | 14International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  15. 15. P a g e | 15International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  16. 16. P a g e | 16International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  17. 17. P a g e | 17International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  18. 18. P a g e | 18IOSCO to progressreformagenda under new leadershipMr. Greg Medcraft, chair of theAustralian Securities andInvestmentsCommission, took over aschair of theInternationalOrganizationofSecuritiesCommissions(IOSCO) Board at itsmeetinginSydney on 21- 22 March.He succeedsMr. Masamichi Kono of theJapan FSA.TheBoard alsoelected Ontario SecuritiesCommission chairman Mr.Howard I. WetstonasIOSCO vicechair followingthe retirement of Mr.EthiopisTafara."I am delightedtobe appointed chair of IOSCO and I saluteand thankMasa Kono for his leadershipof IOSCO,‖ Mr. Medcraft said.―Under my stewardship, I want tobuild on Mr. Konosworkand ensureIOSCO is proactiveand forward-lookingin deliveringthreeobjectives–workingtoensurethat globallyinvestorsare confident andinformed, marketsare fair and efficient and reducingsystemic risk."Mr. Medcraft said that during his term aschair IOSCO wouldworktowardtheseobjectivesthrough:• Engagement with membersand stakeholders;• Co-operation acrossitsmembership and withindustry; and• Standard-setting.Mr. Wetston said:"I am lookingforwardto workingwithGreg MedcrafttoadvanceIOSCOs standard-settingagenda, includingnew mandateson investorprotection and education, cross-border regulationanddeterrence.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  19. 19. P a g e | 19I wouldalsolike totakethisopportunitytothank Masamichi Konoforhisleadershipand contributionstoIOSCO."Mr. Konosaid: ―I wouldlike toexpressmy gratitude toeveryone atIOSCO for their kind support during my tenure aschair.Our collectivestrength hasenabledIOSCO tomake important headwayon international regulatory reform and elevated thevisibilityandrelevanceof IOSCO with global stakeholders.I am confident that further progresswill bemade under themost capableleadershipof my successor.‖TheSydney IOSCO Board meeting covered thefollowingareas:EngagementTheBoard meetingunderscored IOSCO‘scommitment toimprovingengagement withindustry and thebroader IOSCO membership.Industry Round Table on Emerging RisksThemeeting wasprecededby a Round Tableattended by the Board andseven financial servicesexecutivesfromAustralia, Asia, Europe andNorthAmerica todiscussemergingrisks.The discussionsunderscored IOSCO sdetermination to engagewithindustryin developing earlyand forward-lookingresponsestothechallengesthat securitiesmarketsfacein a rapidlyevolvingenvironment.Participantsexchangedviewson emerging risksin global financialmarketsand the possibleunintended consequencesof securitiesregulation and other policy measures,particularlyon emergingmarkets.Someof the potential risksdiscussed includedtheglobal imbalancescausedby capital flows, weaknessesin financial marketinfrastructure,high-frequencytrading, market fragmentation, andcyber-attacks.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  20. 20. P a g e | 20Board members expressed concern over the potential risksof the currentlowinterest rate environment.Membersgenerallyagreedthe search for yield could fuel thecreation ofnew asset bubbles,particularlyin emerging marketswithlargelyundiversifiedeconomies.Theynoted that a sudden upward spike in interest ratescould damageglobal economic growth.The Emerging Markets CommitteeTheBoard discussed measuresto enhancetheinclusivenessof EMCmembersin IOSCO policy and implementationwork.TheEMC accountsfor 75% of IOSCO membership, whichgivesitsignificant responsibility for thedevelopment and implementationofIOSCO standards on a global level.Board members agreed that the emerging marketswould play anincreasingly important role as a source of financing for the globaleconomy.Board membership and working proceduresThemeeting had preliminarydiscussionson changesto the compositionof the IOSCO Board and itsworkingprocedures.Theaim of thesechangesis toensure theBoard is asinclusiveandrepresentativeaspossibleof theIOSCO membership.TheBoard wasestablishedin May2012through themerger of theExecutiveCommittee, the Technical Committeeand the EmergingMarket CommitteeAdvisory Board.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  21. 21. P a g e | 21Theaim isto have in place a permanent basisfor determiningBoardmembership by the timeof theAnnual meetingin Riode Janeiro inSeptember 2014.New IOSCO membersTheBoard approved and welcomedthe followinginstitutionsasaffiliatemembersof IOSCO:• UnionofArab SecuritiesAuthorities(UASA)• JohannesburgStock Exchange(JSE)• Nigeria Stock Exchange (NSE)• TheInternational Swapsand DerivativesAssociation (ISDA)Co-operationIOSCO‘songoing commitment to enhancingconstructiveco-operationacrossitsmemberswasreflectedin a number of new initiativesagreed atthemeeting.Establishing the IOSCO FoundationTheBoard discussed the governanceframeworkfor theFoundation anddiscussedwhereit should be located.Board memberssupportedphysically locatingtheFoundation in Madrid,aseffortscontinuetosecure funding commitments.Afinal decisionon all aspectsof the Foundation will be madeand thenext stepsfor formallyfiling the Foundation documentswill be takenafter completion of the pre-commitment phaseand thoroughexaminationof all legal issues.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  22. 22. P a g e | 22New work streamsThemeeting agreedto establisha taskforce on cross-borderregulationanda new standingcommitteeon investoreducation and protection, andagreedon the need for a project on deterrenceframeworks.- TheTaskForce onCrossBorder Regulationwill developatool boxof measuresin regulatingsecuritiesmarketsactivitiesthat crossborders.If appropriate, it will then develop principlestoguidethecoordinateduse of thesetools.Thetools tobe considered may includesubstitutedcompliance,mutual recognitionand supervisoryco-operation.TheTaskForce‘swork is intended tohelp policymakersandmember regulatorsin addressingthe challengestheyfaceinregulatingcross-border activity.- The Committee on Investor Education and Protection will have abroad mandate to lead IOSCO‘s work on retail investor educationandprotection.Its aim will be toensure IOSCO takesa consistent andcomprehensiveapproach to retail investment productsandservices.By focusing on investor education it will enable IOSCO membersto share their experiences and build expertise globally in financialliteracy.- Themeeting considered (and foreshadowedapproval of) a newmandateto develop principlesfor credibledeterrenceframeworks.Themandate callsfor the IOSCO committeeon enforcement toidentify the core elementsof a credibledeterrenceframework forsecuritiesregulation, includingstrategiesand good practices.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  23. 23. P a g e | 23It respondsto a public demand for tougher sanctionstodetermarket misconduct.Thefailure topunishwrongdoersduringthecurrent financialcrisishaseroded publicconfidencein capital markets.International SecondmentsRegisterTheBoard agreed to thecreation of an International SecondmentsRegistertobe maintainedby the IOSCO Secretariat, whichwill assistmembersin organizing secondmentswithother IOSCO members.Mr. Medcraft said:―Secondmentsare a keywayof buildingunderstandingand co-operationbetweenmembers.TheRegisterwill play a keyrolein making thishappen.‖Multilateral Memorandum of Understanding ontheexchangeofinformationTheBoard consideredadditional measuresto encourage non-signatorymembersto sign theIOSCO MultilateralMemorandum ofUnderstanding on cooperation and exchangeof information, theinstrument used by securitiesregulatorsaround theworldto combatcross-border fraud and misconduct.It also reiterated IOSCO‘s commitment to provide technical assistanceand political support to those non-signatories that require it in order tosign theMMoU.Earlier this month, the Reserve Bank of Malawi signed theMMoU, bringing to 94 the total number of IOSCO membersignatories.Togetherthesemembersregulate about 95% of the world‘ssecuritiesmarkets.However,30 membershave yet to becomesignatories.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  24. 24. P a g e | 24As long asthesejurisdictionsremain outsidethe internationalenforcement regime, theyoffer potential safehavensfor wrongdoersandcreategapsin IOSCO‘s international enforcement network.Standard-settingThemeetingprogressed IOSCO‘s important standard setting workforsecuritiesmarkets.It also had preliminary discussions about how best to prioritize andrationalize IOSCO‘swork streams in an effort to focus on areas thatdeliverthe maximum benefit to theorganizationand itsmembers.Financial BenchmarksTheBoard discussed the draft principleson financial benchmarksdeveloped by the TaskForce on Financial Market Benchmarks.Theprinciplesincludehigh level principlesthat areapplicableto allbenchmarksand additionalprinciplesthat are appliedunder specificcircumstances.TheBoardagreedtoissueasecondconsultationpaperfocusingprimarilyon theadditional, more detailed principles.Theconsultationpaper is expectedtobe releasedfor a four-weekcomment period during April. The final report isexpectedtobepublishedin June.G20/FSB mandatesto repair the financial systemTheBoard discussed progressin reform workmandatedbythe G20Leadersand coordinatedby the Financial StabilityBoard.Themeeting heard updateson OTC derivativesreform initiativesandimplementationissues,progresson joint IOSCO-BCBS(BaselCommitteeon BankingSupervision) work on Margin RequirementsforInternational Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  25. 