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Monday February 4 2013 Top 10 Risk Compliance News Events

Monday February 4 2013 Top 10 Risk Compliance News Events

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Published by George Lekatis
International Association of Risk and Compliance Professionals (IARCP)
http://www.risk-compliance-association.com

Every Monday
Top 10 risk and compliance management related news stories and world events
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International Association of Risk and Compliance Professionals (IARCP)
http://www.risk-compliance-association.com

Every Monday
Top 10 risk and compliance management related news stories and world events
Do you want to receive (at not cost) every Monday the Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week's agenda, and what is next?
You can register at:
http://www.risk-compliance-association.com/Top_10_Risk_Compliance_Management_Stories_Events.html

Receive the New Member Orientation Newsletters
You will have the opportunity to learn (at not cost) what members registered before you have already learned. Understand better risk and compliance management, projects, careers, challenges and opportunities.
You can register at:
http://www.risk-compliance-association.com/New_Member_Orientation_Newsletters.html

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International Association of Risk and Compliance Professionals (IARCP)
1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.risk-compliance-association.com

Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week's agenda, and what is next

Dear Member, If you want to have only the presentations of the Certified Risk and Compliance Management Professional (CRCMP) program, you can have them (at $97 instead of the $297 of the full program). To learn more: www.risk-compliance-association.com/Distance_Learning_and_Certific ation_CRCMP_Presentations.htm _____________________________________________________________ Do you know any zombie managers?

Unfortunately, I do.
I heard you… You asked: “What is a zombie manager George?”

Simple: A zombie manager is a manager that is also a zombie…
No, wait; we have a better official definition. According to Bruce Karpati, Chief, SEC Enforcement Division's Asset Management Unit, U.S. Securities and Exchange Commission: “Zombie funds” (or more accurately, “zombie managers”) result when private equity holdings are not designed for quick liquidity.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Since zombie managers are unable to raise new capital, their incentives may shift from maintaining good relations with their investors to maximizing their own revenue using the assets that they have. Being a zombie manager in and of itself is of course not unlawful and most zombie managers will continue to act in the best interests of their investors. However, given the incentives to favor their own interests, we believe that there will be some problematic conduct and possible violations of the law. Read more at Number 7 of our list. Michel Barnier, the European Commissioner for Internal Market and Services, said that the EU and U.S. should implement the Basel measures in parallel, starting in the “first weeks of 2014.” Mr Stefan Ingves, Governor of the Sveriges Riksbank and Chairman of the Basel Committee on Banking Supervision, also said that: 1. There is a material variation in risk weights for trading assets across banks (after adjusting for accounting differences and for differences in the riskiness of different bank portfolios) 2. Certain modelling choices seem to be major drivers of the variation in risk weights 3. The quality of existing public disclosure is generally insufficient to allow users to determine how much of the variation in reported risk weights is a reflection of underlying risk taking, and how much stems from other factors (eg modeling choices, supervisory discretions).

Read more at Number 1 below.
Welcome to the Top 10 list.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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From ideas to implementation
Remarks by Mr Stefan Ingves, Governor of the Sveriges Riksbank and Chairman of the Basel Committee on Banking Supervision, at the 8th High Level Meeting organised by the Basel Committee on Banking Supervision and the Financial Stability Institute and hosted by the South African Reserve Bank, Cape Town

Protecting Investors by Seizing the Opportunity to Strengthen Audit Quality
Jeanette M. Franzel, PCAOB Member American Accounting Association Midyear Conference and Doctoral Consortium , New Orleans, LA

EIOPA Multi-Annual Work Programme 2012-2014
EIOPA is an independent European Supervisory Authority acting within the scope of various Directives covering insurance and reinsurance undertakings, institutions for occupational retirement provision and insurance intermediaries as well as related issues not directly covered by these Directives.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Recent policy developments for strengthening the resilience of the financial sector
Welcoming remarks by H E Sultan Bin Nasser Al-Suwaidi, Governor of the Central Bank of the United Arab Emirates, at the 8th High-Level Meeting for the Middle East & North Africa Region on “Recent policy developments for strengthening the resilience of the financial sector”, organized by the Basel Committee on Banking Supervision (BCBS), the Financial Stability Institute (FSI) and the Arab Monetary Fund (AMF), Abu Dhabi.

Suitability Requirements With Respect To the Distribution of Complex Financial Products Final Report
In February 2012, the IOSCO Technical Committee published a Consultation Report, entitled Suitability Requirements with respect to the Distribution of Complex Financial Products (the Consultation Report).

President Obama discusses his nomination of Mary Jo White to lead the Securities and Exchange Commission and Richard Cordray to continue as Director of the Consumer Financial Protection Bureau.
_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Private Equity Enforcement Concerns
By Bruce Karpati, Chief, SEC Enforcement Division's Asset Management Unit, U.S. Securities and Exchange Commission, Private Equity International Conference New York, N.Y.

Recommendation on the development of recovery plans
The attached recommendation on the development of recovery plans is based on the duty of the European Banking Authority (EBA) according to Article 25 (1) of Regulation EU No. 1093/2010 (hereinafter referred as “EBA regulation”) to contribute to and participate actively in the development and coordination of effective and consistent recovery and resolution plans.

