Eva Dauberton
News Editor
US Federal Agencies propose new rules on incentive-based compensation arrangements
The Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Federal Housing Finance Agency, and the National Credit Union Administration (the Agencies) have issued a Notice of Proposed Rulemaking (NPR) to address incentive-based compensation arrangements, as required by section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Some context
Section 956 of Dodd-Frank mandates the Agencies, as well as the Board of Governors of the Federal Reserve System (Federal Reserve Board) and the Securities and Exchange Commission (SEC), to establish regulations or guidelines regarding incentive-based compensation practices at specific financial institutions.
This includes prohibiting any type of incentive-based compensation arrangements or any feature of any such arrangements that encourage inappropriate risks by a covered financial institution.
On 14 April 2011, they collectively published a proposal to implement section 956 of Dodd-Frank and on 10 June 2016, a subsequent proposal to implement this section.
Key takeaways
In this NPR, the Agencies are re-proposing the regulatory text of the 2016 proposed rule and requesting comments on specific alternatives and general questions. This is in light of additional supervisory experience, changes in industry practice, and other developments.
Next steps
The comment period will end 60 days after the notice is published in the Federal Register.
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SEC requests additional feedback on FINRA Rule 6730 proposals
The US Securities and Exchange Commission (SEC) has requested additional feedback on whether to approve or disapprove the proposed rule change to amend FINRA Rule 6730.
The proposed change would reduce the reporting timeframe for transactions reported to the Financial Industry Regulatory Authority (FINRA)’s Trade Reporting and Compliance Engine (TRACE) system from 15 minutes to 1 minute, with exceptions for FINRA member firms with de minimis reporting activity and for manual trades.
Some context
The proposed rule change was published for comment in the Federal Register on 25 January 2024. On 29 February 2024, the SEC extended the time period within which to approve the proposed rule change, disapprove the proposed rule change or institute proceedings under section 19(b)(2)(B) of the Exchange Act to determine whether to disapprove the proposed rule change.
Key takeaways
This order institutes proceedings to determine whether the proposed rule change should be approved or disapproved. The SEC deems the institution of proceedings appropriate, given the legal and policy issues raised by the proposal.
The SEC requests that interested persons provide written submissions of their data, views, as well as any other concerns they may have with the proposal. In particular, the SEC invites the written views of interested persons concerning whether the proposed rule change is consistent with the Exchange Act and the rules and regulations thereunder.
Next steps
Responses should be submitted on or before 17 May 2024, and rebuttal comments should be submitted by 31 May 2024.
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US Agencies issue guide on third-party risk management practices for community banks
The Federal Reserve System’s Board of Governors, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency (the Agencies) have released a guide to help community banks manage risks associated with third-party relationships.
In June 2023, the Agencies issued the Interagency Guidance on Third-Party Relationships: Risk Management (TPRM Guidance), which contained sound risk-management principles for banking organisations to consider when developing and implementing risk-management practices for all stages in the life cycle of third-party relationships.
This new guide expands on the principles discussed in the TPRM Guidance and provides potential considerations, resources, and examples for each stage of the third-party relationship. It may be a helpful resource for community banks, but it is not intended to replace the original guidance.
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SEC fines audit firm and owner $14 million for failing to comply with PCAOB standards
The Securities and Exchange Commission (SEC) has fined audit firm BF Borgers CPA PC and its owner, $14 million. Respondents were charged for deliberate and systemic failures to comply with Public Company Accounting Oversight Board (PCAOB) standards in more than 1,500 SEC filings from January 2021 through June 2023.
The SEC also charged the respondents with falsely representing to their clients that the firm's work would comply with PCAOB standards, fabricating audit documentation to make it appear that the firm's work did comply with PCAOB standards, and falsely stating in audit reports included in more than 500 public company SEC filings that the firm's audits complied with PCAOB standards.
In order to settle the SEC's charges, BF Borgers agreed to pay a $12 million civil penalty, and Benjamin Borgers, the owner, agreed to pay a $2 million civil penalty. Both respondents have also agreed to permanent suspension from appearing and practicing before the SEC as accountants.
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HKMA releases the Hong Kong Taxonomy for Sustainable Finance
The Hong Kong Monetary Authority (HKMA) has released the Hong Kong Taxonomy for Sustainable Finance (Taxonomy) to promote informed decision-making and facilitate relevant finance flows for green and sustainable finance.
The HKMA has also published Supplemental Guidance with background information, illustrative use cases, and responses to frequently asked questions to assist with the use of the Taxonomy.