25. P a g e | 25non-centrallycleared derivatives,the needfor further work on creditratingagenciesand on credit default swaps.On OTC Derivativesmembersstressed the importanceof assessingthecollectiveimpact of the different measuresregardingthe regulationofOTC derivativesin an effort to strengthen the final outcome and avoidunintended consequences.Board members alsodiscussedprogresson IOSCO‘sworkin developinga methodology to identify non-bank systemically important financialinstitutions(non-bank SIFIs), coveringmarket intermediaries,assetmanagersand hedge funds.Theproject forms part of a broader G20mandate on global systemicallyimportant financial institutions(G-SIFIs) that encompassesworkbytheBCBSand the InternationalAssociation of InsuranceSupervisors(IAIS)on systemicallyimportant institutionsin thebankingand insurancesectors.Membersemphasizedtheimportanceof lookingat this issuefrom theperspectiveof not just institutions,but alsomarkets,productsandinstruments.Entitiesin thesecuritiesspacewereconsiderablydifferent and some ofthem, like many funds,had shock-absorbingfeatureswhichreducedrather than exacerbatedsystemic risk.Board membersalsodiscussedthe applicationof theFSB KeyAttributesof effectiveresolution regimesfor financial institutionstoentities in thesecuritiesspace.Again, members emphasized theimportanceof aligningthis workwiththeproject on identificationof non-bank SIFIsassome entitieswithshockabsorbing featuresmight not need to be resolvedin the manner ofother systemically important entities.Membersalsonoted theprogressbeing made by IOSCO and theCommitteeonPayment andSettlement Systems(CPSS)workingtogetherInternational Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  26. 26. P a g e | 26on recovery and resolution of Financial Market Infrastructures,includingcentral counterparties.NOTES1.IOSCO is the leadinginternational policy forum for securitiesregulatorsand isrecognizedasthe global standardsetter for securitiesregulation. Theorganizations membership regulatesmore than 95% oftheworlds securitiesmarketsin more than 115jurisdictionsand itcontinuesto expand.2.The IOSCO board is the governing and standard-setting body of theInternational Organization of Securities Commissions (IOSCO), and ismadeup of 32 securities regulators.Themembersof theIOSCO board arethesecuritiesregulatoryauthoritiesofArgentina,Australia, Belgium, Brazil, Chile, China,France, Germany, Hong Kong, India, Italy, Japan, Korea, Malaysia, Mexico,Morocco,theNetherlands,Nigeria,Ontario,Pakistan, Portugal, Quebec, Romania, Singapore, SouthAfrica, Spain, Switzerland, TrinidadandTobago, Turkey, United Kingdom and the UnitedStates.3.TheEmerging MarketsCommitteeis a specializedworkinggrouprepresentingtheworld‘semerging financial markets.It endeavorsto promote the development and greater efficiencyofemergingsecuritiesand futuresmarketsby establishing principlesandminimum standards, preparing trainingprograms for thestaff ofmembersand facilitatingexchangeof information and transfer oftechnologyand expertise.4. IOSCO aimsthrough itspermanent structures:•to cooperate in developing, implementingand promoting adherencetointernationallyrecognizedand consistent standardsofregulation, oversight and enforcement in order toprotectinvestors,maintain fair, efficient and transparent markets,and seek toaddresssystemic risks;International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  27. 27. P a g e | 27•to enhanceinvestor protection and promote investor confidencein theintegrityof securitiesmarkets,through strengthened informationexchangeand cooperationin enforcement against misconduct and insupervision of marketsand market intermediaries;and•to exchangeinformationat both global and regional levelson theirrespectiveexperiencesin order to assistthe development ofmarkets,strengthenmarket infrastructureand implement appropriateregulation.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  28. 28. P a g e | 28Prudential RegulationAuthority (PRA)On 1April 2013,thenew regulatory regime for financial servicesin theUnitedKingdom came intoeffect.ThePrudential RegulationAuthority (PRA) hasbecome theUnitedKingdom‘sprudential regulator of deposit-takers,insurersand majorinvestment firms.As part of theBank of England, thePRAwill make an importantcontribution totheBank‘s financial stability objectiveof protectingandenhancingthestability of the UK financial system.ThePRAhastwostatutory objectives:a general objectiveto promotethesafetyand soundnessof the firms it regulates,focusingon theadverseeffectsthat theycan have on the stabilityof the UK financial system; andan objectivespecific toinsurancefirms, tocontributeto ensuring thatpolicyholders are appropriatelyprotected.ThePRA‘s objectivesare underpinned by theprinciplethat a stablefinancial system, which is resilient in providingthe critical financialservicesthe economy needs,is a necessarycondition for a healthyandsuccessful economy.Firms can adverselyaffect the stabilityof thefinancial system eitherthrough thewayin whichtheycarryon their businessor by failing in adisorderlymanner.It will not, however,be the PRA‘s roletoensure that no firm fails.Rather, the PRAwill seek toensure that any firmsthat fail dosoin a waythat avoidssignificant disruption to thesupplyof critical financialservices, and thusto the PRA‘s statutoryobjectives.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  29. 29. P a g e | 29I wouldlike tothank everyone whosubmitted writtencommentson theearlier document or attendedthe PRA‘s launchevents.Thecommentswerevery constructiveand I am particularlypleasedwiththestrong support for the PRA‘scommitment toforward-looking, judgement-basedsupervisionand transparent decision-making.Without replying toeverycomment, I wouldlike tofollowuponafew keythemes.Perhapsthemost common issueraisedby respondentswastheinteractionbetweenthePRAand theFinancialConduct Authority (FCA).I understand firms‘concerns about the potential burden ofdual-regulation, whichiswhyboth thePRAandtheFCAhavecommittedtoworkingtogether and co-ordinatingacrossa rangeof areas, forexampleby lookingto avoid duplicativedata requests.ThePRAand theFCAhave different objectives, though, and thebenefitsof the new regime will only be achieved if both institutionscan focusontheir ownresponsibilities.Further detail on how the PRAwill workwiththe FCA isset out in theMemorandum of Understandingbetweenthe tworegulators,and in Box3of thisdocument.A few respondentsraised issuesabout capital requirements, including thepotential competitive advantage for larger deposit-takers of using internalcapital models comparedwith smallerfirms.As this document setsout, thePRAis committedtoapplying theprincipleof proportionalityin itssupervisionof firms.In thiscontext, proportionalityisjudged in termsof thethreatsthat firmscan poseto thePRA‘s statutoryobjectives.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  30. 30. P a g e | 30An important first step in the direction of applying the principleofproportionalityis describedin the recent publication on barriersto entryfor new firms.I believe that this step alsorepresentsa commitment toapply theprinciplesetout in thenewlegislationthat thePRAshouldhaveregardtominimisingadverse effectson competitionin theindustriesit regulateswhenpursuing its statutory objectives.Finally, some respondentshighlightedthe importanceof regulatingcredit unionsappropriately.ThePRArecognisesthesignificant rolethat credit unionsplayin the UKeconomy and given the particular nature of their business, credit unionsare subjecttotheir own prudential regime.Therelativelysmall size, lack of complexityand interconnectednessofcredit unionsmeansthat theywill generallyposefewerriskstothe PRA‘sobjectivesthanother firmsandthereforewill besubject toalessintensiveform of supervision.This is again consistent with the application of the principleofproportionalityin the PRA‘sapproach.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  31. 31. P a g e | 31International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  32. 32. P a g e | 32Working with other authoritiesCo-ordination withother authoritiesis essential tothe PRA‘s success.Bank of England and FPCThePRAis a part of theBank of England, and isthereforeconnectedtotheBank‘sother functions— includingitsroleaslender of lastresort,and itswork on market intelligence,oversight of financial marketinfrastructure, prudential policy, financial sectorresilienceandresolution.This facilitatesthe flowof information betweenthesefunctions.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  33. 33. P a g e | 33ThePRA‘s objectiveof promoting thesafety and soundnessoffirms, focusing primarily on the harm that theycan causeto the UKfinancial system, complementsthe Bank‘s wider objectiveto‗protect andenhancethestabilityof the financial system of theUnited Kingdom‘.And the PRA‘s focuson minimisingthe adverseeffectsof firm failurecomplementsthe special resolutionobjectivesunder the BankingAct2009which theBank, asSpecial ResolutionAuthority, shareswith otherauthorities.An effectiveregulatoryframework for financial stability alsoneedstocombinefirm-specific supervision withworkto protect and enhancetheresilienceof the financial system asa whole.ThePRAthereforeworkscloselywith theFPC, within theBank, whichhasstatutoryresponsibilityfor reducingriskstothe financial system asawhole.TheFPC can make recommendationsand give directionsto the PRA onspecific actionsthat should be taken in order to achievetheFPC‘sobjectives.ThePRAis responsiblefor implementingFPC recommendationson a‗comp ly or exp lain ‘ basis, and for complying with the FPC‘sdirectionsin relation to the useof macroprudential tools, specified byHMTreasuryin secondary legislation.ThePRAreportstothe FPC on itsdelivery of theserecommendationsanddirections.There is a frequent two-wayflowof informationand exchange of viewsbetweenthe PRA and theFPC.ThePRAprovidesfirm-specificinformation tothe FPC, to assist itsmacroprudential supervision.And the FPC‘sassessment of systemic risksinfluencesthe PRA‘sjudgementsin pursuit of its ownobjective.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  34. 