Review of Requirements on Investment Activities of Insurers Important parts
MAS adopts a principles-based approach on the regulation of the investment activities of insurers.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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FSA statement on Basel III rules on capital requirements for exposures to CCPs
In July 2012 the Basel Committee on Banking Supervision (BCBS) agreed a revised Regulatory rules text on the capital requirements for bank exposures to central counterparties. These rules set out the capital treatment for bank exposures to qualifying central counterparties (QCCP). A QCCP is defined as 'an entity that is licensed to operate as a CCP (including a license granted by way of confirming an exemption), and is permitted by the appropriate regulator/overseer to operate as such with respect to the products offered.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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From ideas to implementation
Remarks by Mr Stefan Ingves, Governor of the Sveriges Riksbank and Chairman of the Basel Committee on Banking Supervision, at the 8th High Level Meeting organised by the Basel Committee on Banking Supervision and the Financial Stability Institute and hosted by the South African Reserve Bank, Cape Town

Introduction
Let me begin today by thanking Josef Tošovský, Chairman of the Financial Stability Institute, for organising the latest in its series of High Level Meetings. The Basel Committee continues to view these events as extremely important, as they bring together senior policymakers and supervisors in a forum in which we can share thoughts on critical issues of the moment and reflect on long term challenges. Let me also extend my thanks to the South African Reserve Bank for its superb hospitality as the annual host of this High Level Meeting. Change and reform – new ideas and new ways of doing things – can be challenging in good times. When all is well, the perceived need is low and the costs – including opportunity costs – are difficult to justify. Even small ideas can be difficult to implement. Crises, on the other hand, provide a catalyst for fundamentally rethinking past practices.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Many banks have learnt this as a painful lesson in recent years: when times were good, potential operational, risk management and cultural deficiencies were not examined closely enough. When serious problems emerge, however, there is a demand for new ideas and new ways of doing things: the status quo becomes unacceptable. Of course, the same scenario has applied to the regulatory framework more broadly. Pre crisis, any call for stronger capital and liquidity rules was generally howled down as burdensome and unnecessary. Post-2008, the costs of a weak regulatory framework have been all too obvious and painful for the banking sector, and as a result the demand for new ideas was immediate and forceful. My theme for today is that successful regulatory reform is about ideas and implementation. Certainly, we needed to rethink the regulatory framework in light of what we have learnt from the past five years – the status quo was not acceptable. But if we want to be successful, the Committee also needs to make sure that the ideas we developed into Basel III are truly put into practice.

From ideas ….
The Basel Committee’s response to the financial crisis was to recognise that policy weaknesses contributed to the excesses that built up in the financial sector. A substantial overhaul was necessary: minor adjustments to the framework were not going to be enough. We needed some big, new far-reaching ideas. In summary, we decided that it was necessary to:
_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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• require banks to maintain substantially higher levels of capital, with the minimum common equity requirement increasing from 2% to 7% of risk weighted assets; • require banks to hold higher quality forms of capital, with common equity at the core of the requirements, and standards to ensure other types of capital instruments are truly loss-absorbing. It is worthwhile emphasising that these reforms also go a long way to simplifying banks’ capital structures, as well as making them more transparent and comparable; • introduce an additional capital buffer (the capital conservation buffer) designed to enforce corrective action when a bank’s capital ratio deteriorates. The capital conservation buffer allows banks to dip into their capital reserves, while at the same time providing disincentives for banks to do so due to the restrictions it imposes on dividend and bonus payments; • add a macroprudential element in the form of the countercyclical buffer, which requires banks to hold more capital in good times to prepare for inevitable downturns in the economy; • supplement the risk-based regime with a simple backstop in the form of a (non-risk based) leverage ratio; • impose additional capital requirements on systemically important banks – both global and domestic – to take account of the externalities their failure would impose on society; and • introduce the first international standards for bank liquidity and funding, designed to promote the resilience of a bank’s liquidity risk profile to both short term liquidity shocks (the Liquidity Coverage Ratio – LCR) and longer-term mismatches in funding (the Net Stable Funding Ratio – NSFR).

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Of course, there are plenty of other big ideas being floated on how the banking industry should be restructured in the aftermath of the crisis, particularly those related to varying models of structural separation (eg the ideas of Volker, Vickers and Liikanen). But for those that fall within the mandate of the Basel Committee, we believe that the ideas produced by Basel Committee thinking – translated into the Basel III reforms, and subsequently endorsed by the G20 and Financial Stability Board – provide a substantial foundation on which the banking system can be rebuilt to be much more robust and resilient in the future. Basel III capital requirements are probably well known to all of you, so I do not propose to say much more about them today. What I would instead like to focus on is our thinking in relation to liquidity, and particularly the LCR. As an idea, it is simple: a bank should have enough liquid assets to survive a 30-day period of stress. And perhaps to some, it might seem underwhelming. If you tell your spouse that we have implemented a reform that requires banks to have enough cash to last 30 days, more than likely you will get the same response I did when I tried to explain it to my wife: “what do

you mean, only 30 days?”