Some context
In May 2023, the HKMA issued a discussion paper titled “Prototype of a Green Classification Framework for Hong Kong,” which outlined the development of a local green classification framework and proposed the structure and core elements of a prototype framework. Respondents welcomed the development of the prototype and believed that it could provide a clearer definition of green products, enhance interoperability, and mitigate the risks of greenwashing. Based on the feedback received, the prototype was refined and officially published as the Taxonomy.
Key takeaways
The Taxonomy provides financial professionals with a consistent and internationally recognised definition of “green” and “environmentally sustainable” economic activities guided by scientific principles. Specifically, the Taxonomy:
- Is interoperable, comparable, and inclusive of other green definitions globally.
- Is based on core principles that ensure its credibility, scientific approach, and alignment with all important benchmarks, including the Paris Agreement.
- Encompasses 12 economic activities under four sectors: power generation, transportation, construction, and water and waste management.
- Has three layers of depth to provide green definitions of different degrees of preciseness, taking into account the complexity of the activities and their applicability in Hong Kong circumstances.
- Maps to standardised industrial codes.
- Has key metrics and substantial contribution criteria.
Next steps
The HKMA plans to expand the Taxonomy’s coverage to include more sectors and activities, including transition activities. They will also collaborate with relevant stakeholders to promote its application and enhancement.
Separately, the HKMA will launch a beta version of a cloud-based platform soon for banks to assess the potential impact of physical risks on residential and commercial buildings in Hong Kong under different climate scenarios. This platform is part of the HKMA’s efforts to assist the banking sector in addressing data and analytical tools issues and building capabilities in climate risk management.
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MAS fines wealth and fund management company S$2.5 million
The Monetary Authority of Singapore (MAS) has imposed a composition penalty of S$2.5 million on Swiss-Asia Financial Services Pte. Ltd. (SAFS) for violating MAS’ anti-money laundering and countering the financing of terrorism (AML/CFT) requirements. Additionally, MAS has reprimanded SAFS’ Chief Executive Officer and Chief Operating Officer (COO) for failing to perform their duties and functions.
SAFS, a wealth and fund management company, experienced significant business growth between September 2015 and October 2018. However, its AML/CFT controls did not keep pace with the growth and were inadequate, resulting in multiple breaches of MAS’ AML/CFT requirements.
The breaches uncovered during MAS’ inspection included:
- SAFS failed to consider certain relevant risk factors related to the company’s customers and business activities in its enterprise-wide risk assessment (EWRA).
- SAFS failed to perform customer due diligence (CDD) measures before establishing business relations.
- SAFS failed to scrutinise multiple third-party transactions in customers’ accounts even though the transactions were not consistent with SAFS’ knowledge of the customers.
- SAFS failed to identify a number of customers as being at higher risk of money laundering or terrorism financing (ML/TF) even though there were red flags.
- SAFS failed to submit suspicious transaction reports in relation to several customers even though there was sufficient basis to do so.
- SAFS failed to conduct any internal audit to monitor the effectiveness of the company’s AML/CFT controls and compliance with regulatory requirements.
MAS’ AML/CFT requirements for capital markets intermediaries are set out in Notice SFA04-N02 on Prevention of Money Laundering and Countering the Financing of Terrorism – Capital Markets Intermediaries. Each breach of Notice SFA04-N02 is an offence punishable under section 27B(2) of the MAS Act (Cap. 186), where the maximum prescribed fine is S$1,000,000 per offence. The breach is compounded under section 176 (1A) of the MAS Act 1970.
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MAS issues notice on data submission for funds managers
The Monetary Authority of Singapore (MAS) has issued a notice regarding the submission requirements for fund data by managers of specified collective investment schemes (CIS). It applies to managers of authorised CIS, excluding REITs, and has been issued under section 101(1) of the Securities and Futures Act 2001.
Along with this notice are a data dictionary for fund managers and a data dictionary for service providers.
Key takeaways
The notice outlines both monthly and daily submission requirements, including the following information:
Monthly submission requirements
- Fund valuation and expenses: Expenses, including fees
- Investor information: Investor profile and account balance, investor categories
- Fund and share class-related information: Fund details, share class details, share class benchmarks, share class performance, and distribution
Daily submission requirements
- Fund valuation and expenses: Unit price and units outstanding
- Fund holdings: Positions and security terms and conditions
- Investor information: Investor transactions
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EBA presents its main achievement in 2023
The European Banking Authority (EBA) has published the first part of its annual report, highlighting the organisation’s achievements and activities in fulfilling its mandate and work program over the past year.