34. P a g e | 34Co-ordinationbetweenthePRA and theFPC is assistedby the commonmembership of theGovernor of the Bank of England, the DeputyGovernorfor Financial Stability andtheChief ExecutiveOfficer(CEO) ofthePRA on both thePRA Board and theFPC.FCATheFCAactsasconduct regulator for thefirmsprudentiallyregulatedbythePRA.ThePRAhasa statutoryduty to co-ordinate withthe FCA in the exerciseof itspublicfunctions, includingpolicymaking and supervision.AMemorandum of Understanding(MoU) betweentheFCA andthePRAdescribeshow the tworegulatorsfulfil this duty to co-ordinatein a waythat supportseach regulator‘sabilityto advanceitsown objectives.Akey principlefor this co-operation, given the regulators‘separatemandatesfor prudential and conduct regulation of PRA-authorisedfirms, is that each authorityshould focuson thekey riskstoitsownobjectives,whilebeing awareof thepotential for concernsof the other.In some cases,thetwoauthoritieshavea direct interestin the sameissues,but from different perspectives,or at different levelsof detail.For example, the PRAwill want to understand risks to firms ‘ cap it aland profitabilityif sumsaredueasredressfor aconduct matter,but it willnot need to be asclosetothedetails of the remedial action astheFCA.In other cases,there needsto be closer co-operation.For example, theFCAand the PRAwill share their respectiveviewsonkey conduct and prudential issuesfacinga firm.Publicactionssuchasenforcement casesare carefullyco-ordinatedtoassessthe potential for more significant prudential implications.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  35. 35. P a g e | 35And from an operational perspective, structured data routinelycollectedbyone regulatorare readilyaccessibletothe other.Co-ordination betweenthePRA and theFCA is assisted by themembership of their CEOson each other‘sboard.This cross-boardrolefocuseson areasof overlap and discussionsofmaterial relevancetoeach CEO‘s ownorganisation.Co-ordination betweentheorganisationsis alsoassistedby commonmembership of their CEOson the FPC.ThePRAand the FCAarealsoparty to other MoUs withthe Bank asawholeand HM Treasuryon international engagement, and therest of theBank on theoversight of financial market infrastructure.Other UK bodiesThePRAoften needstoworkwithother UK regulators, either topursueitsown objectiveor toassist them in theirs;this may alsoincludeotherenforcement agencies.ThePRAhasagreementstosupport the sharing of informationandjudgements,and theco-ordinationof actions.ThePRA‘s general approachtothesearrangementsand the relationshipstheyunderpinis focused on:•enablingall partiesto focuson their own objectives;• thesubstantiveissuesof potential co-ordination;•avoidingwherepossibleadetailed, prescriptiveapproach, toensurethatjudgement and flexibility are not lost;and•provisionsfor regular review,ensuringthat MoUs remain current andembedded withintheorganisations.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  36. 36. P a g e | 36International co-operationBankingis an international industry. ManyUK firmshave operationsoverseas,and many firmsdomiciled overseashavesubsidiariesorbranchesin the UnitedKingdom.Deposit-takersand investment firmsarethereforesupervisedon aco-operativeinternational basis, and thepolicy framework for thissupervision is toa largeextent agreedglobally, including by the BaselCommitteeon BankingSupervision (BCBS) and Financial StabilityBoard(FSB), toensurethat all jurisdictionsupholdappropriate standardsin their collectiveinterest.ThePRAparticipatesactively in global and European supervisory fora,playing a full and activerole with itscounterpartsin supervisingcross-border firms, and seeking to be aninfluential and persuasiveparticipant in international policy debates.In particular, thePRAactivelyparticipatesin theworkof theFSB andtheBCBS.And it aimstoinfluenceand reflect in itsapproachthe workof theEuropean System of Financial Supervision, of whichit is a part.Theapproach to supervisionset out in this document implementsthePRA‘s international obligationsand commitments, includingthe BaselCommittee‘sCore Principlesfor EffectiveBanking Supervision and itsConcordat on consolidatedsupervisionand subsequent publicationsoninternational supervisoryco-ordination.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  37. 37. P a g e | 37Interview with GabrielBernardino, Chairman ofEIOPA, conducted by ChristophBaltzer, VersicherungsWirtschaft(Germany)Insurersseem tobethevictimsof ascenario offinancial repression, especiallywithlowinterestrates. What wouldbetheconsequencesof thepolicy of cheap moneyfor insurers?We seethis in some countriesin the EU wherealowinterest rate environment startsbeinga bigchallengefor some typesof products, especiallywhenyou have got long term guarantees.We at Eiopahave identified it alreadyin 2011.We have run the first stresstest exerciseparticularlyon low interestenvironment, becausewesee it assomethingwhichis approaching.Theexperienceof Japan showeduswhat can bethe consequencesofsuch a scenario.It‘s the responsibilityof thesupervisoryauthoritiestobe proactiveonthis.This is an area whereweneedto be attentive.We have identifiedcertain vulnerability: there arecompaniesthat couldfaceproblemsif thislowinterestrate scenario will be maintained.There are number of supervisors in the EU that have already takensteps, but earlier in March EIOPA issued its Opinion, in which werecommend a coordinated supervisory response to the long lasting lowinterest rates.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  38. 38. P a g e | 38Gladly, ontheinsuranceorpensionmarket westill havesufficient time todeal withit, provided that weidentify risks sufficientlyin advanceandtake necessaryactions.That‘sa differencecomparingto the crisis in thebanking sector, whereyou need to act immediately.At the same time some new productsthat wereintroduced beforethecrisis should be adopted to the new economic environment:insurancecompanies should reflect on thetype of productsand the type ofguaranteesthat theyare issuingtothe market.DoesSolvencyII help to prepareforthisscenario?Onemisunderstandingthat needsclearlyto be spelled out is that it‘s notSolvencyII that provokeschallengestobusiness.It‘s the economicenvironment.SolvencyII makesone difference:You need torecognize it earlier.If you haveamarket consistent valuationof assetsand liabilitiesit will bemuch more clearthat you have a challengein your portfolio.If you continueto havea valuation that doesnot reflect themarket, thenyou can pretend that there isno problem.But theproblem exists.SolvencyII makesthis transparent and that isgood for consumers, forcompanies and alsofor supervisors.We needtohave a preventive supervision.Supervisionshould not be there to act whenthe fire is alreadyin yourhome.Supervisionshould be there toprevent that the fire occurs.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  39. 39. P a g e | 39Versicherungswirtschaft wrotein 2003 that SolvencyII wouldbein forcein 2006. Doyou believethat SolvencyII will bein force whenyour termfinishes?My term finishesin 2016.That‘sa date that is still possibleto haveSolvency II in place.Before that weneed a number of political decisions, but I believethatSolvencyII will be in place.It‘s fundamental from a supervisoryperspective becausewenow have aregimethat doesnot respond tothe risks.We have toremember whywestarted SolvencyII.Thepurposewasto increasepolicyholder protection and incentivizebetter risk management.And from all thework that wehavedone in SolvencyII there isalreadysomepositiveevolution in the wayinsurersmanage risks.Wehave seen abankingcrisisin 2008. What weforget about is theinsurancecrisis in theyears 2001until 2003. This wascaused byequityinvestments, reserve deficiencies andunprofitable businessin manylines.Doyou think ascenario of this kind will still bepossibleunderSolvenyII?No regulatoryregimecan avoid crisis.There is no perfect regime.SolvencyII bringsmuch more awarenessof risks at an earlystage.From the sideof thecompaniesit‘sa fundamental change of culturewhencompanieswhile investingin markets,need tounderstand therisksthattheyare running.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  40. 40. P a g e | 40Thesupervisorsin their turn will alsohave necessarytoolsandinformation in order to look at the companiesfrom therisk-basedprospective.Is thisa zero failure system?No.There areno zerofailuresystems. But there hasbeen progress.You mentioned thecrisisof 2001until 2003.Theindustryhaslearned from that and weincorporated it in Solvency II.Thepush for increasedriskmanagement and for better understandingbycompanies whenthey invest in certain types of assets– theseare thelessonslearned from that past.This is fundamental right now:one of theconsequencesof the lowinterest ratesis that insurancecompaniesare searchingfor yield.It‘s bound to happen that theygo to other types of investment.But then it‘sfundamental that theyhavea good understandingof thoseclasses.And that‘swhat SolvencyII brings.Insurerscriticizewhat theyrefer toasartificial volatility in thebalancesheetsunder Solvency II. Someeven talk about irrationalityof capitalmarkets. Doyou understand this criticism?SolvencyII will givefiguresthat will be more volatile than in thecurrentsituation.It wasclear from the beginning.Everybody wasalertedto that.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  41. 