Yet this idea has been one of the most fundamental reforms of the crisis. It also is a classic example of an idea that had been toyed with for a long time, but took a crisis to bring to fruition. A study of Basel Committee history shows liquidity to have been on the agenda almost for the entire existence of the Committee, but we have never come close to an international standard. Basel III has changed that.
_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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So even though the LCR is “only 30 days of cash”, its significance should not be underestimated. As you would be aware, the focus of the Committee over the past two years has been on refining the formulation of the LCR announced in 2010. Given this is the first time the international community had developed a global liquidity standard, it was agreed that it should be subject to an observation period, during which it could be adjusted as a result of further analysis and assessment. The aim of the observation process was not to further tighten or weaken the standard: the goal was purely to ensure the calibration was more reflective of empirical evidence and appropriate for implementation as a minimum standard, across the Committee’s 27 member countries and more broadly. The changes agreed to by the Committee focus on three main areas: • High quality liquid assets (HQLA): A diverse and sufficiently large stock of HQLA is essential to help banks withstand liquidity stress. The revised definition now provides limited recognition of additional assets such as a broader range of corporate bonds, a selection of listed equities, and some highly-rated residential associated with such assets, their inclusion in the stock of HQLA is subject to a relatively low limit as well as significant “haircuts”. The Committee has tried to balance the benefits of greater diversification of the liquidity pool against the cost of including slightly lower quality assets. • We have also changed some of the assumed inflow and outflow rates that determine the size of the pool of liquid assets that a bank is required to hold.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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• As in the case of the capital conservation buffer, the standards now make very clear that liquidity is to be built up and maintained in good times so that it can be used in times of need. In other words, liquidity is not useful if it is frozen. In addition, in light of the considerable stress facing banking systems in some regions of the world, the Committee revised the implementation plan of the LCR by introducing a phase-in arrangement. The LCR will come into force as planned in 2015, although banks now will have until 1 January 2019 to meet the standard in full. Nevertheless, I expect many banks will choose to move to the higher standard more quickly. In announcing the revisions to the LCR, many headline writers categorised it as some kind of win for the banking industry over the regulators. This is simplistic. We had an observation period for good reason: to make sure we got the settings right. There was, I think, legitimate concern that, as a minimum standard, the 2010 formulation of the LCR may have been calibrated too conservatively overall. For example, the treatment of traditional retail and commercial banking was probably too harsh, and this has been adjusted. Equally the treatment of derivative-related risks was probably too weak, and so that has been adjusted too. Much has been made of the inclusion of RMBS in the definition of high quality liquid assets, but the eligibility criteria are tight and the initial
_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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perception that the Committee had granted carte blanche to the securitisation sector is well wide of the mark. As the Chairman of the Basel Committee’s governing body, Governor King of the Bank of England, said when announcing the full set of changes, they are designed to make the LCR “more realistic”. I think this sums it up very well. Of course, the overall impact of the changes is to improve the reported LCR of the banking system. Based on our most recent data (end June 2012), we estimate that the weighted average LCR for a sample of roughly 200 of the world’s largest banks is around 125%, compared with a little over 100% for the previous calibration. This does not mean, however, that all banks are ready and able to meet the standard today. Even though the industry average is well above the minimum, our estimates suggest that roughly one-quarter of our sample could still have an LCR below 100% even with the latest policy changes. So there remains a significant liquidity shortfall that will need to be addressed by a number of banks. One also has to bear in mind that favourable terms from central banks have helped to improve bank funding. Central banks serve as lenders of last resort and, as economic conditions improve, banks will need to become more self-reliant. However, the timetable for the gradual introduction of the ratio ensures that the new liquidity standard will in no way hinder the ability of the global banking system to finance a recovery. It has taken a lot of time and effort to reach agreement on the LCR.
_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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It is, as I said, a deceptively simple idea, but its implications are big and far-reaching. Unsurprisingly, there is much in the detail that required a lot of careful analysis and thought, not to mention a willingness to find a way through differing national perspectives. It is, however, critical that the new ideas such as the LCR (and the other new features of Basel III such as the capital conservation buffer, countercyclical buffer, leverage ratio and NSFR) are implemented if their benefits are to be realised. Against that background, let me now turn to the work we have started to ensure that the Basel III framework is implemented as intended.

