March 31, Peter Green, Morrison & Foerster Maria Rabinovich, Scotiabank Remmelt Reigersman, Morrison & Foerster

Transcription

1 March 31, 2015 Legal & Regulatory Panel: Evolving Issues for the Structured Investments Industry 11:50-12:30 Moderator: Joe Inzerillo, BNP Paribas Peter Green, Morrison & Foerster Maria Rabinovich, Scotiabank Remmelt Reigersman, Morrison & Foerster

2 Joe Inzerillo, BNP Paribas U.S. Peter Green, Morrison & Foerster Europe and UK Maria Rabinovich, Scotiabank Issuer KYC Canada Remmelt Reigersman, Morrison & Foerster U.S. Tax Q&A Agenda 40 Minutes

3 Agenda - Registered Investment Advisors (RIAs) in structured product distribution channel - Challenge to the Structured [Investments] Industry SPA

4 RIAs in Distribution Channel - Emerging and key distribution channel for issuers & broker-dealers (B-Ds) - RIAs typically advise clients on specific financial needs - RIAs subject to higher legal standard than B-Ds - Subject to fiduciary duties vs. suitability obligations for B-Ds - Fiduciary duty - client s best interest SPA

5 Differences with B-D? - B-Ds work directly with RIAs - not the ultimate structured product holder - Generally have discretion to make investment decisions SPA

6 FINRA & SEC Issues - Arguably decreases B-D risk - RIAs are Institutional Accounts Apply when B-Ds have RIAs as Customer Rule 2111(b) limited suitability obligations - Marketing materials are Institutional Communications (FINRA Rule 2210(a)(3)) - Not considered retail communications - Offering materials may not be required to be filed with the SEC (FWP) SPA

7 B-D Onboarding RIAs as Customers - RIAs have made meaningful progress with legal and compliance staffing - MSDA not necessarily appropriate legal document the RIA is a customer of the B-D MSDA representations not necessarily appropriate - Cont SPA

8 B-D Onboarding RIAs as Customers - Key contractual points RIA represents that it is registered with the SEC and is in compliance with applicable law (Advisers Act) RIA has the requisite authority to make investment decisions on behalf of its (respective) customers (the ultimate structured product holder) - Cont SPA

9 B-D Onboarding RIAs as Customers RIA exercising independent judgment key for RIA to be considered Institutional Account Acknowledgement that the B-D is not a fiduciary RIA representation that it is providing its customers with confirmations and offering materials SPA

10 Compensation - Disclosure Issues - RIAs are compensated for AUM Cannot double dip No commission, discount, etc. - Structured products are sold at lower price than when sold in brokerage channel - One of the few recognized exceptions for fixed price offerings SPA

11 Industry Challenge - Dealing with same criticisms in 2015 as we did in 2005 SPA

12 Industry Challenge - Industry collectively funds independent thinktank - Non-industry professionals - academics, former regulators - Effective, creditable, independent, timely and constructive responses - Publish white papers - Educate public/regulators/journalists - Stress test products - Make industry recommendations: single nomenclature, document architecture, etc. SPA

13 Peter Green, Morrison & Foerster Europe and UK

14 MiFID II Product Governance More detailed requirements on product governance than is currently the case Product approval process for each product before marketing and distribution Need to identify a target market and ensure product is distributed to target market ESMA Final Technical Advice December 2014 ESMA believes product governance rules should apply generally to all financial products but should be applied proportionately Detailed requirements for product manufacturers and distributors

15 ESMA Consultation on Complex Products Paper published on March 24, 2015 Relates to MiFID II Execution-only exemption but has wider importance Debt Instruments incorporating a structure that makes it difficult to understand the risk A structure and related risks that a retail client would be unlikely to understand Complex Instruments for this purpose include ABS/ABCP Subordinated debt Perpetual bonds Instruments with unfamiliar or unusual underlying Packaged products

16 ESMA Consultation on Complex Products Non-complex Instruments for this purpose include Covered bonds Simple step-up notes Floating rate notes Structured Deposits incorporating a structure making it difficult to understand the risk of return Can the average retail client reasonably be expected to understand the circumstances in which a return will be paid and the way in which it will be calculated?

17 Prospectus Directive Consultation Paper issued on February 18, 2015 wide ranging review A number of questions asked as to how the PD regime should be changed in the future: When should an exemption apply? Is the EUR100,000 wholesale exemption appropriate? Is the lighter disclosure regime for large denomination issues on a regulated market appropriate? Is short form disclosure regime appropriate Should the prospectus requirement be mitigated for secondary sales? Maximum length limit Should one year validity limit be extended? EU Commission Paper on Capital Markets Union published in February 2015

18 Maria Rabinovich, Scotiabank Issuer KYC Canada

19 Remmelt Reigersman, Morrison & Foerster U.S. Tax

20 Section 871(m) Update Final regulations When? Effective dates? Additional comment letters in 2015 ISDA SIFMA Chicago Board Options Exchange Investment Industry Association of Canada

21 Negative Interest Interest rates across Europe have fallen to record lows The central banks of Sweden, Denmark, and Switzerland have all lowered their benchmark deposit rates below zero in the last two months As a result, yields on certain European bonds have fallen to zero or below Last month, Nestle s corporate bonds traded at negative yields. Recently, Germany issued a five-year bond at a negative yield, while GDF Suez issued a two-year corporate bond paying zero interest In an attempt to decrease the amount of deposits held in a low interest-rate environment (and to alleviate regulatory costs of holding certain deposits), J.P. Morgan Chase recently announced it may start charging institutional clients on certain deposits

22 Negative Interest Tax Treatment There is no legal authority on the U.S. federal income tax treatment of negative interest For U.S. federal income tax purposes, the debt holder could arguably deduct negative interest paid One possible treatment of the negative interest is as a fee paid by a debt holder for the purpose of storing money somewhere safe. This fee could be deductible for the debt holder (in the case of a corporation) as a trade or business expense Furthermore, questions remain about the U.S. federal income tax treatment of negative interest paid in cross-border transactions One issue of particular concern to the securities industry is whether U.S. payors must withhold 30% U.S. withholding tax on negative interest paid to foreign businesses and individuals

23 March 31, 2015 Legal & Regulatory Panel: Evolving Issues for the Structured Investments Industry 11:50-12:30 Moderator: Joe Inzerillo, BNP Paribas Peter Green, Morrison & Foerster Maria Rabinovich, Scotiabank Remmelt Reigersman, Morrison & Foerster