CUBE RegNews: 3rd November

A selected summary of key developments for regulated financial institutions

Greg Kilminster

Greg Kilminster

Head of Product - Content

FCA publishes crypto guidance

Following the implementation of the Financial Conduct Authority’s crypto marketing regime on 8 October 2023 – swiftly followed by an enormous number of warnings issued to crypto firms – the regulator has found it necessary to issue additional guidance to crypto firms to remind them of their responsibilities. The new guidance does not create any additional obligations and indeed notes that “the Guidance need not be followed to achieve compliance with the relevant rule or requirement. However, if a person acts in accordance with this Guidance in circumstances contemplated by the Guidance, we will treat that person as having complied with the rule or requirement to which that guidance relates.” 

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RBC fined $6 million for internal accounting control failures

The Securities and Exchange Commission (SEC) announced that the Royal Bank of Canada, the country’s largest bank, will pay a $6 million penalty to settle charges related to violations of securities laws in its accounting for internally developed software costs. 

The SEC’s order reveals that from 2008 to 2020, the bank’s accounting controls failed to accurately account for the costs of internally developed software projects. The bank applied a uniform rate for capitalisation without a reliable method to determine the appropriate rate, resulting in the improper capitalization of certain costs. 

While the bank neither admits nor denies these findings, it has agreed to a cease-and-desist order, refraining from future violations of these provisions. Additionally, the bank will pay a $6 million civil penalty, offset by amounts paid to Canadian regulatory authorities for the same conduct. 

Click here to read the full RegInsight on CUBE’s RegPlatform

SEC charges compliance officer with fraud 

The Securities and Exchange Commission (SEC) has brought charges against John Hughes, the President and Chief Compliance Officer of registered investment adviser Prophecy Asset Management LP. The charges stem from Hughes’ involvement in a multi-year fraud scheme that concealed losses of hundreds of millions of dollars from unsuspecting investors. 

Prophecy Asset Management managed multiple hedge funds and boasted an impressive $500 million in reported assets under management. The SEC’s complaint paints a picture of alleged deceit and manipulation by Hughes and his associates at Prophecy Asset Management. They are accused of misleading the funds’ investors, auditors, and administrator about the funds’ trading practices, risk, and performance, all while collecting more than $15 million in fees. 

At the core of the allegations is Hughes’ supposed misrepresentation of the safety of investors’ capital. According to the SEC’s complaint, he led investors to believe that their investments were well-protected, assuring them that the funds’ capital was diversified among dozens of sub-advisers who traded in liquid securities and had cash collateral to offset potential losses. In reality, most of the funds’ capital was funneled to one sub-adviser who incurred massive trading losses that exceeded the available cash collateral. Furthermore, Hughes caused the funds to invest in highly illiquid assets, resulting in substantial losses. To cover up these losses, Hughes is alleged to have fabricated documents and orchestrated a series of deceptive transactions to obscure the actual financial state of the funds. 

The complaint also contends that Hughes intentionally misled investors about the diversification and trading strategies in two other funds. As of 2020, after losses in Prophecy Asset Management-managed funds had swelled to over $350 million, Hughes and the company took the extraordinary step of indefinitely suspending investor redemptions. 

Click here to read the full RegInsight on CUBE’s RegPlatform

SFC circular on tokenised securities

Hong Kong’s Securities and Futures Commission has issued a circular to provide more guidance on tokenised securities-related activities. The circular focuses on providing guidance to intermediaries in addressing and managing new risks arising from the use of new tokenisation technology so that the tokenisation marketplace can be developed in a healthy, responsible and sustainable manner. It also covers issuance and dealing in or advising on tokenised securities. 

Click here to read the full RegInsight on CUBE’s RegPlatform