…. to implementation
Steady progress is being made. As of January 2013, 11 out of 19 Basel Committee jurisdictions have final Basel III rules in place, including our hosts today, South Africa. A number of non-member countries also implemented Basel III at the beginning of the year, further expanding its coverage. While it would be ideal to have much broader coverage at this time (as at today, around one-third of global banking assets are officially subject to the Basel III requirements), the delays should not be interpreted as any lack of commitment by global regulators to implement the agreed reforms. At recent international gatherings, all members have been asked to reaffirm their commitment to implementing the agreed reforms as soon as possible. And they have given that commitment (subject, of course, to the vagaries of domestic rule-making processes that each must follow).
_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Nevertheless, let me be clear: the question being discussed is when the reforms will be implemented, not if. Any setback to implementation is undesirable, since Basel III is a key platform on which to rebuild a stronger global banking system. But the delays are not critical at this point, for two reasons. First, the Basel III capital rules contain a lengthy phase-in period, meaning that in 2013 the new requirements should not be particularly burdensome for banks (eg none of the new deductions from capital are applied this year). Second, many regulators who have been unable to implement the new standards by the beginning of this year are still measuring and monitoring their banks’ capacity to meet the new requirements. And, of course, markets are applying similar pressure. In other words, the “force” of the new capital regime is much broader than just those countries that have implemented their domestic regulations. Nevertheless, to ensure visibility of the implementation of reforms, the Basel Committee has been regularly publishing information about members’ adoption of Basel III. We will continue to do this so as to keep all stakeholders and the markets informed, and to maintain peer pressure where necessary. It is especially important that jurisdictions that are home to global systemically important banks (G-SIBs) make every effort to issue final regulations at the earliest possible opportunity. But simply issuing domestic rules is not enough to achieve what the G20 Leaders asked for: full, timely and consistent implementation of Basel III. In response to this call, in 2012 the Committee initiated what has become known as the Regulatory Consistency Assessment Programme (RCAP).
_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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The regular progress reports are simply one part of this programme, which assesses domestic regulations’ compliance with the Basel standards, and examines the outcomes at individual banks. The RCAP process will be fundamental to ensuring confidence in regulatory ratios and promoting a level playing field for internationally-operating banks. It is inevitable that, as the Committee begins to review aspects of the regulatory framework in far more detail than it (or anyone else) has ever done in the past, we will find aspects of implementation that do not meet the G20’s aspiration: full, timely and consistent. We are going to find parts of the framework that have been implemented only in part, or late, or inconsistently. The financial crisis identified that, like the standards themselves, implementation of global standards was not as robust as it should have been. This could be classed as a failure by global standard setters. To some extent, the criticism can be justified – not enough has been done in the past to ensure global agreements have been truly implemented by national authorities. However, just as the Committee has been determined to revise the Basel framework to fix the problems that emerged from the lessons of the crisis, the RCAP should be seen as demonstrating the Committee’s determination to also find implementation problems and fix them. Committee published recently by Professor Charles Goodhart notes that the Committee has on more than one occasion over the past 35 years considered undertaking more detailed analysis of domestic implementation of global standards, but shied away from this as being “too intrusive”.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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However, we have now taken that step, since if we are serious about fixing the problems of the past, then we need to not just look at the policy settings, but also their application. Our efforts on implementation should therefore be seen as an integral part of the reform agenda – not just an adjunct to it. When it comes to our country-by-country assessments, thus far the Committee has conducted detailed assessments of the final regulations adopted in Japan, and the draft regulations in the European Union and the United States. Follow-up assessments in the European Union and United States will be conducted once final regulations are available. Assessments under the RCAP are currently underway for Singapore and Switzerland. Later this year will follow China, Australia, Brazil and Canada. As with all of the RCAP work, transparency is critical to success – all of these reports will, of course, be published in full when complete. It is important to note that, in undertaking this work, the Basel Committee has no enforcement power, so it would be meaningless to think we can force jurisdictions to change their local regulations if we find gaps. Our goal is therefore framed more positively: to deepen the implementation process and to help jurisdictions identify the gaps and address them. Ideally, the assessments provide a roadmap by which identified gaps can be closed. They also provide stakeholders and markets with a much higher degree of transparency about the extent of any local divergence from agreed international standards, and the importance of these.
_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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In this way, we believe we will establish the appropriate incentives for local rulemakers to apply the global standards, and for markets and others to apply appropriate pressure where banks may be subject to weaker-then-expected prudential requirements. More consistent domestic regulations will be an improvement. But beyond looking at how local regulators have transposed Basel agreements into domestic regulations, the Committee has also begun examining whether the framework(s) are producing consistent outcomes. Ultimately, what counts is that the capital ratio calculated and reported by individual banks provides a meaningful and comparable representation of their capital strength. Differences in regulation, or their application, can undermine the regulatory framework by making it more difficult for bank depositors, counterparties, investors, shareholders and supervisors to have confidence that reported capital ratios serve their intended purpose. In this context, some concerns have been recently voiced that banks are not calculating risk weighted assets consistently. The Committee has, in fact, been investigating this issue for much of the past year. This work has examined the calculation of risk weights in both the banking and the trading books. As with our country assessments, we will publish the results of both studies. The preliminary results of the trading book are most advanced, and will be published very shortly. The analysis is based on two sources of data: public disclosures by banks and a hypothetical test portfolio exercise in which 15 large, internationally active banks have participated from nine Basel Committee jurisdictions.
_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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I will not pre-release the detailed results today, but the headline messages are that: • there is a material variation in risk weights for trading assets across banks (after adjusting for accounting differences and for differences in the riskiness of different bank portfolios); • certain modelling choices seem to be major drivers of the variation in risk weights; and • the quality of existing public disclosure is generally insufficient to allow users to determine how much of the variation in reported risk weights is a reflection of underlying risk taking, and how much stems from other factors (eg modeling choices, supervisory discretions). In thinking about these results, it needs to be borne in mind that the objective is not to achieve zero variation. If we wished to achieve that outcome, we could simply force all banks onto the standardised approach to capital adequacy and remove any modelling options. But the standardised approach – while an ostensibly consistent methodology – would not necessarily guarantee a meaningful measure of risk when applied to the world’s largest banks with the biggest and most complex trading portfolios. Modelling necessarily introduces a degree of variability, since Basel standards deliberately allow banks and supervisors flexibility in order to accommodate for differences in risk appetite and local practices, but with the goal of also providing greater accuracy. Further, from a financial stability perspective, it is desirable to have some diversity in risk management practices so as to avoid that all banks act in a similar way. When banks would have identical response functions, economic cyclicality would increase, potentially creating additional instability.
_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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At the same time, excessive variation in risk measurement is clearly undesirable. Finding the right balance is the key. The preliminary work suggests we may not have the balance right in the current set-up. But as with all of our work on implementation, it is necessary to identify problems before we can set about correcting them. The on-going analysis has generated a wealth of information about risk modelling by banks. This is useful for international policymakers. The Committee has not yet decided what actions it might take in response to the analysis, but some of the possible policy options could comprise improvements in public disclosure practices, limitations in the modeling choices for banks, and further harmonisation of supervisory practices. These ideas will also feed into the current fundamental review of the trading book. In addition, our international study provides national supervisors with a much clearer understanding of how the risk models of their banks compare to those of international peers. This means that national supervisors are much better equipped to discuss the results with their banks and take action where needed. The Committee will be doing further work on the trading book, in addition to the banking book work, to explore the outcomes in more depth.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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I am confident that it will generate additional insights in the modelling of risk-weighted assets and to explain better why modelling results differ across banks. It will also allow building quantitative benchmarks against which supervisors can test their banks. The Committee’s work on how banks calculate risk weighted assets also feeds into a broader concern that, in pursuit of risk sensitivity, the Basel III framework has grown too complex. There are many contributory factors to the build-up of complexity, including developments in the financial markets and adoption of sophisticated risk management practices by banks. It is naïve to think banks utilising complex trading strategies and products, across global markets, can be supervised using simple rules (even if calibrated to penal settings). Indeed, an important driver has been the necessity to address perverse incentives that are created by simple rules. So while seeking appropriate risk sensitivity, care is also being taken to ensure that complexity does not undermine the very benefits it offers. The Basel Committee has also been working during 2012 to review possible areas for simplification, aiming to strike a term, the Committee intends to publish a paper to explain its thinking on the trade-offs that need to be made, and identifying potential ways to make the framework simpler and more comparable.

