Unit 3 - Association and Legislation

Question 1

Give 2 examples of criminal offence?

Give an example of civil offence

Answer 1

Criminal offence -insider dealing (against individuals NOT companies), misleading statements or impressions. Punishment is 7 years +/ or unlimited fine

Civil offence - market abuse - punishment is unlimited fine (if insufficient proof for criminal offence)

Question 2

What is insider dealing?

Answer 2

As stated in Criminal Justice Act 1993 (S52)
- Dealing/ encouraging others to deal/ disclosure of inside info

Inside info = relates to particular securities, precise info, non public and price sensitive

Question 3

What instruments are covered in insider dealing?

Answer 3

• Shares, ADRs, warrants
• Tradable debt - bonds, gilts, commercial paper, debentures
• Options, futures and CFDs ( on above eg interest rate swaps, spread bets)

When info is used for these items on a regulated market/ via professional intermediary

Question 4

What instruments are excluded from insider dealing?

Answer 4

• Assets with no secondary market e.g. bank account, unit trusts (ICVC, OIC), life policies
• Commodities and commodity derivatives
• spot and forward Fx

Question 5

What are 4 general defences that anyone can use against insider dealing?

Answer 5

1. didn’t expect the info would lead to profit/ avoid loss
2. believed on reasonable grounds that the info was already public
3. would have acted the same way irrespective of the info
4. didn’t expect the recipient to deal (only works for disclosure of material info

Question 6

What are the 3 specific defences market participants can use against insider dealing?

Answer 6

1. price stabilisation rules i.e. IB buying shares in companies they’re buying or artificially supporting share price
2. market info i.e. dealing on your own info as a company that you’re buying a smaller company
3. market makers e.g. liquidity providers i.e. they are obliged to trade at prices they see

Question 7

What are price stabilisation rules?

Answer 7

Allows managers to support price of new issues by buying it on the secondary market (i.e. market between other investors) for a limited time after their issue

Question 8

Who enforces insider dealing rules?

Penalty?

Answer 8

• LSE monitor transactions (publish it through primary info providers who share it publicly)
• FCA prosecute (max penalty is 7years or unlimited fine)

Question 9

What are 3 misleading statements and impressions that are criminal offences?

Answer 9

• S89 - misleading statements
• S90 - misleading impressions (both recklessly and on purpose)
• S91 - misleading statements in relation to benchmarks

Question 10

Give 2 misleading statements and impressions defences?

Answer 10

General - believed info wasn’t false/ misleading
Specific - price stabilisation rules / control of info rules (i.e. holding on to it to make sure it’s true)/ share buy back rules

Question 11

What are market abuse offences?

Answer 11

• engaging or trying to insider deal
• recommend someone else to insider deal
• illegally disclosing insider info
• doing/trying to engage in market manipulation

Question 12

What is the purpose of market abuse regulation
What is the scope of market abuse regulation?

Scope of market manipulation specifically?

Answer 12

Purpose - measures to prevent market abuse + ensure integrity across EU financial markets. Set maximum fines

1) Financial instruments traded/ admitted to trade/ request for admission to trade on relevant markets:
- regulated markets/ MTF/OTF
- OTC trades which affect price of above

2) Emissions allowance - e.g. carbon credits

Market manipulation - commodity derivatives, commodity spot markets

Question 13

What is the FCA Market conduct handbook?

Answer 13

Guidance on:

1. Behaviour that is market abuse and not
   - insider dealing/ improper disclosure
   - market manipulation: manipulating transactions/ spreading info/ manipulating devices (i.e. spread info and then act on it)/ benchmark manipulation
2. types of regulated sanctions
   - takeaway regulated status/ unlimited financial penalties/ public statements/ applying to courts for injunctions or restitutions

Question 14

What are legitimate behavior that may result in market abuse?

Answer 14

1. share buy back programmes and stabilisation measures
2. following FCA rules
3. following Takeover code
4. Market soundings - e.g. with IPO may need to share insider info but this requires formalised process, notifications that it’s confidential info, record keeping (insider lists)

Question 15

How do you reports suspicions of market abuse?

Answer 15

Suspicious transactions and order reports (STORs)
- including transactions/ unexecuted orders
- without delay as soon as suspicious

Question 16

How are managers transactions held accountable?

Answer 16

• Persons discharging managerial responsibility (PDMRs) regime states managers should disclose to company and FCA when trading own company shares
• within 3 business days
• closed periods = 1m prior to YE / half yearly results PDMRs shouldn’t deal
• breach = civil offence against person/ company
• this includes all publicly traded companies not just regulated

Question 17

Where can you find info on on the money laundering control framework?