41. P a g e | 41What haschanged is themagnitudeof this volatility.We didn‘t have ashigh volatilitiesin thepast aswehad in therecentyears.We have todeal withthis volatility in thesystem.That‘swhat wearedoingright now withthe long term guaranteeassessment (LTGA), which preciselyfocuseson that.TheLTGAis trying tounderstand what kind of adjustmentsweneedtomake to the regime todeal withartificial volatility.But not all volatility is artificial.Much of it is representativeof what is in themarket.I don‘t want to discusswhethermarketsare rational or not.If you have long term liabilitiesand long term assetsand you have a verygood match betweenthem, your numbersare lessprone to havethisvolatility.If you have a huge level of mismatchingthenon the one sideyou aretakingadvantageof opportunitiesin the markets,but you have a risk.But for some long term liabilitiesweneed to have some adjustmentstocopewith the fact that the productsand the liabilitiesare long term andtheshort term volatilitiesin the assetshave a meaning, but theydon‘thavean economicmeaning for the type of liability that insurershave.This is the adjustment that weare trying toeffect right now.Theregimewassincethebeginningbasedontheideathat wewanttoseethereality.And the realityis that marketsare more volatilenowadays.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  42. 42. P a g e | 42We needtorecognizethereality.What wouldbeapositivepolitical solutionforthat?An agreement on OmnibusII whichispreservingthe fundamentalelementsof SolvencyII, preserving themarket consistent valuation thatwehave got in Solvency II and preservingthe principlesof a robust andprudential regime while consideringalsotheeconomic nature of theliabilities.I think that wehavegot some good proposalson the table.Government bondsare categorized asnorisk investments. Doyou thinkthat this isagoodwayto tackleproblemsof state debt?Morethan any other system SolvencyII takesintoaccount the reality offinancial markets,includingonsovereigns.In a SolvencyII balancesheet, sovereignswill be assessedat marketvalue.It‘s much more advanced than other regimes.Any kind of influence that markets are putting on any kind of sovereignsin Europe right now, is taken into the Solvency II numbersimmediately, without any kind of adjustments.Thenthere is the element of capital requirementson top of that.But it‘simportant to understand the magnitude.If you look at technical provisionsand capital requirements,technicalprovisionsrepresent 80 to 85percent of a balancesheet.Capital requirement is just a small item comparedtothat.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  43. 43. P a g e | 43By havingmarket consistent evaluationin thetechnical provisionsand inthebalancesheets,you have alreadya hugereflectionof all the riskstheassetshave, includingsovereigns.Now theperception of sovereign risk iscompletelydifferent from what itwasten years ago, whenwestarted todevelop the system.Going forwardweneed toconsider this.What is alsoimportant tounderstand iswhen somethingshould bedone, it should be done for all sectors.We cannot have a different appreciationof sovereign risk for insurersandfor banks.It needsto be done for the financial system asa whole.And it‘s alsoimportant totake dueattention to thetime when wearedoing this.It‘s not a good policyto changethiswhenyou arestill in a crisis.How doyou evaluatetheSwissSolvencyTest?It‘sinusesince2006andisin force alreadyfortwoyears.Theprinciplesare very much alignedtoSolvencyII.I think it‘svery good that theystarted to implement the system becauseSwitzerland is an important insurancemarket and EIOPAhasvery goodrelationship and closelycooperateswiththe Swissauthority FINM A.We can observe challengesbut alsoa good outcome from theimplementationofarisk-basedregimein Switzerland:wehaveseensomechangesin behavior in the marketsand in the productsthat Swissinsurerssell.But let‘sbe frank: it‘smuch easier for onecountry toimplement a regimethan to have a decisionon a tablewith 27different approaches.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  44. 44. P a g e | 44What arethemost important tasksfor Germaninsurerstotackleon theirwaytoSolvencyII?Therearesomecompaniesthat aremorepreparedandothersthat arelessprepared.That‘swhyweare developingguidelinesfor the preparation phaseforSolvencyII.We havedefinedareaswherewewant supervisorstoensurethatundertakingsare prepared: governance, risk management,pre-applicationof internal models, elementsrelated to theOwnRisk andSolvencyAssessment (ORSA), the informationtobe provided tosupervisors.Theobjectiveof theseguidelinesis tohelp marketsand supervisorstohavea clear ideaof how toprepare tothenew regime.For examplethere is a need to make progressin thesystems andprocessesthat arenecessarytodeliverhigh qualitydatatobeprovidedbycompanies and further analysed by supervisors.This is fundamental for therisk+basedenvironment.Soby our guidelinesweare not introducingSolvencyII earlyon, but weexpect national supervisorstostart implementingtheseelementsin aconsistent and convergent wayand torequestfrom companiestopreparethemselvesin theseareasin order tobein a good shapewhenSolvencyIIis enforced.It is a win-winsituation for both companies and supervisors.Is thereasituation wheresystemic risk becomesaproblemfor insurersand reinsurers?We understand what is systemic risk in banking.Looking at the insurancesector it‘salsochallenging.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  45. 45. P a g e | 45But thetype of businessis different.Thematuritiesof businessaredifferent.If you talk about traditional insurancebusiness, wedon‘t see muchevidenceof all thesefactorsthat can bring systemic risk.But insurerscan involve themselvesin some typesof businesswhichismuch more prone tosystemic events, for exampleexposurestocreditdefault swaps.Systemic risk in theinsurancemarket ismore a questionsof theactivitiesrather than insurersby themselvesbeing systemic.If you have a type of business that is much more leveraged, where youhave maturity transformations like you have on the banking side, if youwalk and run like a bank, then you need to be treatedlike a bank.Are thecollegesof supervisors abletocopewiththeir task, especiallyifyou look at thevastnessof some insuranceenterprises.It‘s important that supervision is performed in a waythat it can deal withreality.It‘s important that welook at the risksfrom a group perspective.In Europe wehave recognizedthis much earlier thanmany jurisdictionsaround the globe.In the late 1990swehad an insurancegroup directive whichsaidthat it‘snot sufficient to supervisesinglecompanies, but to do supplementarysupervision at a group level.With SolvencyII weare recognizingthereality: Thegroupsmanagetheirbusinessin amuch more centralisedwayand thisneedstobe reflectedinsupervision in order toavoid duplicationsand doubleburdensbut at thesametimeinordertohaveabetterperceptionoftherealrisksthat arerunat the group level.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  46. 46. P a g e | 46That‘swhycollegesof supervisorsare such an important tool.Theprogressthat theyhave made ishuge.Therole of EIOPAin thesecollegesis tomake sure that thereis aconsistent and convergent supervision.This is a process. We have still some room for improvement.Doyou think amorecentralized approach wouldbebetter for thebigfinancial institutions?There arestepsthat need to be takenin this area.I think thebest waytodo that is tobuild up on therole andresponsibilitiesgiven to usbythe Regulation establishingEIOPA.We can build a step by step approach towardsa more centralizedsupervision.I don‘t believein ruptures.That needsto be an evolution and not a revolution.We gain from having more centralizationin some areas.For exampleinternal models are fundamental for the new regime.It‘s important that there is good understandingof how the modelsworkon individual and groups‘level Here wecould have an approachcentralized by EIOPAbecauseit‘snot possiblethat all the authorities inall the countries whereyou havecompanieswithina group, will have thesameexperienceimmediatelytodeal withit.But it needsto be a step by step approach.In UK it is nowprohibitedforbrokerstotake commissions.Doyouthinkthat this will improveconsumer protection?International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  47. 47. P a g e | 47Intermediaries are the visiblefaceof theindustry towardsconsumers.Thequalityof the informationand advicethat is provided is crucial.There area number of thingsto improve.But is it all about disclosure?Is disclosurethe key issue?Thereality provesthat this is not the case.Disclosure is important but it‘s not the panacea.I think thisisnot fair tosay―We gaveall theinformation totheconsumer, but he doesn‘t understand it, soit‘s his problem‖That is not apolicy I wouldrecommendfrom a perspectiveof consumerprotection.First of all thereare different typesof intermediariesand businessesweare talkingabout.In life insurance it‘simportant that the consumershave good knowledgeof the commission the intermediariesare taking.This is a contract for manyyears, soin life insurance themandatorydisclosureshould bethe rule.If you look at the non-life sideyou should have the right to get theinformation.But the conditionsfor non-life contractscan be changed on an annualbasis,they are not fundamental for your decision.Theconflict of interest ismuch lessrelevant for non-life products.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  48. 48. P a g e | 48What is important inconsumer protection then?You need to understandwhat consumersare worried about. Evidencestell usthat in manycasesthecommission theintermediarygets,is not fundamental forconsumers.Theywant tohave a good advice.But if theyneeded topay for that advicedirectly, thentheywouldnot buytheproduct.But asa societydo you want peopleto belessinsured?Sobanning thecommissionsthis measure needstobe well analyzed.Shouldpension fundsbeobliged tofulfill therequirementsofSolvencyII?It‘s not our intention that pension fundsshould followSolvencyII.When weadvised theEuropean Commission, wesaid that there are someareas,whereweseean advantageof applying the same basicstructurePension fundsare dealingwiththesimilarkind of risk, soit‘simportantfor the protection of members and beneficiaries tohave good riskmanagement, good governance, better transparencyetc.But wesaidalsothat astraight forwardapproachlike in SolvencyII isnotthebest solution for pension funds.There aredifferent typesof security mechanismsaround Europe.It‘s important in anykind of solvency regime that the calculation ofliabilitiesand thevalue of the assetsare takenmore realistically.We made a QISexerciseand wewill have preliminaryresultsfrom thistest at theend of Marchor in thebeginning ofApril.