Conclusion
If there is one message I would like to leave you with it is that, when it comes to reform, ideas and implementation go together.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Much of the Basel Committee’s work on big “ideas” that respond to the shortcomings in the regulatory framework identified by the financial crisis is reaching the end stage. The capital rules are set (and, in an increasing number of jurisdictions, coming into force), and the revisions to the LCR have recently been agreed. In 2013, we will seek to set out the specification of the backstop leverage ratio, and the NSFR will be refined between now and the end of 2014. Clearly, we still have work to do, but increasingly it is about getting the technical details correct rather than new far-reaching ideas. Even when the Committee’s policy response to the crisis is complete, much more work will still be needed. Implementation needs to be seen as an integral part of the reform agenda, not a sideline activity. As we examine this issue to a depth that it has not previously been examined, we will inevitably find things that need improvement. Turning a blind eye to these, as may have occurred in the past, is not an option – we need to persevere and find those areas where additional modifications to the regulatory framework are needed to ensure it is effective. If we do not work to improve implementation, we will not embed the reforms into domestic banking systems in the full, timely and consistent manner that is in everyone’s interests.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Protecting Investors by Seizing the Opportunity to Strengthen Audit Quality

Jeanette M. Franzel, PCAOB Member American Accounting Association Midyear Conference and Doctoral Consortium New Orleans, LA I am honored to be here today at the mid-year auditing section conference of the American Accounting Association (AAA). Before I get started, I must tell you that the views I express today are my personal views and do not necessarily reflect the views of the Board, any other Board member, or the staff of the PCAOB. In preparing for this conference, I noted that the theme for the AAA's upcoming annual conference in August deals with viewing current significant challenges as "Brilliantly Disguised Opportunities." This is a fantastic theme, and I thought I'd take the opportunity to get all of us thinking along these lines now, as we begin 2013. The "brilliantly disguised opportunity" I want to talk to you about today is strengthening audit quality in the aftermath of the recent financial crisis. We find ourselves, once again, forced to evaluate the integrity of the assurance provided to the financial markets through financial reporting and auditing. All participants in the supply chain of financial reporting and auditing, as well as the regulators and corporate governors, need to seize the "opportunities" we are currently facing to instill lasting change that will protect investors and help ensure that we can continue to pass along opportunity and prosperity to future generations of Americans.
_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Each of you, too — as educators of students entering the accounting profession and as researchers on the issues we are facing, plays a key role in the solutions. At the PCAOB, we are taking on an ambitious list of significant issues to help ensure investor protection and high quality audits now and for the long term. Today, I will discuss four of these key issues in audit oversight and our plans for change: audit quality, professional skepticism, inspections and remediation, and standard setting.

Audit Quality, Professional Skepticism, Inspections and Remediation, and Standard Setting
We've all heard those words before. Two are about how auditors do their work -- audit quality and professional skepticism; and the others are about how the PCAOB does its work -- inspection and remediation, and standard setting. In 2013, the Board is looking at them anew. In revising our strategic plan last year, we stepped back, took stock, and looked at these issues with a long term view. As the PCAOB marks its 10th anniversary this year, it is appropriate and necessary to evaluate our progress. The PCAOB is a relatively new regulator and still has work to do to establish sustainable regulatory approaches for the long term, while remaining nimble and responsive to emerging risks and issues. The Board's recently updated strategic plan[1] reflects this. Its near term priorities for 2013 include: Audit Quality: identifying audit quality measures, with a longer term goal of tracking such measures for domestic global network firms[2] and reporting changes in these measures over time;
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Inspection Findings: enhancing the PCAOB's processes and systems to refine the analysis of PCAOB inspection findings, including comparative analysis across firms over time, to further inform the investing public and PCAOB's standard-setting and other regulatory activities; Inspection Reports: improving the timeliness, content and readability of inspection reports; Remediation Determinations: improving the timeliness of remediation determinations and providing additional information on the PCAOB's remediation process; Standard Setting: enhancing the framework for the PCAOB's standard-setting process and the related project-tracking information provided to the investing public; and Audit Committees: enhancing the PCAOB's outreach to, and interaction with, audit committees to constructively engage in areas of common interest, including auditor independence and audit quality.