Answer 17

1. Proceeds of crime act 2002 - sets out ML related to crime = an offence + must report suspicions
2. the money laundering regulations 2017 - sets out admin for companies at risk of money laundering/ terrorist financing
3. SYSC - high level guidance for authorised firms + refers to JMLSG guidance
4. Joint money laundering steering group guidance - guidance on how to implement non money laundering provisions (approved by treasury)

Question 18

What are the 3 stages of money laundering as detailed in proceeds of crime act?

Answer 18

1. Placement - putting criminal money/assets into a bank
2. Layering - money taken from bank and used to buy different investments/ other country = separates money from its criminal source
3. Integration - now money looks legit and used for anything

Question 19

Who’s most at risk in the 3 stages of money laundering?

Answer 19

1. Placement - banks
2. Layering - investment firm e.g. fund manager
3. Integration - anyone

Question 20

What are the money laundering regulations?

Answer 20

PRaDER
1. must conduct risk assessment on possibility of ML/ terrorist financing for firm

2. policies to mitigate and manage risk proportional to the size of the firm. Need to have director responsible (different to SYSC bc this applies to all firms not just authorised firms)
3. careful who we rely on (conduct DD on any relied upon party, especially by firms in high risk places, have to do their own)
4. Customer DD
   - Identify customers/ company (ownership + control structure)
   - enhanced DD for PEPs, high risk factors
   - simplified CDD case by case e.g. may happen listed companies/ authorised firms but needs to be on case by case basis
5. Education for employees
   - law on ML + combating financing for terrorism (CFT)
   - Report to MLRO > National crime agency inc. if they can’t get enough info to verify customers
6. Record keeping - 5yrs

Question 21

What examples might require enhanced DD?

Answer 21

• dual trading instruments that can be used for e.g. weapons and energy
• correspondant banking rs = bank provides another bank a service usually in high risk country
• PEPs
• complex/ large transactions where no apparent economic/ legal purpose

Question 22

What are the criminal offences for directors/ SM relating to money laundering?

Answer 22

1. Not complying to regulations (irrespective of if ML actually occurs) > 2yrs in prison +/ or unlimited fine
2. Making false/ misleading statements regarding ML > 2yrs in prison +/ or unlimited fine

Question 23

What are the offences detailed by proceeds of crime act (POCA) for money laundering?

Answer 23

1.General offences (can be committed by anyone)
- hiding/ helping/ acquiring ML > 14 yrs +/ or unlimited fine
- knowingly prejudicing an ix > 5 yrs +/ or unlimited fine

2. Regulated sector offences (reg. financial services)
   - not reporting ML > 5 yrs +/ or unlimited fine
   - tipping off 2 yrs +/ or unlimited fine

Question 24

Who is the joint money laundering steering group?

Answer 24

Combo of UK trade associations including British bankers association - set out guidance on implementing ML regulations

Question 25

What are the JMLSG guiding principles? What are the JMLSG risk mitigation approach?

Answer 25

What are the JMLSG guiding principles 1. verify customers before acceptance + ongoing basis 2. adequate staff training 3. prompt reporting What are the JMLSG risk mitigation approach - allocate responsibilities of above to specific persons - document everything e.g. evidence of EDD - client verification records kept 5yrs from date account closed - following them usually protects them from discipline

Question 26

Difference between MLRO and nominated officer? What firms dont need MLRO?

Answer 26

MLRO - specific to financial services - senior manager function therefore an approved person that must undergo fit and proper test. Must report to SM every year. Nominated officer - required by proceeds for crime act, terrorism act and MLR (usually called MLRO) Exceptions to MLRO - sole trader, general insurance firms, mortgage intermediaries

Question 27

What is the objective of the national crime agency? Who are the led by? Report to?

Answer 27

- tackle organised crime - defend UK borders - fight fraud - protect young people Led by senior chief constable Report to Home Secretary

Question 28

What does the Terrorism act 2000 and anti-terrorism crime security act 2001 state? Punishment?

Answer 28

Must report suspicions of use of funds/ ML terrorist funds Failure to do this > 5 yrs/ unlimited fine

Question 29

Purpose of the counter terrorism act 2008?

Answer 29

Extra powers to HM treasury to - increase ID requirements for customers - get firms to submit reports to them directly (without court permission) - limit/ stop business (if financial action task force requires or if HMT thinks significant national risk)

Question 30

How do you separate ML and terrorist financing?

Answer 30

ML - any benefit (money or otherwise) that comes from crime Terrorist financing - small amounts of money, could come from legit source

Question 31

What does the bribery act (2010) state? Penalties?

Answer 31

1. pay bribes - money to change outcome in my favour 2. receiving bribes 3. bribing foreign official (unless local written law states payment must be made) 4. failing to prevent bribery (unless proof of adequate procedures to prevent it) Penalties - Person - 10 yrs/ unlimited fine - Company - unlimited fine

Question 32

What does the data protection act state? What data does it apply to?

Answer 32

1. processing must be lawful + secure 2. purpose of processing must be specific, not excessive, accurate, 3. shouldn't be kept for longer than needed applies to personal data (can be used to identify a living person)

Question 33

What are the EU transparency directive?