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  49. 49. P a g e | 49Someof the QIS optionswereconsistent withSolvencyII, otherswerelessconsistent.But wenever said that weshould followSolvencyII.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  50. 50. P a g e | 50EU-US INSURANCE DIALOGUEAGREES HIGH LEVELPROJECT PLANTheSteeringCommitteeof the EU-U.S.InsuranceDialogueProject toincreasemutual understandingand enhancecooperation met in Basel, Switzerlandand agreed on a high level workplanfrom 2013to2017.Theparties achieved agreement on a prioritizationof objectivesand aschedulefor theimplementation of theinitiativespreviouslyagreed uponbytheSteering Committeeand described in the ―Way ForwardDocument‖ (December 2012).As part of the five-year plan, anagreement wasreachedtomove forwardin 2013with particular focus on thoseinitiativesrelatingto professionalsecrecy/ confidentialityand reinsuranceand collateral requirements, aswell astobegin workon some other initiativespertainingto solvencyand capital requirements, group supervision andon-siteexaminationpractices.TheSteeringCommitteeanticipatesa public forum in late 2013toreporton the years achievements,tolaunchcollaborative workon supervisorycollegesand to givestakeholdersan opportunityto share their thoughtson best practicesand experiencesregarding supervisorycooperation andcoordination.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  51. 51. P a g e | 51Final ruleThe requirementsfordetermining when a companyis predominantly engaged infinancial activitiesFor immediatereleaseTheFederal Reserve Board hasannounced approval of a final rule that establishesthe requirementsfordeterminingwhenacompany is "predominantlyengaged in financialactivities."Therequirementswill be used by the Financial StabilityOversightCouncil(FSOC) whenit considersthepotential designationof anonbankfinancial company for consolidated supervision by the Federal Reserve.UndertheDodd-Frank Wall Street Reform andConsumer ProtectionAct, a nonbank financial company can bedesignated by the FSOC forsupervision by the Federal Reserve only if it is "predominantlyengaged infinancial activities."Acompany is considered to be predominantlyengaged in financialactivitiesif 85percent or more of the companysrevenuesor assetsarerelatedtoactivitiesthat are defined asfinancial in nature under the BankHoldingCompanyAct.Additionally, theFSOC mayissuerecommendationsfor primaryfinancialregulatoryagenciestoapplynew or heightened standardsto a financialactivityor practice conducted by companiesthat are predominantlyengagedin financial activities.Thefinal rule largelyadoptstheapproachin theproposedrule,withafewexceptions.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  52. 52. P a g e | 52For example, thefinal rulestatesthat engagingin physicallysettledderivativestransactionsgenerallywill not be considereda financialactivity, a changefrom the proposal.Thefinal rulealsodefinesthe terms"significant nonbank financialcompany" and "significant bank holdingcompany."Among thefactorstheFSOC mustconsiderwhendeterminingwhethertodesignatea nonbank financial company for consolidated supervisionbytheFederal Reserveis theextent and nature of the companystransactionsand relationshipswithother significant nonbank financial companies andsignificant bank holdingcompanies.If designated, thosenonbank financial companieswill be required tosubmit reportstotheFederalReserve, theFSOC, andtheFederalDepositInsuranceCorporation on thecompanyscredit exposureto othersignificant nonbank financial companiesand significant bank holdingcompaniesaswellasthecredit exposureof suchsignificant entitiestothecompany.Consistent withtheproposal,afirm willbeconsideredsignificant if it has$50billionor more in total consolidatedassetsor hasbeendesignatedbytheFSOC assystemicallyimportant.Thefinal rulewill become effectiveon May6, 2013.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  53. 53. P a g e | 53FEDERAL RESERVE SYSTEMDefinitions of ―Predominantly Engaged In Financial Activities‖and ―Significant‖ Nonbank Financial Company and BankHolding Company.AGENCY: Board of Governorsof the Federal Reserve System(―Board‖).ACTION: Final rule.SUMMARY: The Board is adopting this final ruleto establish forpurposesof TitleI of the Dodd-Frank Wall Street Reform and ConsumerProtectionAct (the―Dodd-FrankAct‖ or ―Act‖)(1)therequirementsfor determiningif a company is ―predominantlyengagedin financial activities‖ and(2)definitionsof theterms ―significant nonbank financial company‖ and―significant bank holding company.‖ Thesetermsarerelevant tovariousprovisionsof TitleI of the Dodd-FrankAct, includingsection 113, whichauthorizestheFinancial StabilityOversight Council (―Council‖) todesignatea nonbank financial company for supervision by the Board iftheCouncil determinesthat thenonbank financialcompanycould poseathreat to the financial stabilityof theUnited States.DATES: The final rule will become effectiveon May6, 2013.BackgroundTheDodd-Frank Act established theCouncil, which, among otherauthoritiesand duties, may subject a ―nonbank financial company‖ tosupervision by the Board and consolidatedprudential standardsif theCouncildeterminesthat material financial distressat the nonbankfinancial company, or thenature, scope, size, scale, concentration, interconnectedness,or mix ofthecompany‘s activities,could posea threat to the financial stabilityoftheUnited States.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  54. 54. P a g e | 54Nonbank financial companies that are designated by the Council undersection 113 of the Dodd-Frank Act are referred to as ―nonbank financialcompanies supervisedby the Board.‖Theauthorityof theCouncil to subject a nonbank financial companytoconsolidatedprudential supervisionby theBoard is an importantcomponent of recent legislativeand regulatorychangesdesignedtoaddressgapsand weaknessesin the financial regulatorysystem thatbecame evident during the financial crisis.Thesegapsoften allowedfinancial firmswhosefailure could posesubstantial riskstothe financial stability of theUnitedStatesto avoidprudential, consolidatedsupervision.TitleI of theDodd-Frank Act definesa ―nonbank financial company‖ toincludeboth a U.S. nonbank financial companyand a foreign nonbankfinancial company.Thestatute, in turn, definesa ―U.S. nonbank financial company‖ asacompany(other thanabank holdingcompanyandcertainotherspecifiedtypesof entities) that is(i)incorporatedor organized under thelawsof the UnitedStatesor anyState;and(ii) predominantlyengaged in financialactivities.A―foreign nonbank financial company‖ is defined asa company(otherthan a company that is, or is treatedas, a bank holding company) that is(i) incorporatedor organized outsidetheUnitedStates;and(ii) predominantlyengaged in financialactivities.For purposesof TitleI of theDodd-Frank Act, a company isconsideredtobe ―predominantlyengaged‖ in financial activities if eitherInternational Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  55. 55. P a g e | 55(i)theannual grossrevenuesderived bythe company and all of itssubsidiariesfrom financial activities,aswellasfrom the ownershiporcontrol of an insureddepositoryinstitution, represent 85percent or moreof the consolidatedannual grossrevenuesof the company; or(ii)theconsolidatedassetsof thecompany and all of its subsidiariesrelatedtofinancialactivities,aswellasrelatedtotheownershiporcontrolof an insured depositoryinstitution, represent 85percent or more of theconsolidatedassetsof the company.TheDodd-FrankAct requirestheBoardtoestablishtherequirementsfordeterminingif a companyis―predominantlyengaged in financialactivities.‖Section 165(d)(2) of theDodd-Frank Act alsorequires nonbank financialcompanies supervised by the Board and bank holding companieswithtotal consolidatedassetsof $50billion or more to disclosethenature andextent of(i)thecompany‘s credit exposure to other significant nonbank financialcompanies and significant bank holdingcompanies; and(ii) thecredit exposure of such significant entitiesto thecompany.Theterms―significant nonbank financial company‖ and ―significantbank holdingcompany‖ are usedin section 113of theDodd-FrankAct aswell,whichspecifiesthat theCouncil mustconsidertheextent andnatureof a nonbank company‘s transactionsand relationshipswithother―significantnonbank financialcompanies‖ and―significant bank holdingcompanies,‖ among other factors, in determining whethertodesignateanonbank financial companyfor supervision by theBoard.TheAct doesnot define theterms ―significant nonbank financialcompany‖ or―significant bank holdingcompany,‖ but insteaddirectstheBoard todefine thosetermsby rule.On February 11, 2011, theBoard invitedcomment on a proposed rulethatwouldhaveInternational Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  56. 