Investment Management Regulatory Update - Q1 2012
Developments this quarter
Welcome to the second edition of our Investment Management Regulatory Update which summarises the regulatory developments affecting the UK investment management sector.
In this edition we cover the following key international, European and UK regulatory developments:
- Regulatory Reform Update
- Retail Conduct Risk Outlook (RCRO)
- Alternative Investment Fund Managers Directive (AIFMD)
- FSA amendments to the Listing Rules
- European Markets Infrastructure Regulation (EMIR)
- Short Selling Regulation (SSR)
- Exchange Traded Funds (ETFs)
- Foreign Account Tax Compliance Act (FATCA)
- Retail Distribution Review (RDR)
- Capital Requirements Directive (CRD 4)
- Central Securities Depositories proposal launched
- Transaction Reporting User Pack (TRUP)
- Enforcement action
In the recently published Financial Services Authority (FSA) Business Plan there was significant commentary on the changes within the regulatory regime in the UK and introduction of the ‘twin peaks’ regulatory model, which will involve dual regulation by two bodies; the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). The emphasis of the new model is described as “forward looking, pro-active, judgement based, intensive and intrusive supervision” a move away from the “old reactive style of regulation”.
The FSA has created transition plans designed to ensure an orderly and progressive transition with the internal move to ‘twin-peaks’ regulation taking place, as planned, on 2 April 2012. Dear CEO letters were sent out explaining how this will work and informing firms that they would be receiving more information from their supervisors.
The overarching objective of the PRA is to ensure the safety and soundness of firms and to avoid disorderly failure which has systemic consequences. For the FCA strategy, the overarching aim will be to ensure that markets work well by protecting consumers and protecting and enhancing the integrity of markets.
In most cases for investment management firms the changes to the supervisory approach will be focused on the core FCA themes as the FCA will typically be the sole regulator. Currently known themes include compliance effectiveness, market abuse controls, wholesale conduct of business rules and product governance.
The FSA’s RCRO 2012 was published in March 2012. It highlights the FSA’s views of the key conduct risks for different types of firms. In the publication the FSA highlighted 15 key risks which are prioritised as:
- ‘current issues’ where the risks have already crystallised with poor firm conduct already resulting in customer detriment;
- ‘emerging risks’ where there is evidence of poor conduct in firms but little or no evidence of widespread detriment yet; and
- ‘potential concerns’ where risks may emerge in the future given the effects of environmental factors and firm behaviour.
In the executive summary, Martin Wheatley - Managing Director, Conduct Business Unit FSA, asks firms to “review the RCRO and have regard to those risks which are relevant to the sector(s) in which [they] operate. [Firms] should assess whether [they have] taken sufficient action to meet the challenges represented by the risks highlighted in the RCRO.”
The key messages in this publication are:
- The FSA (and the FCA) will be adopting an increasingly interventionist approach to the retail market to prevent the widespread crystallisation of conduct risks; and
- Firms will be expected to ensure their business models are aligned with the fair treatment of customers.
In addition to risks brought about by firms’ responses to regulatory and/or legislative change, the key risks relevant to the asset management sector are:
Complexity in retail investment products and services
- Current issue - Unregulated Collective Investment Schemes (UCIS): The majority of UCIS are designed for institutional investors. However, the FSA has found that they are being inappropriately sold to categories of clients for which they were not designed. Their concerns include providers and promoters targeting UCIS at retail intermediaries in ways that encourage mis-sales later in the value chain;
- Emerging risk - Exchange Traded Products (ETPs): These products share many similar characteristics but vary in structure and risk, for example due to the type of market they invest in. Advisers and their clients may not fully understand the differing levels of risk within these products and may suffer detriment if they are sold a product unsuitable to their risk appetite.
- Potential concern - Absolute Return Funds (ARFs): There are various risks associated with ARFs and firms will need to make sure that they are compliant with regulatory obligations in relation to these products, for example in relation to the targeting of them and the explanation of their risks.
Host Authorised Corporate Directors (ACDs)
- Current concern - Firms sponsoring a new Open Ended Investment Company (OEIC) have tended to appoint another group company to perform the role of ACD. Recently, an alternative model has emerged under which the firm sponsoring the OEIC appoints an independent third party to act as Host ACD. There is a risk that relationship between the investment manager and the Host ACD may inhibit the Host ACD from providing appropriate challenge, and the Host ACDs may not price the service appropriately to reflect the legal risk that they are exposed to from the provision of the service; may not invest sufficiently in systems and controls; and may not be adequately capitalised to absorb any losses if poor oversight produces significant financial losses to consumers.