Assessing and Tracking Audit Quality
The first of these near term priorities that I want to talk about today is assessing and tracking audit quality. Ten years after the establishment of the PCAOB, it is fair to ask, "What is the present state of audit quality?" and "Has audit quality improved since the enactment of the Sarbanes-Oxley Act?" We've had many stakeholders and members of the profession tell us that they believe audit quality has improved, and we, at the PCAOB, tend to agree. PCAOB inspections, however, continue to find serious audit deficiencies in public company audits on a regular basis. In addition, the results of our first round of inspections of audits of brokers and dealers are troubling.
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In pursuing our core mission of protecting investors through audit oversight, the Board has a number of initiatives targeted at improving major areas of audit practice that establish audit quality. In light of the many financial reporting and auditing crises over recent decades, I find it surprising that a generally understood and measurable concept of audit quality has not emerged. This issue was raised at the outset of the recent financial crisis in a recommendation of the Department of the Treasury's Advisory Committee on the Auditing Profession (ACAP). The committee recommended that the PCAOB study the feasibility of developing key indicators of audit quality and effectiveness. And, earlier this week, the International Auditing and Assurance Standards Board issued a consultation paper on a proposed framework for audit quality that sets out key attributes that are conducive to audit quality. A recent synthesis paper, Audit Quality: Insights from the Academic Literature, notes that despite more than two decades of research, there is little consensus about how to define, let alone measure, audit quality. Furthermore, the various stakeholders in the financial reporting process have different views as to what constitutes audit quality. While some might define a quality audit in terms of audit inputs -- such as whether auditors follow standards -- investors and audit committee members may focus on certain audit outcomes -- demanding that audits uncover fraud, for instance. Many have also viewed audit quality in terms of the absence of negative outcomes such as restatements, litigation, or subsequently discovered material problems. The divergence in views on audit quality has contributed to the "expectations gap" over what an audit should be.
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This has persisted for decades, and also causes a divergence in definitions of what constitutes an audit failure. PCAOB uses its own definition of audit failure in inspection reports. It is a deficiency of such significance that the firm, at the time it issued its audit report, failed to obtain sufficient appropriate evidence to support its audit opinion on the financial statements and/or on the effectiveness of internal control. Under the definition, deficiencies include instances where a firm did not identify or address appropriately financial statement misstatements or improper disclosures, as well as failures by the firm to follow auditing standards. The Board has made it a 2013 priority to identify audit quality indicators. A longer term goal is to track such measures for domestic global network firms and report on those measures over time. This project is already underway and will include the identification of audit quality measures in the areas of audit process and results, as well as the development of methods for objectively measuring those audit quality indicators. Because of the complexity of these issues, our process for developing these measures likely will be iterative. Due to the multi-dimensional nature of audit quality, a "balanced scorecard" approach with various indicators and measures likely will be necessary. I anticipate that the development, measurement, and analysis of audit quality indicators will inform PCAOB policy making and provide key information about the state of audit quality across firms and over time.

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The results of this process will also provide us with information for reviewing, adding context to, or clarifying our current definition of "audit failure" for our inspection reports. In my view, the PCAOB's project on audit quality indicators and measures will represent a significant development in helping to advance audit quality and the reliability of audits now and in the long term. The PCAOB is in a unique position to observe, track, and measure many aspects of audit quality inputs and provide benchmarking information to firms, promote firm accountability, and provide transparency and useful information to investors and other stakeholders. Such information will be useful in the marketplace as well, so that investors and audit committees can demand better audit quality and shift audit firm competition over price to competition over quality.

Auditors' Use of Professional Skepticism in Audits
A key element of audit quality is the auditor's use of professional skepticism. Professional skepticism is particularly important in those areas of the audit that involve significant management judgment or transactions outside the normal course of business, and the auditor's consideration of fraud. These are often the high risk areas of the audit. PCAOB inspections have identified numerous audits with deficiencies where auditors did not consistently and diligently apply professional skepticism. In many of those cases, the audit teams did not obtain sufficient appropriate evidence to support their audit opinions.

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This issue has been of such prevalence that we have identified the apparent failure to appropriately apply professional skepticism as a systemic quality control issue in some firms. In addition, as part of the Board's outreach on auditor independence over the past 18 months, a major theme that the Board heard from a variety of stakeholders was the need for professional skepticism to be emphasized more in the education, training, and standard setting for auditors, as well as in the firms' cultures, tone at the top, and systems of quality control. On December 4, 2012, PCAOB issued Staff Audit Practice Alert No. 10: Maintaining and Applying Professional Skepticism in Audits to emphasize and remind auditors of the requirement to appropriately apply professional skepticism throughout audits. It provides specific examples of audit deficiencies in which a lack of professional skepticism was at least a contributing factor. The Practice Alert includes examples that raise concerns about a lack of professional skepticism, such as instances in which engagement teams did not: - obtain an understanding of the specific methods or assumptions underlying estimates; - evaluate the significance of evidence that supported values other than those closest to the issuer's recorded prices; - test beyond inquiring of management the significant assumptions underlying valuations; - question whether certain assets were potentially impaired, despite evidence that the carrying amount may not be recoverable; and - question an issuer's use of a GAAP exception even though doing so conflicted with the plain language of the exception and with the firm's internal accounting literature.
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The Practice Alert also identifies possible impediments to the application of professional skepticism, including: unconscious biases and other circumstances that cause auditors to gather, evaluate, rationalize, and recall information in a way that is consistent with client preferences; incentives and pressures in the audit environment such as pressures to build or maintain a long term audit engagement, avoid significant conflicts with management, provide an unqualified audit opinion prior to the issuer's filing deadline, achieve high client satisfaction ratings, keep audit costs low, or cross-sell other services; and scheduling and workload demands that put pressure on engagement teams to complete their assignments too quickly, which might lead auditors to seek evidence that is easier to obtain rather than evidence that is more relevant and reliable, to obtain less evidence than is necessary, or to give undue weight to confirming evidence without adequately considering contrary evidence. Finally, the Practice Alert contains a discussion of how firms can promote the appropriate application of professional skepticism on audits through a robust system of quality control. A number of firms are currently undertaking significant initiatives in response to PCAOB inspection findings to better understand the factors that influence the application of professional skepticism on their audits. To do this, they need to evaluate the specific factors that led to any lack of, or impairments to, the application of skepticism. This is a difficult but crucial area to get right in auditing. As described in a recent literature synthesis on this topic, professional skepticism is a multi-dimensional concept that remains difficult to define and measure.