56. P a g e | 56(i)establishedthe requirementsfor determiningif a company is―predominantlyengaged in financial activities‖ for purposesof TitleI oftheAct and(ii)defined the terms―significant nonbank financial company‖ and―significant bank holding company‖ (―First NPR‖).In responsetotheFirstNPR, theBoardreceived23comments,includingcommentsrelatedtothedefinitionof activitiesthat are financial forpurposesof TitleI.Among other things,thesecommentsindicated that some commentersbelievedthat a firm engagedin financial activitiescould avoiddesignation simplyby choosing not tocomplywith the conditionsimposedon the manner in whichthoseactivitiesmust be conducted bybank holding companies.After consideringthosecomments,aswellasthelanguageand legislativeintent and historyof theDodd-FrankAct and the Bank HoldingCompanyAct (―BHC Act‖), asamendedbytheGramm-Leach-BlileyAct (―GLBAct‖), onApril 2, 2012,the Board invited comment on an amendment totheFirst NPR toclarifythat, consistent withthepurposeof TitleI, anyactivityreferencedin section4(k) of theBHC Act will be consideredtobea financial activitywithout regard to conditionsthat do not definewhetheranactivityisitselffinancialbut wereimposedonbank holding companiestoensure that the activityis conducted bybank holdingcompaniesinasafeandsoundmannerortocomplywithanother provision of law(―Second NPR‖).In the Second NPR, the Board proposed an appendix of the listof theactivitiesthat wouldbe considered tobe financial activitiesasofApril2, 2012,together withconditionstheBoard believednecessarytodefinetheactivityasa financial activityand excluding conditionsthat the Boardbelievedwererelated to thesafeand sound conduct of theactivity, compliancewithother law, or other factorsnot relatedtowhethertheactivitywasfinancial, for purposesof determining whethera companyispredominantlyengagedin financial activities.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  57. 57. P a g e | 57In responseto theSecond NPR, the Board received 12comments.Explanation of Final RuleThefinal ruleprovidesclarityfor purposesof determiningwhetherparticularcompaniesqualify asnonbank financialcompaniesunder TitleI of the Dodd-Frank Act.Thisisimportant both inthecontext of Councildesignationaswellasforlargebank holding companiesand nonbank financial companies that arerequired to report their credit exposurestoother significant nonbankfinancial companiespursuant tosection 165(d).In developing this final rule, the Board hasconsidered the commentsreceivedon both theFirst and Second NPRsand the languageandpurposesof the relevant statutoryprovisions.In addition, theBoard consultedwith theother Council membersandmember agencies.After this review, theBoard hasdeterminedto adopt the attachedfinalrule, whichincludesseveral modificationsof the earlier proposalstoaddressmattersraisedby commenters.A. Predominantly Engaged in Financial Activities1. Two-Year Test Based on Consolidated Financial StatementsTheFirst NPR providedthat a companywouldbe consideredto bepredominantlyengaged in financial activitiesif:•Theconsolidatedannual grossfinancial revenuesof the company ineither of itstwomost recentlycompletedfiscal years represent 85 percentor more of thecompany‘s consolidated annual gross revenues(asdetermined in accordancewithapplicableaccountingstandards) in thatfiscalyear; orInternational Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  58. 58. P a g e | 58•Theconsolidatedtotal financial assetsof thecompany asof the end ofeither of itstwomost recentlycompletedfiscal years represent 85 percentor more of thecompany‘s consolidated total assets(asdeterminedinaccordancewithapplicableaccountingstandards) asof the end of thatfiscalyear.Several commenters assertedthat the 85percent threshold in the revenueand asset testswastoohigh and that a companyshould be considered tobe―predominantlyengaged in financialactivities‖ if a lowerpercentageof the company‘s revenuesare derivedfrom, or a lowerpercentageof itsassetsare relatedto, activitiesthat are financial in nature.Thestatutorylanguageof theAct establishesthat a company will beconsideredtobepredominantlyengagedin financial activitiesif either 85percent of itsrevenuesare derived from, or 85percent of its assetsarerelatedto, financialactivities.TheBoard doesnot have the discretion tolowerthe 85percent thresholdestablished by Congress.Therefore, thefinal rule retainsthe revenueand asset testsdescribedaboveasproposed in theFirst NPR.Thefinal rulealsoretainstheproposeddefinitionof―consolidatedannualgrossfinancial revenues‖ of a company.Acompany‘s consolidated annual grossfinancial revenueswouldbedetermined in accordancewithapplicableaccountingstandards, and arethat portion of theconsolidatedannual grossrevenuesderiveddirectlybythecompany, or indirectlyby any of itsconsolidatedsubsidiaries,from:(i)activitiesthat arefinancial in nature; or(ii)theownership, control, or activitiesof an insured depositoryinstitution or any subsidiary of an insured depositoryinstitution.Similarly, the final rule retainsthe proposeddefinitionof ―consolidatedtotal financial assets‖ of a company, whichis that portion of theInternational Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  59. 59. P a g e | 59company‘s consolidated total assets,asdetermined in accordancewithapplicableaccountingstandards, that are relatedto(i)activitiesthat arefinancial in nature, or(ii)theownership, control, or activitiesof an insured depositoryinstitution or any subsidiary of an insureddepositoryinstitution.Asin theFirst NPR, thefinalruleprovidesthat computationofassetsandrevenuesfor purposesof determiningif a company meetsthe statutorythreshold wouldbe based on the relevant company‘s annual financialrevenuesin, or financial assetsat the end of, either of itstwomost recentfiscalyears.This methodology is designedto account for transitoryfluctuationsinassetsand revenuesthat may not be indicativeof any substantivechangein thefinancialnatureof thecompanyoritspredominant activitiesandtoallowthe Council toeffectivelyfulfill its important responsibilitiesofdesignating(and reviewingexistingdesignationsof) thosenonbankfinancial companieswhosematerial financial distresscould poseathreattothe financial stabilityof the United States.2. Activitiesthat are Financial in NatureTheDodd-Frank Act providesthat financial activitiesarethoseactivitiesthat have been definedasfinancial in nature in section 4(k) of the BHCAct.In responseto issuesraised by commentsreceived on the First NPR, theBoardinvitedcomment in theSecondNPR onaproposalthat anyactivitydescribedin section4(k) of theBHCAct wouldbeconsideredfinancialinnature under TitleI regardlessof whether the activityis conducted inconformancewithconditionsimposed on bank holding companiesconductingtheactivitythat donot definethefinancial activityitself, suchasconditionsrelatedto safetyand soundnessor related to compliancewith another provision of law,such asthe Glass-Steagall Act.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  60. 60. P a g e | 60TheSecond NPR includedan appendix that enumeratedtheactivitiesand related conditionsthe Board proposed to retain aspart of thedefinitionsof financial activitiesunder section 4(k) of the BHC Act.TheBoard receivedseveral commentson the approach taken in theSecond NPR.Onecommenter expressed support for theapproach proposed in theSecond NPR, whileothersraised questionsregardingthe approach.Thefinal rulegenerallymaintainstheapproachset forth in theSecondNPR, withcertain modificationsthat addressmattersraised bycommenters, includingthe restorationof several conditionstheBoardproposedto remove in the Second NPR.TheBoard alsoreceivedseveral commentson the First NPR requestingclarityregarding therelationshipbetweencertain types of assetsandrevenuesand financial activities.Thesecommentsand the Board‘sresponsesaredescribed in greaterdetail below.Scope of Financial ActivitiesSomecommenters assertedthat the Board doesnot havetheauthority toissueregulationsregardingthescope of activitiesthat arefinancial innature for purposesof TitleI.Onecommenter asserted that, while theDodd-FrankAct expresslyprovidestheBoardwithrulemakingauthorityregardingtherequirementsfor determiningwhethera companyis predominantlyengaged infinancial activities,the Board‘srulemaking authorityis limitedtoestablishingtechnical guidelinesfor calculatinga company‘s financialrevenuesor assetsin assessingwhethera particular company and itsactivitiesfall withinthedefined termsof ―predominantlyengaged‖ and―financial activities,‖ such asidentifying the accountingmethodsthatmay be used in thesecalculations.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  61. 61. P a g e | 61TheBoard believesthat the approach takenin the Second NPR isauthorizedunder theDodd-Frank Act‘sgrant of authoritytotheBoard insection 102(b) toestablish, by regulation, the requirementsfordeterminingif a company ispredominantlyengaged in financialactivities, asdefinedin section 102(a)(6) of the Dodd-FrankAct.Section 102(a)(6) provides that a company is ―predominantlyengagedinfinancial activities‖ if more than 85percent of the company‘s and itssubsidiaries‘annual grossrevenuesare derived from, or more than 85percent of the company‘s and itssubsidiaries‘consolidated assetsarerelated to, ―activitiesthat are financial in nature‖ asdefined in section4(k) of the BHC Act.Theidentificationof thescope of activitiesthat are ―financial in nature‖asdefined in section4(k) of the BHC Act is a necessaryrequirement fordeterminingwhether a company ispredominantlyengaged in financialactivitiesand, thus,iswithintheBoard‘srulemakingauthorityundersection 102(b).As noted, section 102(a)(6) refers to ―activitiesthat are financial in nature(asdefined in section 4(k) of the Bank Holding CompanyAct of 1956)).‖Section 4(k) of the BHC Act, added by the GLB Act, authorizesbankholding companiesthat qualify as―financial holding companies‖ toengagein awide range of financial activities.Section 4(k) definesas―financial‖ a list of Congressionally-authorizedactivitiesadded bythe GLB Act and activitiespreviouslyapproved by theBoardforbank holdingcompaniespursuant tosections4(c)(8) and(13)oftheBHC Act, whichare incorporatedbyreference.Section 4(k) and theBoard‘s rulesimplementingsections4(c)(8) and (13)alsoimposeconditionson the conduct of some of those activitiesforsafetyand soundnessreasonsor tocomplywithother provisionsof law.Some of the Congressionally-authorized activities for financial holdingcompanies, such as lending, overlap completely with activities that hadbeen authorized by theBoard for bank holdingcompanies.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  62. 