- Emerging risks - Centralised Investment Propositions: The risks arising from Centralised Investment Propositions include, for example, investment advisers not considering the suitability of the Centralised Investment Proposition or may put the client into a one-size-fits all model. Remuneration arrangements must be disclosed clearly and fairly to clients. Firms should effectively manage the conflicts of interest between any incentive the advisory firm may have to recommend Centralised Investment Propositions and the requirement to ensure that any advice is in the client’s best interest.
Investor compensation protection
- Potential concern - Customers may not be fully aware of the level of protection they are entitled to, should the investment firm that they are dealing with fail.
The AIFMD came into force on 21 July 2011 and the transposition deadline for Member States is 22 July 2013. The European Commission expects to issue the final Level 2 rules by the middle of 2012. For a summary of the themes dealt with by the Directive, click here.
This quarter has seen the issue of three papers on this Directive from the FSA, the European Securities and Markets Authority (ESMA) and Her Majesty’s Treasury (HMT). The ESMA paper is a request for feedback on Level 2 policy direction and will inform the development of Europe-wide regulatory technical standards. In the UK, the HMT and FSA papers are closely related and contain early thinking on how AIFMD will be incorporated into UK law and applied by supervisors.
On 23 January 2012, the FSA published a discussion paper setting out its provisional approach to implementing AIFMD in the UK. The FSA has estimated that over 1,000 UK firms are likely to fall within scope of AIFMD. The purpose of the paper is to engage relevant stakeholders and receive feedback, particularly in areas where the European legislation has set flexible requirements or where significant changes to UK regulation or supervisory approach will be required. The paper includes information and questions regarding the following:
- Background on the Directive and some key issues regarding implementation in the UK;
- The scope and definition of an Alternative Investment Funds (AIFs) and the treatment of small Alternative Investment Fund Managers (AIFMs);
- Operating requirements for AIFMs including general principles, organisational requirements, prudential requirements and risk management;
- Management requirements on AIFMs, such as liquidity management, use of leverage and securitisation;
- Transparency requirements including annual reporting, disclosure to investors and reporting to the FSA; and
- Requirements for marketing including passporting notifications, private placement and marketing to retail investors.
The discussion paper provides a good overview of the AIFMD, its linkages with existing UK rules and requirements and other EU initiatives. The FSA intends to publish its proposed policy positions and rules in a consultation paper in late 2012. On 23 February 2012, ESMA published a short discussion paper on key concepts of the AIFMD and types of AIFM. The deadline for responses was 23 March 2012. The objective of the paper was to collect feedback on the ESMA’s policy direction with the intention of ensuring a harmonised implementation of the AIFMD across Europe. The discussion paper addresses:
- The definition of an AIFM and AIF;
- The treatment of Undertakings for Collective Investment in Transferable Securities (UCITS) management companies; and
- The treatment of Markets in Financial Instruments Directive (MiFID) firms and credit institutions.
ESMA will take the feedback received into consideration and use it to inform a further consultation paper in Q2 2012, including formal proposals for draft regulatory technical standards on Article 4(4) of the AIFMD.
On 14 March 2012, HMT published a discussion paper on the transposition of AIFMD into UK law. The paper focuses on high-level policy decisions regarding the scope of requirements for small AIFMs.
Under AIFMD, all AIFs and their managers must register with their national Competent Authority. However Member States have the option of establishing a de minimis registration regime for AIFMs managing AIFs with assets under management below certain thresholds.
HMT is considering two options: full application of the Directive requirements to all AIFM or a lighter regime for smaller firms, differentiating between AIFMs. With regard to the latter, the discussion is focused on how FSA/ FCA should differentiate between AIFMs with suggestions including applying requirements selectively depending on the business structure of AIFs. For example, specifying that the leverage requirements required under AIFMD, which all large firms would be subject to, may only apply to firms if those firms routinely use leverage over some notional minimum level.
The deadline for responding to the discussion paper is 4 May 2012 and HMT will follow with a formal consultation this summer.
On 26 January 2012, the FSA published a consultation paper proposing changes primarily to update and clarify the Listing Rules, but also to the Prospectus Rules and the Disclosure and Transparency Rules. The changes will be directly relevant to investment management firms investing or dealing in UK-listed securities.