Answer 33

Disclosure thresholds: 5%, 10%...50%, 75%

Question 34

What are UK disclosure rules recording % ownership?

Answer 34

UK = Disclosure and Transparency Rules: 1. Above 3% 2. then next whole % i.e. from 2.9 > 3% Must disclose within 2 business days 3. For fund managers it's 5%, 10% 4. Exemptions - market makers < 10%, custodians of shares, shares held as collateral

Question 35

What can a company do if they think there's a notifiable interest on their shares?

Answer 35

Send out a Companies act S793 letter (enquiry notice) to get - shares held rn + last 3 years

Question 36

What's included in notifiable interests?

Answer 36

- own shares - spouse shares - shares of a company that you own at least 1/e - your childrens shares - concert parties (i.e. agreement between at least 2 parties to influence a company together, if together they own >= 3% this = notifiable = Connected parties

Question 37

What is the takeover code? Who administers it? Difference to competition and markets authority?

Answer 37

- Principles on how a takeover should happen - takeover panel - aim is to protect shareholders, markets and company CMA = look at if M&A is fair for customers

Question 38

What are the 6 principles of the takeover code?

Answer 38

Shade told Barry be careful Fr 1. all shareholders = equal 2. shareholders given sufficient time + info to decide 3. target acts in best interests of company (inc. employees) 4. target business affairs arent disrupted 5. predator only bids if it can afford it - must be able to make any cash payments in FULL 6. doesnt create false markets (must disclose)

Question 39

What is the principle under the takeover code for predators that have > 30% influence over the voting rights a of a company?

Answer 39

If it gets any more influence then it must make an offer for all remaining shares

Question 40

Answer 40

2 types of market reports 1. Trade reports - Equity and non-equity trades on any regulated trading venue (regulated markets, MTF/ OTF) - to create transparency (as part of MIFID) - either senior manager/ selling firm reports to exchange - automatic/ <3 mins if within trading hours/ before start of next trading period if after trading hours 2. Transaction reports - market surveillance (looking for market abuse / insider dealing) - both parties report to regulator through approved reporting mechanisms e.g. UnaVista or TRAX - by end of next day

Question 41

What are the other reporting regulation? 1. European markets infrastructure regulation 2. Short selling reg 3. Securities financing transactions reg

Answer 41

1. European markets infrastructure regulation - Report OTC derivatives > trade reports to trade repositories. Clear certain OTC derivatives through CCP and adopt risk management procedures 2. Short selling reg - only net short positions - private reporting unless large 3. Securities financing transactions reg - if you use securities to finance a transaction (swap shares for money with idea of buying back) > trade repositories - must also disclose of securities are then used for another purpose - only applies to financial services in UK

Question 42

How do regulators ensure firms have financial prudence?

Answer 42

Use capital requirement directive based on basel framework 1. ID credit, market and operational risk > quantify i.e. min capital requirement 2. discuss with reg on wither additional capital is needed 3. disclosure of risk and risk management taken to standardize process THEN regulator suggests capital adequacy requirement which authorized firms must have more capital than this requirement (must notify if falls below/ to requirement)

Question 43

How are the following defined according to the takeover code? Dealings Acting in concert Interest in shares Relevant securities

Answer 43

1. Dealings - buying and selling of securities or derivatives 2. Acting in concert - buying shares with others to get get / consolidate control inc. - company and its directors/ group companies - company + its pension funds - fund manager and it's managing investments - client + its professional advisors 3. Interest in shares - own/ have rights to/ through derivatives (EXCLUDES SHORT POSITIONS) 4. Relevant securities - securities of target/ predator (which carry voting rights/ conversion rights/ subscription rights) - equity share capital (i.e. capital raised by issuing equity)

Question 44

What is the purpose of financial action task force?

Answer 44

1. sets international trade standards to prevent ML and terrorist financing (not law) 2. help authorities with cases on drugs/ human trafficking etc

Question 45

Who does the Data Protection Act record info with? Who implements Freedom of information act?

Answer 45

The information commissioner's office

Question 46

What is the threshold for needing to ID customers for one off transactions according to ML regs?

Answer 46

One off transactions above €7500 require identification

Question 47

Purpose of FSMA 2000? Purpose of the companies act 2006?

Answer 47

FSMA 2000 - gives regulatory powers to FCA/PRA CA - Allows companies to audit their shareholder register

Question 48

What evidence is needed to identify a new customer under ML regulations?

Answer 48

- gov-issued document (without pic) that has their full name - supported by 2nd doc that has full name + address/ DOB

Question 49

Difference between POCA/ CJA/ MAR?

Answer 49

1. POCA - ML + not disclosing offences 2. CJA - insider dealing is a crime. FCA can prosecute (bc of rules in FSMA)