The report focuses on important deliverables for 2023, including finalising Basel III implementation in the EU, conducting an enhanced EU-wide stress test, collecting and sharing critical data assets, fulfilling digital finance and MiCAR/DORA mandates, strengthening the fight against money laundering and terrorist financing in the EU, and implementing the ESG roadmap.
By mid-June, the EBA will release a consolidated version of the annual report, providing a comprehensive overview of its activities in implementing its mandate and work program in 2023. Parts 2-5 will cover detailed information on the implementation of the EBA’s work program, budget, staff policy plan, management, and internal control systems.
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Andrea Gacki of FinCEN provides update on AML/CFT efforts
In a speech at the SIFMA AML Conference, Andrea Gacki, Financial Crimes Enforcement Network (FinCEN) Director outlined the agency's strategies to enhance transparency, combat money laundering, and counter terrorist financing within the US financial system. Gacki discussed several key initiatives, including proposed regulations targeting investment advisers and residential real estate, implementation of the Corporate Transparency Act (CTA), and ongoing efforts to implement the Anti-Money Laundering Act (AML Act). Additionally, she emphasised FinCEN's focus on targeting illicit finance activities linked to Russia and disrupting terrorist financing associated with Hamas, as well as the agency's enforcement and compliance efforts.
Investment advisers proposed rules
Gacki highlighted the significance of proposed regulations aimed at investment advisers, stressing the need to address regulatory gaps and mitigate risks posed by illicit finance activities within this sector. She cited instances where corrupt individuals and criminals exploited loopholes to access US financial assets, stressing the urgency to align anti-money laundering and countering the financing of terrorism (AML/CFT) regulations with global standards. The proposed regulations aim to establish a risk-based framework tailored to the complexities of the investment adviser sector while ensuring minimal regulatory burdens, thereby aligning with international recommendations and addressing deficiencies identified in previous evaluations.
Residential real estate and Corporate Transparency Act
In addition to proposed regulations targeting investment advisers, Gacki also discussed initiatives focusing on enhancing transparency in the residential real estate sector and implementing the Corporate Transparency Act (CTA). She emphasised the importance of greater transparency in real estate transactions to deter illicit finance activities, noting the proposed rules which aim to strengthen beneficial ownership reporting requirements for companies operating in the US. These initiatives seek to bolster AML/CFT measures, enhance regulatory oversight, and safeguard the integrity of the financial system by promoting transparency and accountability. She noted that FinCEN currently expects that financial institutions subject to customer due diligence obligations will receive access to beneficial ownership information in Spring 2025.
AML Act implementation
Gacki reiterated FinCEN's commitment to implementing the AML Act, emphasising the need to modernise the AML/CFT framework and integrate national priorities into regulatory standards. The agency aims to strengthen AML programs, foster industry collaboration, and encourage innovation to effectively combat financial crime. By aligning with the AML Act's objectives, said Gacki, FinCEN seeks to enhance risk-based approaches, streamline compliance processes, and reinforce the effectiveness of AML/CFT measures to safeguard the integrity of the US financial system. A proposed rule later in 2024 will include requirements to ensure AML/CFT programs are aligned with the National AML/CFT Priorities, issued in June 2021.
Targeting Russian illicit finance and terrorist financing
Gacki highlighted FinCEN's ongoing efforts to target Russian illicit finance activities and disrupt terrorist financing linked to Hamas. She underscored the agency's role in issuing alerts, analysing suspicious activity reports (SARs), and collaborating with law enforcement agencies to investigate and prosecute financial crimes. These efforts aim to disrupt illicit finance networks, strengthen national security, and support international efforts to combat terrorism and proliferation financing, thereby safeguarding the integrity of the global financial system.
Enforcement and compliance efforts
Gacki provided insights into FinCEN's recent enforcement actions and stressed the significance of the Anti-Money Laundering and Sanctions Whistleblower Program as a crucial enforcement tool. She highlighted the Whistleblower Program's role in incentivising whistleblowers to report financial misconduct and facilitating investigations into various illicit activities. She also addressed FinCEN's enforcement actions against cryptocurrency companies, notably the landmark $3.4 billion civil money penalty against Binance, to illustrate the agency's commitment to enforcing AML/CFT regulations across emerging financial sectors to mitigate risks and maintain the integrity of the financial system.
Value of Bank Secrecy Act data and SAR tips
The address concluded with a discussion on the value of SARs and the importance of information sharing through FinCEN's 314(b) program. She summarised some key data from SAR filings as follows.