The proposed changes cover five areas:
- Reverse takeovers – consolidating the regime’s requirements; narrowing the scope to prevent use of the reverse takeover regime as a ‘back-door’ route to obtaining a listing; and making its requirements more proportionate.
- Sponsors - clarification of the scope of sponsor services and new sponsor obligations.
- Transactions - codify various guidance from existing technical notes; introduce concept of supplementary circulars before shareholder meetings; and abolish Class 3 transactions.
- Financial information – codify various guidance from existing technical notes; clarify other rules; and allow targets admitted to certain Multilateral Trading Facilities (MTFs) and investment exchanges to take advantage of reduced information requirements.
- Externally managed companies – introduce new restrictions on listing of externally managed commercial companies.
In addition to those areas covered above the FSA was seeking preliminary views on whether firms believe any specific changes to the Listing Rules are needed in order to further enhance the shareholder protections and overall benefits that they currently afford.
The consultation period closed on 26 April 2012. The FSA intends to publish its feedback and policy statement in the summer with implementation of the rules coming into effect shortly afterwards.
After several unsuccessful ‘trialogue’ negotiations, the European Commission, Council and Parliament finally reached political agreement on EMIR, the proposed regulation for Over the Counter (OTC) derivatives, Central Counterparty Clearing Houses (CCPs) and trade repositories on 9 February 2012. The agreed text was published on 19 March 2012.
Additionally three discussion papers were published by ESMA, European Banking Authority (EBA) and a joint paper from ESMA, EBA and EIOPA (European Insurance and Occupational Pensions Authority) on Level 2 implementing measures. ESMA also held an open hearing.
On 16 February 2012, ESMA launched a discussion paper on draft technical standards. The paper is divided into three sections which correspond to ESMA’s taskforces and include the following:
- OTC derivatives - the focus is largely on clearing obligations, risk mitigation techniques for contracts not cleared by a CCP and the approaches to exemptions;
- CCPs - this section includes detailed requirements specifying the provisions around recognition of CCPs, organisational/ reporting requirements, business continuity and margins; and
- Trade repositories - this section contains the content and format of the information which will need to be reported to trade repositories. It also covers the content of the application for Trade Repositories registering with ESMA and the data that should be made available to the relevant home country Competent Authorities.
The consultation is now closed and responses to the paper were published on the ESMA website in March 2012.
On 6 March 2012, ESMA held an open hearing on EMIR, outlining its approach to drafting technical standards and defining the three taskforces. Some of the highlights included:
- Clearing obligations – The level of granularity in determining which class of derivatives will need to be cleared (e.g. product, group level or individual) has not yet been decided. However, ESMA will use three criteria for determining whether a class of derivatives should be centrally cleared: standardisation; the liquidity of contracts; and the availability of a price reference;
- Exemptions – Regarding the threshold levels, no decision has yet been made by the taskforce. ESMA is also considering using notional values instead of market values in risk weight calculations for derivatives;
- Organisational requirements for CCPs – ESMA recognises the EMIR standards are more stringent than those proposed by the International Organisation of Securities Commissions (IOSCO) and Dodd Frank title VII but does not intend to relax them;
- Prudential requirements for CCPs – Regarding default funds, ESMA is keen to take a criteria-based approach to scenario analysis due to the varying nature of CCPs and the products they clear; and
- Collateral requirements, investment policy, stress testing for CCPs – ESMA does not envisage the use of commodities other than gold in meeting collateral requirements. When setting stress testing requirements, ESMA will take into account the wide diversity of CCP structures and models.
Also on 6 March 2012, EBA, EIOPA and ESMA published a joint discussion paper on the planned EMIR regulatory technical standards covering risk mitigation techniques for OTC derivatives not centrally cleared. The paper included proposals for and questions on capital and collateral requirements, with a particular focus on reducing pro-cyclicality in the latter. Initial and variation margin, collateral eligibility, valuation and haircuts are also covered, as well as transactions with counterparties outside the EU and intra-group exemptions.
This was published alongside an EBA discussion paper on draft regulatory technical standards regarding capital requirements for CCPs, in which EBA outlined its approach to calculating: operational expenses for winding down or restructuring of activities; and operational risk, credit risk and market risk, for which EBA favours using a similar approach to that used for banks, as set out in the Capital Requirements Directive.
The deadline for comments for both of these papers was 2 April 2012.
