3. Associate Legislation and Regulation Flashcards
IMPORTANT: What is Market Abuse?
Market abuse is a statutory offence that covers financial market manipulation and insider dealing. It is a serious offence that damages investor confidence and the integrity of financial markets.
The rules on market abuse apply to:
ARegulated individuals only
BRegulated firms only
CMembers of the public
DRegulated individuals and members of the public
D
What is a RIS?
RIS (regulatory information service), such as the LSE’s Regulatory News Service
Which of the following would not be considered market abuse?
AAn employee of a firm trades on price-sensitive information that has been disclosed through an RIS
BA firm sells a large holding of bonds, a transaction that significantly reduces the market price, and then repurchases their holding at the lower price
CA firm unintentionally submits incorrect trade details, which leads to a significant move in the market
DA firm controls a large percentage of a company’s shares and takes out a large up-bet on those shares with a spread-betting firm
A)Information disclosed through an RIS (regulatory information service), such as the LSE’s Regulatory News Service, is considered to be public information.
C may be a breach because it’s careless
Which of the following are penalties available to the FCA for cases of market abuse?
I
Restitution
II
Unlimited financial penalty
III
Withdrawal of approval
IV
Issue a public statement
A
II only
B
I and II
C
II, III and IV
D
I, II, III and IV
D
MEM & IMPORTANT: What is the max penalty for Insider Dealing? Is it a criminal or civil offence?
7 years imprisonment and/or an unlimited fine, criminal offence
MEM & IMPORTANT: What is the max penalty for misleading statements and impressions? Is it a criminal or civil offence?
7 years imprisonment and/or an unlimited fine, criminal offence
MEM & IMPORTANT: What is the max penalty for market abuse? Is it a criminal or civil offence?
Unlimited fine, civil offence
MEM & IMPORTANT: What ‘act’ deals with insider dealing?
Criminal Justice Act 1993
IMPORTANT: Name two types of behaviour that give rise to the offence of market abuse
- Insider Dealing
- Improper disclosure
They are behaviours which are likely to give a false or misleading impression of the supply, demand or value of the investments concerned
Which of the following is NOT true of insider dealing?
A It only applies to dealings via a regulated market
B Gilts are included in the law on insider dealing
C The FCA is responsible for prosecuting offences
D An exemption exists if it can be shown that the individual wouldhave acted in the same way without the information
A - Not ALL dealings - Shares, depositary receipts (ADR is an american one), warrants (rights to buy shares)
-Tradable debt (bonds, GILTs, loan stock)
-Options, futures, CFDs on shares&debt
Excludes:
-Assets with no secondary market e.g. bank account, unit trusts, collective investment schemes (ICVCs, OEICs etc)
-Commodities and commodity derivatives
-Spot and forward FX
-Insurance products
FCA can prosecute but not give criminal sanctions (i.e. send them to jail)
Which of the following gives the FCA the power to prosecute insider dealing offences?
A
Financial Services and Markets Act 2000
B
Criminal Justice Act 1993
C
The Proceeds of Crime Act 2002
D
Companies Act 2006
A -
Although the offence is contained within the Criminal Justice Act, the ability for FCA to prosecute comes from FSMA 2000.
IMPORTANT Q: Which one of the following activities is most likely to be classed as market abuse?
a) Conducting a transaction after failing togvie suitable advice
b) Carrying out a transaction which breaches money laundering rules
c) Carrying out a transaction using fictitious financial devices
d) Conducting excessive transactions in order to generate commission
C
IMPORTANT Q: What standards determine whether behaviour constitutes market abuse?
a) Those contained in approved practitioner codes
b) Those required by each individual market
c) Those set out in Upper Tribunal’s code
d) Those that are accepted market practice
D
MEM & IMPORTANT: Instruments covered under insider dealing and excluded investments
Included (all instruments that are traded on a secondary market):
-Shares, depositary receipts (ADR is an american one), warrants (rights to buy shares)
-Tradable debt (bonds, GILTs, loan stock)
-Options, futures, CFDs on shares&debt
Excluded:
-Assets with no secondary market e.g. bank account, unit trusts, collective investment schemes (ICVCs, OEICs etc)
-Commodities and commodity derivatives
-Spot and forward FX
-Insurance products
Important: Which one of the following investments is outside the scope of the insider dealing legislation?
a) Options on the FTSE 100 Index
b) Gilts traded on the LSE
c) Commodity Futures
d) Shares traded on AIM
C
Thing about excluded investments for Insider Dealing: Commodities/commodity derivatives are excluded. All others are included
IMPORTANT: Insider dealing is an offence under which legislation?