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It is often difficult to determine if a lack of skepticism is the primary cause of audit deficiencies, and if so, which factors led to the lack of skepticism. Specifically, was it a problem with the auditor recognizing that a potential issue exists that may require more work or effort (lack of skeptical judgment)? Or was it a failure of the auditor to change behavior in response to an issue that was recognized (lack of skeptical action)? What were the specific characteristics and circumstances attributable to the auditor, the evidence, the client, and the audit environment that may have contributed to or caused the lack of appropriate professional skepticism in an audit? The PCAOB will continue to focus on the appropriate application of professional skepticism in our inspections and our discussions with the firms. This is an area where the firms could benefit from academic thought leadership, research, and application tools. I encourage you — in the auditing section of the AAA -- to consider ways to provide relevant research results to the firms, and to assist firms in developing and implementing potential tools, such as surveys and other metrics, for tracking and assessing how professional skepticism is applied on audits. We would like to hear your ideas, too.

Inspections and Remediation
The third subject I'd like to talk to you about today — also among the Board's 2013 priorities — is our inspections and our oversight of the related remediation of identified deficiencies in firms' systems of quality control.
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As you know, the largest PCAOB-registered public accounting firms — those auditing more than 100 issuers — are inspected annually by the PCAOB. Firms that issue 100 or fewer issuer audit reports each year are subject to inspection at least every three years. During 2012, the PCAOB inspected nine firms that audited more than 100 issuers in 2011. As we were conducting the 2012 inspections, we were also issuing the inspection reports for the 2011 inspections of these firms. During 2012, we issued the 2011 inspection reports for six of the nine annually inspected firms. In addition, during 2012, the PCAOB conducted 244 triennial inspections at 167 domestic and 77 foreign firms. The length of time it takes to complete preparation of the inspection reports has been an ongoing challenge for the PCAOB, but we've recently made significant progress in clearing a backlog of older inspections. During 2011, the Board processed numerous older inspection reports, issuing a total of 344 inspection reports that year. (As a reference point, the Board conducted a total of 254 inspections during the previous year.) During 2012, the Board continued to make progress in clearing most of the remaining backlog of older inspection reports. The Board issued a total of 257 inspection reports during 2012. (This compares to a total of 213 inspections conducted during 2011.) The Board also is working through the related remediation determinations that follow the issuance of inspection reports.

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Firms are given 12 months from the date of the inspection report to remediate any deficiencies noted in their quality control systems, which are included in the nonpublic Part II of the reports. Otherwise, they face publication of that portion of the inspection report. As we become more current in our issuance of inspection reports and remediation determinations, we are taking a fundamental look at our processes for issuing these reports. We want to develop processes and tracking metrics to help improve the overall timeliness of these reports and to prevent backlogs from occurring in the future. In addition, we plan to conduct a thorough review of the content and readability of our inspection reports. This review will include proactive outreach to users, such as yourselves, to help us identify ways to improve the usefulness of the reports. Before I move on, let me talk a minute about our inspection findings. As I'm sure you know, the number of serious deficiencies we reported spiked in our 2010 inspections, and remained high in the 2011 inspections. Common areas where we found audit deficiencies included revenue recognition, fair value of financial instruments, testing and evaluating internal controls, related party transactions, the auditor's assessment of and response to fraud risk, and the auditing of equity financing instruments, among others. Quality control findings in the nonpublic Part II of our inspection reports focus on issues that may have caused the audit performance deficiencies reported in Part I, as well as other aspects of the firm's management of its audit practice that could negatively impact audit quality. Some examples of areas of specific concern that have appeared in Part II include problems in the areas of professional skepticism, internal
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inspections, and firms' quality control processes related to specific aspects of auditing, such as testing and evaluating internal control over financial reporting, fair value, and other areas. The Board regularly engages in constructive dialogue with firms to encourage them to improve their practices and procedures. Successful remediation and sustained improvements in audit quality are clearly the goals of this process. Fortunately, we have seen most firms take their responsibilities for remedial efforts and improvements seriously. Based on the timing of the related remediation periods and the firms' efforts in those areas, it is reasonable to expect that firms would achieve significant improvements in their PCAOB inspection results for the audits of the 2012 financial statements -- which will be inspected during 2013 -- in those areas identified as problems during the 2010 and 2011 inspections. I would also hope that we see some improvements emerge in the firms' inspection results for the 2012 inspection cycle in comparison to the 2010 inspections.

Standard-Setting Activities
Lastly, I'd like to speak to you today about 2013 enhancements in the area of standard setting. The PCAOB is uniquely positioned to use its insight from inspection activities to improve existing auditing standards to support high quality audits to protect investors and the public interest. As we look to what the PCAOB has accomplished through its standard setting, and what still needs to be done, we have taken on an ambitious project to broadly reexamine our standard-setting approach.