ESMA intends to publish a consultation paper containing the legal provisions of the draft technical standards in summer 2012. Final technical standards arising from all of these consultations will be submitted to the European Commission for endorsement in the form of Commission Regulations.
In addition to the developments in Europe several relevant papers have also been published by international standard setters this quarter. IOSCO published a final report on requirements for mandatory clearing of OTC derivatives in February 2012 and the Bank of International Settlements (BIS) published a report on collateral requirements for mandatory clearing of OTC derivatives in March 2012.
On 21 February 2012, the EU Council adopted the SSR covering short selling and certain aspects of credit default swaps. SSR is designed to introduce harmonised transparency requirements and regulatory powers across the EU, which may be used to restrict short-selling in exceptional circumstances where there is a serious threat to financial stability.
In parallel to this ESMA has been busy working on Level 2 standards, producing two consultation papers and hosting an open hearing. On 24 January 2012, ESMA published a consultation paper on draft technical standards for SSR which include:
- The details and format of the information to be provided to ESMA by regulators;
- The details around information on net short positions to be reported to regulators and disclosed to the public as well as the method of public disclosure; and
- The method of turnover calculation to determine the principal venue for the trading of a share.
ESMA published the responses it received on 14 February 2012. It published its final report on draft technical standards on short selling on 30 March 2012 and submitted them to the European Commission for endorsement on 31 March 2012.
In addition, on 15 February 2012, ESMA launched a consultation paper on draft technical advice on possible Delegated Acts for SSR. The 78 page document is divided into seven sections and includes:
- The method of determining and calculating a net short position;
- The circumstances under which a credit default swap transaction will be considered a hedging position and the method of calculating an uncovered position;
- Reporting of net short positions, including notification thresholds;
- Methods for calculating the threshold for liquidity on sovereign debt;
- Definition of what constitutes a significant fall in value for a variety of financial instruments;
- Factors that ESMA/ Competent Authorities should take into account when determining if an adverse event has occurred.
Responses to this consultation were published on the ESMA website on 14 March 2012.
Additionally, on 29 February 2012, ESMA held an open hearing on the SSR Delegated Acts, with a particular focus on the following:
- The method used to calculate net short positions and aggregate positions where different entities in a group have long or short positions;
- Uncovered CDS transactions and the potential recognition of inter Member State hedging;
- The period to be considered for setting the threshold of liquidity in relation to the issued sovereign debt for suspending restrictions on short sales; and
- Proposed percentages for “significant fall" in value set per financial instruments other than liquid shares.
ESMA published its final report on technical advice on Delegated Acts on 20 April 2012.
ESMA consultation ETFs and other UCITS issues
On 30 January 2012, ESMA published its consultation paper on draft guidelines for ETFs and other UCITS issues. In this paper ESMA proposes future guidelines relating to:
- Disclosure required in the prospectus and Key Investor Information Document (KIID) of index-tracking leveraged UCITS;
- Definition of UCITS ETFs and introduction of a UCITS ETF identifier to avoid confusion with other types of exchange-traded products;
- Disclosure requirements for actively-managed UCITS ETFs and rules for protecting investors dealing on secondary markets;
- Employment of efficient portfolio management techniques;
- Rules applicable to UCITS entering into total return swaps and the related disclosure requirements; and
- UCITS gaining an exposure to strategy indices.
The definition of ETFs is likely to be the area attracting most attention in this consultation. The closing date for comments was 30 March 2012. ESMA will take into account responses to this consultation paper in finalising the guidelines for adoption in Q2 2012.
IOSCO consultation on ETFs
On 15 March 2012, IOSCO published a consultation on the regulation of the global exchange traded fund market aimed at providing a common global approach to the regulation of ETFs.
The consultation proposes 15 core guidelines for oversight of the industry. The consultation covers regulatory principles relating to the ETF disclosure and classification, the sale and marketing of ETF shares, and structure of ETFs. It also covers issues such as market abuse and liquidity in relation to ETFs which may pose broader risks to financial stability.
The consultation closes in June 2012 and IOSCO will publish a follow up paper later in the year.
On 8 February 2012, the US Treasury and the Internal Revenue Service (IRS) released proposed regulations on FATCA, which is effective from 2013. FATCA is expected to have a significant impact on the systems and operations of both US and non-US companies.