62. P a g e | 62Others expanded theauthorization of activitiespreviouslyapprovedbytheBoard for bank holdingcompanies,such ascertain insuranceactivities, by removing the conditionsthat applyto bank holdingcompanies engagingin theactivity.Bank holdingcompaniesthat arenot financial holding companiesmayonlyengagein activitiespreviouslyapprovedbytheBoardunder sections4(c)(8) and 4(c)(13)of theBHC Act and are subjecttothe relatedconditions.While the BHC Act isclear asto thetype and scope of activitiesthat arepermissiblefor eachcategoryof bank holdingcompany, section102(b) oftheDodd-FrankAct is silent astohow the overlappingdefinitionsoffinancial activitiesand relatedconditionsincorporatedin section 4(k)should be applied in determiningwhether companiesthat are not bankholdingcompaniesare predominantlyengaged in financial activitiesforpurposesof TitleI.Becausesection102doesnot addresshow toapplytheseoverlappingandsometimesinconsistentdefinitionsof financial activitiesor how to applytherelatedconditionsincorporatedin section 4(k) in assessingthefinancial activitiesof nonbank firms, thereferencein section 102of theDodd-FrankAct tofinancial activities―asdefined in section 4(k)‖ isambiguous.As the agencywithsole authority to ―establish, by regulation, therequirementsfor determining if a company is predominantlyengagedinfinancial activities,asdefined in section 102(a)(6),‖ it is appropriate fortheBoard toresolvethisambiguity.Under Supreme Court precedent, a statutoryterm defined bycross-referenceto another statuteis not aloneevidenceof clearCongressional intent that the implementingagencyconstruethe termidentically.In Environmental Defensev. Duke Energy Corp. (―Duke‖), the Courtheld that the general presumption of statutoryconstruction ―that thesameterm hasthesame meaning whenit occurshere and there in aInternational Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  63. 63. P a g e | 63singlestatute,‖ may be overcome wherecontext indicatesthat the termwasintendedtobe construed differently.Consistent withtheCourt‘sanalysis in Duke, the Board believesthatneitherthe text, thecontext in whichthe text appears,nor thelegislativepurposeor history of the Dodd-FrankAct suggeststhat Congressintendedthat a nonbank company must engagein financial activitiesincompliancewith all theconditionsand requirementsimposed undersection4(k) and theBoard‘simplementingregulationsin order for thecompanytobeconsideredtobeengagedin therelevant financialactivity.Areadingof TitleI that limitedthe scope of companiesconsideredto be―predominantlyengaged in financial activities‖ toonly thosecompaniesthat conduct activitiesin compliancewiththe conditionsapplicabletobank holding companies wouldundermine thepurposeof TitleI and theauthoritygrantedby Congressto the Council toprotect U.S.financialstability.Definingfinancial activitiesfor purposesof TitleI to includeall of theconditionsimposedon the conduct of theactivitiesby bank holdingcompanies wouldleadto the absurd result that somecompanies that arepredominantlyengaged in financial activitiescould avoid considerationfor designation by theCouncil simplybychoosingnot to abideby one ormoreconditionsthat wereimposedonbank holdingcompaniestoensurethesafeand sound conduct of the activityor compliance withother legalrestrictionsunrelated to whetherthe activityis a financial activity.TheBoard‘sproposed approach toaddressing the scope of activitiesisconsistent with Congressional intent asreflectedin TitleI aswell thelegislativehistory of the Dodd-FrankAct.Other sectionsof TitleI support theview that Congressintendedthatcompanies could beeligiblefor designation by the Council regardless ofwhetherthesecompaniescomplied withthenon-definitionalconditionsappliedtobank holdingcompaniesintheimplementationofsection4(k).International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  64. 64. P a g e | 64For instance, section 167(a) provides that a nonbank financial companysupervised by the Board is not required ―to conform its activities to therequirementsof section 4 of the BHC Act.‖This section demonstratesthat Congressrecognized that nonbankfinancial companiesdonot conduct their activitiesin compliancewiththerequirementsapplicabletobank holding companies.It wouldbe illogicaltoconcludethat a companywould be eligible forCouncildesignation only if it conducted itsfinancial activitiesinconformancewiththe requirementsimposedon bank holdingcompanies‘conduct of financial activities set forth in section 4(k), but wouldnot berequired to conform itsfinancial activitiestotheconditionsimposed onbank holdingcompaniesbysection4(k) after beingdesignatedby theCouncil for Board supervision.In addition, theCouncil‘santi-evasionauthoritydemonstratesCongress‘sintent to givethe Council the authoritytoconsider a broad rangeofnonbank financial companiesfor designation.Section 113(c) of the Dodd-FrankAct givesthe Council the authoritytosubjectthe financialactivitiesof any company to supervisionby theBoard if the Council determines,either on its ownor pursuant to arecommendation by the Board, that:(i)thecompany isorganizedand operatesin such a manner toevadeapplication of TitleI of theDodd-FrankAct; and(ii)material financial distressrelated to, or thenature, scope, size, scale,concentration, interconnectedness, or mixof, the company‘s financial activitieswouldposeathreat tothefinancialstabilityoftheUnitedStates.Companiesthat are engagedin activitiesthat arefinancial in nature, butthat alterthemannerin whichtheyconduct thoseactivitiessuchthat theyevadedesignationby the Council under section 113and supervisionbytheBoard may be subjecttodesignationbytheCouncil under thespecialanti-evasion authorityin section113(c).International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  65. 65. P a g e | 65Thelegislativehistory of the Dodd-Frank Act demonstratesthatCongressbelievedthat thestatutorydefinition of a ―nonbank financialcompany‖ wouldmake eligible for Council designation companiesthatwerenot bank holding companies but that engaged in a broad rangeoffinancial activities.For instance, several membersof Congressindicatedthat, while in theirview designation may not be appropriatefor mutual funds, theactivitiesconducted by mutual funds, which typicallydo not conform totheprudential conditionsimposed on the investment advisory ormanagement activitiesof bank holding companies,werefinancialactivitiesfor purposesof TitleI.In addition, section165of the Dodd-Frank Act, whichsetsforth theenhancedprudential standardsapplicableto nonbank financialcompanies designatedby the Council, further illustratesthat Congressbelievedthat the activitiesof investment companies werefinancialactivities.Section 165(b)(1)(A)(i) requires the Board to imposerisk-basedcapitalrequirementsand leveragelimitson nonbank financial companiesdesignatedby the Board and certain bank holding companies,―unlesstheBoard of Governors,in consultation withtheCouncil, determinesthatsuch requirementsare not appropriatefor a companysubject tomorestringent prudential standardsbecauseof the activitiesof such company(such asinvestment company activitiesor assetsunder management) orstructure, in whichcase,the Board of Governorsshall apply otherstandardsthat result in similarlystringent risk controls.‖This statutoryrequirement indicatesthat Congressbelieved thatinvestment companyactivitieswerefinancial.Moreover,referencesin section 4(k) itself distinguishbetweenfinancialactivitiesand the conditionsimposedon thoseactivities.Among the activitiesthat section 4(k) definesasbeing ―financial innature‖ areall of theactivitiesthat the Board had determined, byregulationororder,priortoNovember12,1999,tobe―socloselyrelatedtoInternational Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  66. 66. P a g e | 66bankingor managingor controllingbanks asto be a proper incidentthereto(subjecttothesametermsandconditionscontainedinsuchorderor regulation, unlessmodified bythe Board)‖ under section4(c)(8) of theBHC Act.By recognizingthat the Board could modify the terms and conditionsintheorders and rulesauthorizingtheseactivities,section 4(k) itselfrecognizesthat thesetermsand conditionsdonot necessarilydeterminewhetherthe activityis a financial activity.Pursuant to section 4(k), an activityauthorized under section 4(c)(8) is afinancial activityregardless of theconditionsimposed by ruleor order—all of whichmay bemodified or removed.‖Onecommenter expressed support for theBoard‘sproposaltoconsiderfinancial activitieswithout regard to theconditionsimposedon theconduct of theactivitiesby bank holdingcompanieswhenconsideringwhethera company is predominantlyengagedin financial activitiesforpurposesof TitleI.Thecommenter arguedthat definingfinancial activitiesfor purposesofTitleI to includeall of the conditionsimposed on theconduct of theactivitiesby bank holdingcompanieswouldenablesome companiesthatare predominantlyengaged in financial activitiestoavoid considerationfor designation by theCouncil simplybychoosingnot to complywithconditionsimposedfor prudential or other reasonson themanner inwhichthe activitiesmust be conductedby bank holding companies.Somecommenters questioned theapproach takenin theSecond NPR totheextent that it appeared that the approachmight cover activitiesroutinelyconducted by non-financial firmssuch asmanufacturersorretailers.In thesecommenters‘view, an overly broadinterpretation of thedefinitionof financial activitiessubvertsthe―85-percent‖ testimposedbystatute.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  67. 