UK MAR
IMPORTANT: What are the general defences for someone accused of Insider Dealing? What are the special offenses?
General defences
- Did not expect the dealing to result in profit (or avoid loss) (intent not there)
- believed on reasonable grounds that the info had been sufficiently widely disclosed to ensure none of those taking part would be prejudiced by not being aware of the information
- Would have acted in the same way regardless of being in possession of the information (no influance)
- Did not expect the recipient to deal
Special defences
-Price stabilisation rules (we have a company issuing for the 1st time e.g. sometimes share can suffer confidence loss therefore investment bank can enter into market to secure the price)
-Market information (e.g. company thinking about taking over another but still expect company to buy up shares of the smaller)
-Market makers acting in good faith/ordinary course of business
IMPORTANT: Which one of the following general defences available under insider dealing legisation relates only to the offence of disclosing insider information?
a) The individual did not expect to profit
b) The individual would have dealt anyway
c) The individual believed the information has been widely disclosed
d) The individual did not expect anyone to deal on the information
D - this is the only one that ONLY relates to disclosing to another person
C could be personal for yourself too
IMPORTANT: Which of the following is exposed to the offence of insider dealing under the Criminal Justice Act 1993?
A A director of the company concerned acting as a broker in the shares of that company
B An employee of the company concerned who buys the company’s shares after learning of
a purchase by the Chairman
C The audit partner who sells the company’s shares after reviewing the audit file prior to
signing the annual accounts
D A shareholder acting on information contained in the company’s regular letter to
shareholders
C. Not A has he’s doing on behalf of the company
IMPORTANT: What could be seen as Market Manipulation?
-Misleading statements e.g. lying to persuade someone to deal, concealing relevent facts in takeover documents (so people don’t ahve all info to make good decisions)
-Misleading impressions (abusive squeezes (control supply and demand) and market rigging (artificial impression e.g. price positioning large fictious orders off market price to increase demand/supply)). Includes reckless imperssions or delibilerate.
-Misleading statements in relation to benchmarks (E.g. LIBOR)
Important: Defences for misleading statements and impressions (1 general, 3 special)
-General: Reasonably believed that statement or act was not false or misleading
-Special: Acted in conformity with price stabilising or
-control of information rules (e.g. if holding onto info as long as we can make sure info that was broadcast is true and fair & doesnt create false markets or gets leaked to public)
-share buy-back rules (e.g. if holding onto info as long as we can make sure info that was broadcast is true and fair & doesnt create false markets or gets leaked to public)
IMPORTANT: What is the name given to people who, in order to slow down a decline in their value, manipulate the market price of securities for a limited time?
A) Stockbrokers
b) Fund managers
c) Stabilising managers
d) Securities deals
C
Special defense under both insider dealing and misleading statements and impressions
A broker is aware that his firm is involved in takeover proceedings involving company GHI
plc. The broker receives a client order to sell all their stock ‘At best’. According to the Market Abuse
Regulation what should the dealer do?
A Take the order and execute it
B Refuse to execute the order as the firm is involved in the
corporate action
C Inform compliance that there has been a breach in the Chinese
wall
D Take the order and postpone it until after the takeover is
announced
A - the order is an unsolicited execution only, they should carry on as the client doesnt know!
MEM & IMPORTANT: Scope of MAR (market abuse regulation)- a lot larger than the criminal act (insider deals&misleading). Where can financial instruments be traded to be an offense to MAR? What other instruments are included?
-Applies to financial instruments traded, admitted to trading or for which a request to admission to trading on a regulated market, multilateral trading facility (MTF) or organised trading facility (OTF) and traded over-the-counter (OTC) if they have an affect on the price/value of the above markets.