- FinCEN received nearly 119,000 SARs from securities and futures filers between 1 April 2022 and 31 March 2024.
- This averages almost 5,000 SARs a month.
- The most frequently reported suspicious activity subtypes include Automated Clearing House (ACH) fraud, identity theft, wire transfer fraud, check fraud, and suspicious wire transfers.
- Among the top 15 suspicious activity subtypes, there were notable percentage increases in reporting from the prior year:
- Embezzlement, theft, or disappearance of funds saw a 34 percent increase.
- Elder financial exploitation increased by 63 percent.
- Activities frequently reported in the “other” free text field included "free riding," new account fraud, and money mule schemes.
- Most SARs filed during this period referenced fraud and/or some form of money laundering activity.
- About 17 percent of SARs mentioned cyber-related terms, and approximately 90 SARs referenced terms related to fentanyl.
Gacki emphasised the role of SARs in identifying suspicious activities, supporting law enforcement investigations, and enhancing compliance efforts. She ended by encouraging financial institutions to adopt best practices for SAR reporting and noted the benefits of information sharing under the section 314(b) program of the USA PATRIOT Act in detecting and preventing financial crimes, thereby promoting transparency, accountability, and integrity within the financial sector. She urged entities not yet registered and actively sharing information under this program to participate.
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Joe Longo discusses ASIC’s greenwashing approach
In a speech at the RIAA Conference Australia, Joe Longo, Chair of the Australian Securities & Investments Commission, considered the pressing issue and concept of greenwashing in sustainable finance.
Understanding greenwashing
Longo began by defining greenwashing as the practice of misrepresenting the environmental, sustainable, or ethical attributes of financial products or investment strategies. While the term may seem recent, he noted the concept has roots dating back to the 1980s, highlighting a longstanding concern in the financial industry.
ASIC's regulatory approach
ASIC's efforts to address greenwashing are firmly grounded in enforcing existing legal obligations that prohibit misleading and deceptive conduct. Longo emphasised ASIC's focus on entities that carelessly provide inaccurate or misleading statements, rather than those that transparently disclose their activities.
Central to ASIC's regulatory approach is the recognition that reliable information is essential for market integrity and informed decision-making by investors. Misleading statements about Environmental, Social, and Governance (ESG) issues not only erode trust but also contribute to the misallocation of capital.
ASIC, Longo noted, adopts a multifaceted approach to combat greenwashing, combining regulatory guidance with enforcement actions. Regulatory guidance serves as a scaffold for market participants, outlining expectations regarding sustainability-related claims. Concurrently, ASIC's enforcement actions target entities engaged in greenwashing practices, ensuring accountability and deterrence.
Longo noted the significance of internationally aligned mandatory climate-related financial disclosure requirements in enhancing transparency. Such requirements facilitate informed decision-making and support the growth of sustainability-related products and services.
Collaborative efforts
ASIC collaborates with government agencies, including the Australian Competition and Consumer Commission (ACCC) and the clean energy regulator, to address potential instances of greenwashing. Moreover, ASIC supports initiatives outlined in the Government's draft sustainable finance strategy, such as the development of a sustainable finance taxonomy and a labelling system for investment products marked as ‘sustainable’.
Compliance equals good business
Contrary to common misconceptions, Longo debunked the notion that compliance with regulatory requirements incurs a loss of profit owing to higher costs. He remarked that compliance builds trust, ultimately benefiting companies and investors alike, stating: “Let me say it plainly: a compliant business is a profitable business”. Additionally, compliance enables companies to identify and manage their own climate-related risks and opportunities effectively, to the interests of all stakeholders.
Enforcement approach
ASIC's enforcement actions against greenwashing are rooted in well-established legal obligations prohibiting misleading and deceptive conduct. Longo noted the main areas where AIC has intervened.
- Net zero statements and targets that were either made without a reasonable basis or that were factually incorrect.
- The use of terms such as ‘carbon neutral’, ‘clean’ or ‘green’, that weren’t founded on reasonable grounds.
- The overstatement or inconsistent application of sustainability-related investment screens.
- The use of inaccurate labelling or vague terms in sustainability-related funds.
Conclusion
In concluding, Longo reaffirmed ASIC's commitment to combatting greenwashing and promoting transparency in sustainable finance. He pointed out that whilst the shift towards sustainable finance represents a transformative opportunity, the ‘old’ principles of accuracy and transparency remain paramount. By fostering trust and accountability, ASIC aims to safeguard investor interests and uphold market integrity in the evolving landscape of sustainable finance.
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