67. P a g e | 67In the final rule, theBoard hasaddressed commenters‘concernsthatactivitiesroutinely conducted by non-financial companiescould beconsideredfinancial through restoration of some of the conditions.Description of ―Financial Activities‖In determining whetheror not to includea conditionimposedon thescopeof anactivityorthemanner in whichanactivitymaybeconducted, the Board considered many factors, includingthe informationand viewspresentedby commenters.TheBoard alsoreviewedthe statutorylanguageof section 4(k) of theBHC Act and the Board‘s releasesrelated to the activitiesthat arefinancial in nature under section 4(k).In addition, theBoard reviewed thelegislativehistory of theGLBAct, whichitselfremovedormodifiedmanyof theconditionsapplicabletotheconduct of financial activitiesby bank holdingcompaniesandfinancial holding companies.As an initial matter, the Board notesthat the onlyroleof this rulemakingis todefineactivitiesthat are financial.This rulemakingdoesnot designateanyspecific entity for enhancedsupervision under TitleI of theDodd-Frank Act. Authority todesignatean entityfor enhancedsupervision restsexclusivelywiththe Council.Thus, clarityregardingwhetherany specific entitywill be designatedunder TitleI must come from other agencies.In the Second NPR, the Board noted that thelist of financialactivitiesauthorizedunder section 4(k) included overlappingand redundantactivities, and invited comment on whetheroverlappingor redundantfinancialactivitiesshouldbecombinedorremoved, asappropriate, solelyfor purposesof determiningwhethera nonbank company ispredominantlyengaged in financial activities,in order toreducetheambiguitycreated by theseoverlapping and sometimesinconsistentactivitiesand tosimplify the proposed appendix.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  68. 68. P a g e | 68TheBoard did not receivecomment on this request, and, consistent withtheSecond NPR, the Board hasmaintainedthe completelist of financialactivitiesauthorizedunder section 4(k), includingtheoverlappingandredundant activities,in order toensurecompletenessand to avoidconfusion based on the specificstatutoryauthorityrelied on in definingan activity.Toreducethe ambiguitycreated by theoverlappingand redundantdescriptionsof financial activitiesincludedin the appendix, a companythat engagesinaparticularactivityin amannerthatdoesnot complywiththenarrower definitionof the particular activitywill be considered to beengagedin a financial activityif itsactivities arecaptured bythebroaderdescription of the activity.Thefollowingdiscussiondescribestheactivitiesenumerated in theappendixtothefinal rule that arefinancialin nature asdefinedin section4(k) of the BHC Act for purposesof determiningwhether a company ispredominantlyengaged in financial activities.Thediscussionalsoidentifiesthe conditionsimposed in section 4(k) orbytheBoard‘simplementingregulationspursuant tosections4(c)(8) and(13)that are not reflectedin the appendix becausetheywereimposed forsafetyandsoundnessconsiderationsortocomplywithotherprovisionsoflawand, thus,arenot relevant fordeterminingwhethertheseactivitiesareconsideredfinancial for purposesof determiningwhethera firm ispredominantlyengaged in financial activities.As noted previously, the final rule reinstates several conditions that theBoard proposed to remove from the definitions of financial activities intheSecond NPR.Thefinal ruleretainsall of the conditionsset forth in the descriptionoffinancial activitiesspecificallyenumeratedunder section 4(k), other thantwoconditionswithrespect totheactivityof investingaspart of abona fide underwriting or merchant or investment banking activity, andone condition with respect to insurance company portfolioinvestments, which do not define the activity itself and were imposed forsafety andsoundnessreasonsandtoensurecompliancewithotherprovisionsoflaw.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  69. 69. P a g e | 69AFew Observationsin the PrivateFund SpaceDavid W. Blass, ChiefCounsel, DivisionofTradingand Markets, U.S. SecuritiesandExchangeCommission, American BarAssociation, Tradingand MarketsSubcommittee, Washington, D.C.TheSecurities and ExchangeCommission, asa matter ofpolicy, disclaimsresponsibilityfor anyprivatepublicationor statement byanyof itsemployees.Theviewsexpressedhereinarethoseof theauthoranddonot necessarilyreflect the viewsof theCommission or the staff of the Commission.Thank you very much, Dana [Fleischman, Chair of theTradingandMarketsSubcommittee] for your kind wordsand for invitingme to speakwith you today.I havehad the great pleasure over the last year or sotoworkwith Danaand other membersof the Trading and MarketsSubcommitteeand otherABA groupson a number of initiativessurrounding one broad andoftentimestricky question:whenis a personrequired to register withtheSEC asa broker-dealer?Not exactlya prime subject for a TED Talk, but this group knowshowvitallyimportant it isto settle some of thequestionsthat havebeen openfor a decadeor more about whoneedstoregister withtheSEC asabroker-dealer.I and my staff havealready begun talkingwithyou about such perennialhitsasplacement agents,so-called―finders,‖and businessor M&Abrokers.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  70. 70. P a g e | 70Most recently, wehave had lengthydiscussionswithvariousmembers ofthissubcommitteeabout Rule15a-6,therule exemptingfrom registrationcertainnon-U.S. resident personsengaged in businessasa broker ordealer entirelyoutsidethe U.S.Thesediscussionsled the staff to publish responsesto frequentlyaskedquestionsabout therule toaddresssome of theissuesthat you have toldushavebeen a sourceof confusion.We view theFAQsasan initial set of staff guidanceabout issuesthatcommonlyariseunder Rule15a-6.Theydonot break new ground, but I believetheyare important toensuring that regulatorsand market participantsare operatingunder acommon understandingof how theruleworks.We are very much opentoexploringopportunitiesfor additionalguidancethrough subsequent FAQs.We alsohavehadbroaderdiscussionswithmanyof you about Rule15a-6, includingwhetherthere areopportunitiestomore fundamentallyupdate the rule, whichwasadopted in 1989when the globalizationof thesecuritiesmarketswasjust emerging.I approach thistopic with an open mind, and alsoa belief that Rule 15a-6should be complementary to — though not necessarily identical to — thecross-border approachthat theSEC may take with respect tothesecurity-basedswapsmarket.While Rule 15a-6 is a perennial topic, sotoo are others that we have beendiscussing with various members and committees of the ABA, as well asother interested groups.I have in mind the broker-dealerregistration requirementsastheyapplytothe group I mentioned earlier — placement agents,finders, andbusinessor M&A brokers.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  71. 71. P a g e | 71Thestaff hasbeen consideringa widespectrum of optionsfor certain ofthesemarket participants, ranging from potential recommendationsforexemptionstoworkingcollaborativelywithFINRAon a morecustomized approach for regulation of market participantswhoperformonlylimited broker functions.Thestaff‘sconsideration of this latterapproach, whichhasthe potentialbenefit of removing some barriers toentry, hasbeen greatlyfacilitatedbytheworkbeingdone for the regulation of fundingportals.Introducedby theJOBS Act, funding portalsare intended toperformlimitedfunctionsfor crowdfundingofferings.Becausetheir functionsare limited(for example, theydo not come intopossession of customer fundsor securitiesor provideinvestmentadvice), fundingportalsreceivelighter regulatory treatment, includingbeingsubject toa customized set of rulesunder FINRA‘s rulebook (ascomparedtofullyregisteredbroker-dealers)and receivingan exemptionfrom broker registration withtheSEC.Needlessto say, thestaff is continuingtothink through the appropriateregistration and regulationstructure for fundingportals, and learningfrom that experienceto seeif there areopportunities to extend theapproachto other typesof brokers whoseactivitiesarelimited.Today, I wouldlike to add a new topic of discussion that refersback toour broad theme of broker-dealer registration.Theissuearisesin theprivatefund adviserworld.Before I get started on that topic, though, please let me remind you thatmy remarks represent my own views, and not those of theCommission, anyindividual Commissioner, or any other members of thestaff.As you are wellaware,private fundshavebecome an increasinglylargepart of thefinancial marketplacein the last coupleof decades.International Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com
  72. 72. P a g e | 72Their significancewasrecognized in theDodd-FrankAct, and relatedSEC rules, whichimposenew registrationand reportingrequirementsonprivate fund advisers.Followingsuit, thestaff is putting an increasedexamination focus onprivatefund advisers, both due to the new regulatory requirementsandour own observationsin theprivate fund space.Many private fund advisersare quiterightlycoming to termswiththerequirementsunder the Investment AdvisersAct of 1940that are newlyapplicabletothem and areprobablyfocusedon recent enforcementactionsunder that Act and concernsexpressed by the SEC‘sseniorenforcement and examinationteams.While it is absolutelyright and appropriate that private fund advisersdevotetheir resourcestocomplying withthe requirementsunder theAdvisersAct, I wouldlike to be sure that the private fund advisercommunityis not overlookingsignificant areaof concern under theSecuritiesExchangeAct of1934— activitythat couldcauseaprivatefundadvisertobe required to register asa broker-dealer.ThereasonI focus on thebroker-dealerissuein thiscontext isbecauseofsomepracticesthat the staff hasobserved in connection withnewlyregisteredprivatefund advisers.This is an issuethat warrantssome attention beforeexaminersarrive.Todate, the issuehascome in twoflavors.I will describethesein more detail shortly, but the first flavor(let‘scall itplainvanilla) involvesa fund adviser that pays itspersonneltransaction-basedcompensation for sellinginterestsin a fund or that haspersonnel whoseonly or primary functionsare tosell interest in the fund.In the second flavor(a bit more unusual, saydark chocolate with a subtleinfusionof habanero), the private fund adviser,itspersonnel, or itsaffiliatesreceive transaction-basedcompensationfor purportedInternational Association of Risk and Compliance Professionals(IARCP)www.risk-compliance-association.com