-Applies to emissions allowance (e.g. carbon credits) as well as the usual from criminal justice act
-Commodity derivatives and commodity spot markets
Which of the following are in the scope of the market abuse regime:
IShares traded on AIM
IICopper futures traded on the LME
IIIShares on the Official List of the LSE
IVGas oil futures traded on ICE Futures
AIII
BII, III and IV
CI and III
DI, II, III and IV
D
Important: 6 behaviours that amount to market abuse
-Insider Dealing
-Improper disclosure
-Manipulating transactions (e.g. market rigging)
-Manipulating devices (combo of 3&5, get involved in dissemination in order to distort markets and then take advantage through maniputlative transaction)
-Dissemination (rumour spreading)
-Benchmarket manipulation
Important: What are the safe harbours/legitimate behaviours (a bit like defences)?
-Share buy-back schemes and stabilisation measures
-FCA rules
-Takeover Code
-Market soundings (required a formalised process e.g. insiders lists. This is when a company wants to issue shares for the first time, it appoints investment banks to assist then the bank screens a market for the shares. It canvasses to investors before investors decides, they might need more details)
When should firms report suspicions of market abuse to the FCA? (timings)
Without delay
What does the MAR PDMR (Persons discharging managerial responsibility) say?
Persons discharging managerial responsibility dealing in their own company’s shares must disclose to both their company and to the FCA within 3 business days of the transaction. They also must not deal within closed periods. These are year-end or half yearly results, close 30 days prior to the announcement.
A breach isn’t a criminal offence but disciplinary action would be taken by the FCA against the individual and/or company.
The main objective of the ‘Persons Discharging Managerial Responsibility’ (PDMR) regime is:
A To ensure the LSE is perceived to be a fair and orderly market
B To prevent directors dealing in company shares
C To restrict directors from holding shares in competitorcompanies
D To ensure that confidence is maintained in foreign markets
A - The ‘Persons Discharging Managerial Responsibility’ (PDMR) regime does not prevent directors’dealings, although it does attempt to restrict dealings during the closed periods (when there is agreater risk of insider dealing).
Which of the following best describes the purpose of the ‘Persons Discharging Managerial
Responsibility’ (PDMR) regime?
A It is designed to protect directors from the appearance of
insider dealing
B It requires directors to hold shares in their company for at least
two years
C It prevents directors from issuing shares in their company
D It prevents directors from buying shares in their company
A
When are a firm’s closed periods?
These are year-end or half yearly results, close 30 days prior to the announcement.
IMPORTANT: A company’s director was permitted to sell their shareholding during the company’s closed period. This was allowed because they:
a) Were a non-executive direection of the company
b) Were able to demonstrate extreme financial difficulty
c) Acquired the shraes more than 7 years ago
d) Acquired the shares as a result of a company takeover
B. usually anyone with managerial responsibility is restricted from dealing on their own account during the closed period before the company’s financial report is announced. The restriction may be lifted to allow a tride in exceptional circumstances such as this.
If a chair of the board in a listed company wanted to deal in the shares of her own
company, she would inform:
A The company
B HM Treasury
C The PRA
D The ESMA
A - also need to inform the FCA
IMPORTANT: A person accursed of insider dealing successfully used the ;special defence’ provisions by arguing that they were acting in the role of:
a) Market maker
b) Insolvency practitioner
c) Charity trustee
d) Execution only advisor
A) if a market maker can show that they acted in good faith in the course of their business as a market maker, they will not be deemed guility of insider dealing or encouraging another to deal.
One off transactions about what amount require identification?
EUR 7500
IMPORTANT: A market trader has acquired confidential information about a security which falls outside the scope of inside information. This is because it:
a) Was obtained in the course of their routine work
b)is not likely to affect the price of the security
c)relates to a security which is regularly traded
d)Was not obtained within the last 7 days.
B)
IMPORTANT: When producing a list of investment reocmmendations, the research department of a bank was obliged by its duty of care to disclose certain information. This was because:
a) A potential conflict of interest was identified
b) High-risk products were involved
c) The advice was aimed solely at professional clients
d) This was its initial recommendation list
A) The regulations impose a duty of care on producers of research or recommendations suggesting an investment strategy that they should employ reasonable care to ensure that they maintain objectivity but also disclose any conflict of interest that may exist in relation to that investment.