The aim of FATCA is to prevent US taxpayers from avoiding tax payment obligations by using non-US accounts. It intends to do this through ensuring there is no gap in the ability of the US Government to determine the ownership of US assets in foreign accounts. As such, the regulations set out the process for US account identification, information reporting and withholding requirements for foreign financial institutions (FFIs), other foreign entities, and US withholding agents. FFIs that fail to enter into such agreements with the IRS to report US accounts will face a 30% withholding charge.
On the same day the US Treasury released these proposed rules, the US, UK, French, German, Italian and Spanish Governments issued a joint statement on an agreed approach to the legislation and its implementation, aiming to combat cross-border tax evasion through agreed information sharing.
The RDR, which comes into effect on 1 January 2013, is a key part of the FSA’s consumer protection strategy.
Final rules are in place for describing and disclosing status of advice (independent or restricted), adviser charging (banning commission payments) and platforms and professionalism (raising professional standards for advisers by implementing a minimum level of qualification and Continuous Professional Development requirements). The FSA guidance consultation on independent and restricted advice has recently closed and finalised guidance is likely to be published in the next quarter. Final rules on the treatment of cash rebates and on payments between providers and platforms are also outstanding.
There have been a number of papers published in the last quarter giving an indication of how the FSA is approaching the implementation and oversight of the RDR. Some of the relevant papers are covered below.
Retail Conduct Risk Outlook
As outlined above the RCRO 2012 was published this quarter. The FSA highlights the RDR and notes the interaction with EU initiatives such as MiFID II which will include new selling standards for some Packaged Retail Investment Products. The two key risks relating to RDR which are highlighted are:
- The risk that, in the transition to RDR. firms may seek to maximise their recurring revenue in a way that may lead to poor outcomes for customers; and
- Business model change following RDR, which may lead to poor outcomes for consumers, for example providers offering other incentives to advisers which may continue to bias the sales process.
This illustrates the importance that the FSA is placing on firms taking a customer-centric approach when preparing to implement the new RDR requirements.
PS12/5: Distribution of retail investments: RDR adviser charging and Solvency II disclosures
In March 2012, the FSA published a policy statement providing additional guidance in relation to the operational considerations of facilitating the payment of adviser and consultancy charges under the RDR adviser charging rules including reporting requirements for Product Sales Data (PSD) returns. For example, the policy statement gives the product provider the flexibility of returning investments upon cancellation either gross or net of any adviser charge deducted. However, the terms that the provider offers upon cancellation, where they are facilitating the payment of adviser or consultancy charges, should be disclosed to the customer.
The FSA has issued questionnaires to product providers and more recently, distributor firms to assess the progress made on implementing the RDR. It is also seeking information on the number of advisers each firm expects to have post RDR. The surveys will identify areas where the FSA can provide further guidance and support to firms in the run up to the implementation deadline.
PS12/3 – Distribution of retail investments: RDR adviser charging – treatment of legacy assets
In February 2012, the FSA published its long awaited policy statement on legacy assets and legacy commission. The paper sets out final rules which confirm the FSA’s position on banning the payment of incremental commission on pre-RDR contracts where new advice is given after the RDR comes into force. However, it also provides certainty that trail commission, agreed prior to RDR, can continue to be paid as long as certain criteria are met. Finally, the FSA also removed ambiguity in previous commentary to make it clear that where new advice is given on an existing pre-RDR contract, it does not automatically cease the continued payment of trail commission.
GC12/3 – Independent and restricted advice
In February 2012, the FSA published a guidance consultation designed to help firms with implementation of their rules and guidance on independent and restricted advice, by providing additional material on commonly asked questions. The paper provides greater clarity about the FSA’s expectations in relation to both restricted and independent advice, as well as some practical examples of how restricted firms should explain the nature of the restriction.
The paper also provides greater certainty about the FSA’s expectations with regard to use of panels, platforms, model portfolios, discretionary investment services and how firms should communicate their advice services to clients.
Distributor-influenced funds factsheets
In February 2012, the FSA issued final guidance setting out changes to the Distributor-Influenced Funds (DIF) factsheet to take account of coming rule changes under the RDR. The majority of the changes reinforce the existing rules which state that a distributor cannot receive any benefit, financial or non-financial, from the underlying fund manager for making a personal recommendation to invest in a DIF. Aligned to the above, the FSA has also stated:
“Given the inherent conflicts of interest involved, we would question whether an independent firm could meet its obligations to act in the best interests of its client and provide advice in an unbiased manner if it recommends a distributor-influenced fund.”