Which of the following is not an appropriate action for avoidance of a conflict of interest?
A Disclosing an interest to a client
B Relying on written conflicts of interest policy
C Declining to act for a customer
D Implementing Chinese walls in place of a personal accountnotice
D - Personal account notices cannot be substituted with Chinese walls. The personal account dealingrules are mandatory.
IMPORTANT: An order to trade is effected for illegitimate purposes and which secures the price of an investment at an abnormal level is an example of:
a) a manipulating transaction
b) A maniputling device
c) Misleading behaviour
d) Distortion
A
MEM & IMPORTANT: The 3 stages of Money Laundering. Who are most at risk of facilitating at each stage?
- Placement (proceeds of any crime placed into a bank or building society) - banks most at risk
- Layering (Payments are taken from the bank and used to buy different investments to cover the audit trail) - Investment firms/fund managers most at risk
- Integration (Money appears as a legitimate source of income) - Anyone can be at risk here. A business or property?
Graham accepts regular deposits from the director of a small overseas company. Which of the stages of money laundering could Graham find himself under suspicion of under the Money Laundering Regulations?
AIntegration
BSegregation
CLayering
DPlacement
D) think ‘deposit’. These are usually banks so could have thrown off
IMPORTANT: Name the main sources of rules and regulations governing money laundering (6)
- The Proceeds of Crime Act (POCA) 2002 (Suspected criminal things or property)
- The Serious Organised Crime and Police Act (SOCPA) 2005 (if a Spanish bullfighter with deposits in the UK can prove that the bullfighting happened in Spain (legal) and not the UK (illegal) then it can avoid criminalisation. But certain things like growing weed in california etc is still an offense in the UK so needs to be reported).
- The Criminal Finances Act 2017 (created 2 criminal offenses - uk tax evasion and foreign tax evasion).
- The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017) - (Administative provisions which firms need to implement to combat money laundering eg training requirements and firm’s obligations to check new customers)
- The Senior Management Arrangements, Systems and Controls (SYSC) Sourcebook (provides rules and guidence for authorised firms in formulating anti-money laundering prolivies, procedures and controls.)
- Joint Money Laundering Steering Group (JMLSG) Guidance (Guidence provided to firms on how they should provision for anti-money laundering. Approved by HM treasury so if a firm has adhered to guidence then the courts take this into consideration.
What does the Money Laundering Regulations say the admin processes at any company at risk of Money Laundering should implement to manage the risk?
- Risk assessment
- Policies control and procedures to mitigate and manage risk (proportionate to size and nature of the firm)
- Reliance - must conduct due diligence on any relied upon party at the start of business arrangement AND cannot rely upon customer due diligence by firms in high-risk due diligence
IMPORTANT: In order to combat the risk of terrorism, which organisation may issue a direction to firms in the financial sector?
a) Europol
b) National Crime Agency (NCA)
c) The Treasury
d) The Prudential Regulation Authority (PRA)
C
An employee of an authorised firm suspects that deposits being made by a client aresuspicious. Which of the following would allow the employee to identify funds being deposited forterrorist activities rather than funds being deposited for money laundering?
A
Knowledge of the legitimacy of the source of funds
B
The deposit is a large one-off payment made in cash
C
The transaction is communicated indirectly through a thirdparty account
D
The deposit is a result of unusual patterns of trading for theclient
A - This is the difference between terrorism and ML. The others could be terrorism or ML.
IMPORTANT Q: A UK bank receives depositis derived form an activity which is legal in another country but illegal in the UK. Under the Serious Organised Crime and Police Act (SOCPA) 2005, does this consititute a money laundering offence?
a) No, if the activity was legal in the country of origin, the deposit is legal in the UK
b) Yes, it is UK law which takes precedence in this situation
c) Not normally, but the Secretary of State may prescribe creatin offences as relevent criminal conduct in which case it must be reported
d) it will be at the discretion of the bank
C
When ensuring compliance with anti-money laundering procedures and the combating offinancing of terrorism, which (if any) should financial services firms prioritise?
A
Anti-money laundering procedures
B
Combating the financing of terrorism
C
Both are equally important
D
Combating the financing of terrorism if the proceeds are fromoverseas
C
Why does a firm have a written money laundering policy?
A
So that management can identify specific customer investmentrequirements
B
To ensure that there is a framework with which to deal withmoney laundering
C
Only where enhanced due diligence is required due to thesensitive nature of the firm’s client
D
To set out specific details in relation to the legislation providedin the Criminal Justice Act
B - Not D because Criminal justice act is Insider deal&Misleading statements rather than ML
IMPORTANT Q: An employee of a regulated business received information that made him suspicious that a breach of the Proceeds of Crime Act has occurred. Why may he have been not guilty under the ‘failure to disclose’ conditions?
a) He felt the person concerned was of good character
b) He held only a junior position
c)The information was disclosed at a friend’s birthday party
d) The incident occurred three months previously
C) One of the confitions whcih needs to be satisfied to support failure to disclose is that the information giving rise to the knowledge or suspicion came to him during the course of business in the regulated sector.
IMPORTANT: Regulated firms subject to the MLR 2017 (Money Laundering Regulations) must submit suspicious activities relating to potential ML to who? What report to they submit?
AN individual employee reports to the MLRO (Money Laundering reporting officer) who then reports to the National Crime Agency (NCA). The report is called the ‘suspicious activity report’ (SAR).
A Money Laundering Reporting Officer (MLRO) has not organised any money launderingtraining in the firm for the past 30 months.
Two new employees, who joined the firm last month, have been found to have been involved inhandling criminal funds. The criminals have since fled the UK.
Which of the following parties are the FCA most likely to prosecute?
A
The two new employees will be personally liable
B
The MLRO will be personally liable
C
The two new employees and the MLRO will be personallyliable
D
The firm will be liable as an entity
B - As an approved person, the MLRO will be prosecuted by the FCA for breach of the MoneyLaundering Regulations (MLR).
The MLRO is required to organise training at least every 24 months, and therefore the two new employees have a defence against an accusation of money laundering. They have not received thenecessary training, and thus did not know any better.
IMPORTANT: Which of the following would be an offence under the Proceeds of Crime Act 2002, Part 7 Money Laundering?
A A disclosure of suspicious activity comes to the attention of the suspected party’s solicitor who advises the suspected party
B A firm’s nominated officer suspects money laundering is occurring. However, a disclosure to the authorities could “tip off” the suspected clients at this stage and she considers it wise to delay further action by 2 weeks
C Suspicious activity is reported to a firm’s nominated officer who does not share the suspicion and therefore does not report the matter to the authorities
D A firm’s nominated officer suspects money laundering is occurring. However, she is about to travel abroad for a vital business trip and decides to delay the disclosure to the authorities by a week
D) They need to submit asap
MEM & IMPORTANT: How many years should a firm keep records of money laundering suspicions?
5 years
MEM & IMPORTANT: criminal offences for directors/senior managers and max penalties
-Failure to comply with the money laundering regulations
-Recklessly making a statement in context of money laundering which is false or misleading
BOTH (2 years and/or unlimited fine)
MEM & IMPORTANT: How often does the MLRO report to senior management?
At least once every 12 months
MEM & IMPORTANT: Five offenses linked to Money Laundering under POCA (proceeds of crime act) 2002. 4 general and 2 regulated sector offences. What’s the punishment for these offences?
General - up to 14 years and/or unlimited fine
- Concealing - conceal or disguise criminal property.
- Arrangements - being concerned in an arrangement which the person
knows, or suspects, facilitates the acquisition, retention, use or control of criminal property for another person. - Acquisition, use and possession- acquiring, using or having possession of criminal property. The person must know or suspect that the property arose out of criminal conduct
General - 5 years and/or an unlimited fine
4. Knowingly prejudicing an investigation
Regulated Sector
5. Failure to disclose/report – there is a duty on employees in the regulated sector to make reports if they know or suspect that another person is engaged in ML or terrorist financing activity. 5 years and/or an unlimited fine
6. Tipping off - It is committed if a person knows or suspects that by disclosing the information this is likely to prejudice the money laundering or the terrorist financing investigation. 2 years and/or an unlimited fine