This sets out the FSA’s approach to independent firms who are recommending DIFs post RDR and represents an additional factor that firms will need to consider when deciding on their independent or restricted status post RDR.
EBA consultation on draft ITS on reporting of large exposures
In February 2012, the EBA published a consultation paper proposing draft Implementing Technical Standards (ITS) on the reporting of large exposures as required by Article 383 of the Capital Requirements Regulation (CRR). The proposals represent an addendum to the ITS proposal on supervisory reporting requirements published on 20 December 2011 on the EBA's website.
The aim of the draft ITS is to implement uniform reporting requirements which are necessary to ensure fair conditions of competition between comparable groups of credit institutions and investment firms. Uniform requirements will ultimately make institutions more efficient and result in a greater convergence of supervisory practices. The draft ITS will cover both compliance-related issues and concentration risk.
The current large exposures limit 10% threshold is considered to be too high to allow Member State Authorities to effectively assess and monitor concentration risk. Two options have been considered to address this: (1) introducing a lower relative threshold e.g. 2% of eligible own funds; or (2) an absolute limit complementing the existing threshold.
Firms will need to comply with these requirements from 1 February 2013.
On 7 March 2012, the European Commission launched a proposal to introduce regulation aimed at improving the settlement of securities in the EU through the Central Securities Depositories (CSDs).
The proposed regulation aims to improve the safety and efficiency of securities settlement in Europe. It is also expected to shorten the time taken for the settlement of securities and to minimise the failure of settlements. The proposal will introduce common standards across the EU for securities settlement and CSDs. The key elements of the proposal are as follows:
- The settlement period will be set at a maximum of two days after the trading day for securities traded on stock exchanges and other regulated markets;
- Market participants who fail to deliver securities on the agreed settlement date will be subject to penalties and will have to buy and deliver those securities to their counterparties;
- Issuers and investors will be required to keep electronic records of all securities and record them in CSDs if they are traded on stock exchanges and other regulated markets;
- CSDs will have to comply with strict organisational, conduct of business and prudential rules and will have to be authorised and supervised by their Member State Authorities;
- CSDs that are authorised in their home state will be allowed to passport their services to other Member States;
- Market participants can choose between any of the 30 CSDs in Europe; and
- CSDs in the EU will have access to other CSDs, trading venues, central counterparties and other market infrastructures regardless of which EU country they are based in.
The proposal has been passed to the European Parliament and the Council for negotiation and adoption.
On 1 March 2012, the FSA published the third version of TRUP. TRUP provides guidance to firms on understanding the transaction reporting obligations that come from Directive 2004/39/EC on MiFID, implemented through SUP17 of the FSA Handbook.
The purpose of Version 3 is to provide clarification on areas that firms and trade bodies have raised with the FSA and where this would help the FSA to monitor market abuse. It incorporates guidance that has been published outside of TRUP since the last version was issued. This version of TRUP also aims to:
- remove historical information that is no longer relevant; and
- update references and incorporate guidelines published by the Committee of European Securities Regulators (CESR).
The guidance in TRUP 3 was effective from 1 March 2012.
The FSA issued 42 Final Notices in Q1 2012. Of particular interest to the investment managers were the final notices issued to Greenlight Capital Inc and David Einhorn, President and sole owner of Greenlight, who were fined a total of £7.2m for engaging in market abuse.
The facts as relayed by the FSA were as follows. On 9 June 2009, Mr Einhorn participated in a telephone conference in which a corporate broker acting on behalf of Punch Taverns Plc disclosed that Punch was at an advanced stage of the process towards a significant equity fundraising. Immediately following the call Mr Einhorn gave instructions to sell the Greenlight fund’s entire holding in Punch. This resulted in Greenlight’s holding in Punch being reduced from 13.3% to 8.89% over four days. Following a fundraising announcement on 15 June 2009, Punch’s shares fell by 29.9%, meaning Greenlight had avoided losses of approximately £5.8 million.
The FSA deemed that, viewed as a whole the information Mr Einhorn had received was inside information, despite the fact that he received the information on the express understanding that he was not being wall-crossed. The FSA accepted that Mr Einhorn’s trading was not deliberate because he did not believe that it was inside information. However, it was concluded that this was not a reasonable belief given Mr Einhorn’s prominent position as President of Greenlight and given his experience in the market. Mr Einhorn was unable to rebut the presumption that he had dealt on the basis of this inside information.