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In our current strategic plan, we included a new strategy for standard setting for audits of emerging growth companies, in light of the recently enacted Jumpstart Our Business Startups Act (JOBS Act). We expect to continue to devote significant time and resources to preparing analyses to assist the Securities and Exchange Commission in making determinations under this Act regarding the applicability of new PCAOB standards to emerging growth companies, as well as continuing to explore ways to further incorporate economic analysis into our rulemaking processes. For the long term, we are doing the work necessary to establish a vision and framework to guide and prioritize our standard-setting activities. Such a framework would be flexible and adjustable to respond to emerging risks and trends. As part of this framework, we will consider using a combination of various approaches and related criteria for standard-setting projects, depending on the circumstances. We are thinking about the different categories or "tracks" for our standards projects. For instance, when we determine that a project is necessary because of unique circumstances related to U.S. issuers, we choose to take on a project even if other standard-setting organizations are not dealing with the issue. In other cases, there may be issues that other standard-setting organizations have raised or have acted upon where we can leverage that work to varying degrees in our own related projects. As part of these efforts, we are looking to find a mechanism to eliminate the notion of "interim" standards — the title we use for the original AICPA standards the Board adopted when it began operations back in 2003.
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We have a 2013 project entitled, "Reorganization of PCAOB Auditing Standards." This project involves developing an approach to integrating and reorganizing the interim auditing standards (referred to as "AU") with the auditing standards issued by the Board (referred to as "AS"). This project is intended to make it easier for users to navigate the standards and facilitate users' ability to compare PCAOB standards to the International Standards on Auditing (ISA) and other standards. This reorganization project is included in the Board's recently released standard -setting agenda. The agenda has been updated and improved with a new format where projects are divided into six month increments. It will be updated periodically. The new format allows for greater flexibility, while also providing greater transparency into ongoing developments. The agenda is highly ambitious. The following five projects are scheduled for action in the first half of 2013: Related parties (adoption or re-proposal) Reorganization of PCAOB standards (proposal) Auditor's reporting model (proposal) Auditor's responsibilities with respect to other accounting firms, individual accountants, and specialists (proposal) Audit transparency: identification of the engagement partner (adoption or re-proposal)
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The timing of two other potential 2013 standard-setting projects is dependent on third parties: Audits of brokers and dealers (dependent on SEC rulemaking) Going concern (proposal, dependent on FASB timing) An additional eight projects also remain on our standards agenda: Auditor independence and audit firm rotation (next steps under consideration) Audit transparency: identification of other public accounting firms or persons not employed by the auditor (adoption or re-proposal) Assignment and documentation of firm supervisory responsibilities (proposal) Quality control standards (concept release) Auditing fair value measurements (proposal) Auditing accounting estimates (proposal) Confirmation (re-proposal) Subsequent events (proposal) We plan to make substantial progress during 2013 on the current agenda while also continuing to develop a long term view and framework for setting standards beyond the current project list. This is a substantive workload, and it is something to watch throughout the coming year.

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Conclusion
As you can see, the Board's 2013 agenda is brimming with opportunities to make needed improvements in auditing while enhancing our audit oversight. I expect the firms to demonstrate meaningful, measurable progress in audit quality in the next few years. At the same time, the PCAOB is working on better tools to measure and monitor audit quality levels. A major driver of audit quality throughout the audit process is professional skepticism, and the Board is overseeing firms' initiatives to look closely at factors that lead to any lack or impairment of professional skepticism, and how to adjust their quality control systems to strengthen its application. PCAOB inspections and remediation oversight is a profound regulatory tool. We will be working hard this year to refine the analysis of inspection findings, and we will begin improvements to the timing, content and readability of our inspection reports. Finally, the Board has adopted an ambitious list of standard-setting activities for this year, while improving its standard-setting processes and project-tracking. The PCAOB was established as the result of a devastating financial crisis, and was given a key role in protecting investors and the public interest in audit oversight. Since that time, much progress has been made, but more needs to be done.

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After nearly 10 years on the job, the PCAOB is working hard to make sure audit firms remember to focus on the fundamentals of good audit quality and investor protection. I look forward to continuing to work with the academic community to further our goals in these areas. Thank you.

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EIOPA Multi-Annual Work Programme 2012-2014 1. Introduction
EIOPA is an independent European Supervisory Authority acting within the scope of various Directives covering insurance and reinsurance undertakings, institutions for occupational retirement provision and insurance intermediaries as well as related issues not directly covered by these Directives. EIOPA has legal personality, administrative and financial autonomy and is accountable to the European Parliament and the Council of the European Union. EIOPA’s objective is to protect public interests by contributing to the short, medium and long-term stability and effectiveness of the financial system, for the Union economy, its citizens and businesses. This objective is pursued by promoting a sound regulatory framework and consistent supervisory practices in order to protect the rights of policyholders, occupational pension scheme members and beneficiaries and contribute to the public confidence in the European Union’s insurance and occupational pensions sectors. EIOPA is part of the Joint Committee which has the goal of strengthening cooperation between the ESAs. EIOPA’s tasks, responsibilities and scope of action are wide-ranging. It is therefore essential to define strategic choices in each of the different areas of work.

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2. Regulatory Tasks
EIOPA’s regulatory powers in the insurance, reinsurance and occupational pensions sectors include developing technical standards, issuing guidelines and recommendations and providing opinions in EIOPA’s field of competence. The policy environment will be subject to significant change between 2012 and 2014 with the finalisation, implementation and subsequent monitoring of the Solvency II framework for insurance and reinsurance, and development of revised legislation for occupational pensions. EIOPA will take an ambitious European approach to policy in these sectors: there will be substantial benefits to greater harmonisation in the measurement of the risks facing both insurance undertakings and IORPs, in their internal governance, and in the information they provide to members, policyholders and supervisors. We will work with consumers and industry, with the EU member states, and with European and international organisations. We will use the full range of EIOPA’s tools to implement our policy: standards, guidelines, opinions, and advice.

Strategic directions 2012-2014
- Completion of the standards and guidelines required for the introduction of Solvency II, and the monitoring of their implementation - Establishment of the operational tasks required of EIOPA under Solvency II - Enhancement of convergence in supervision by greater use of tools e.g. supervisory review process, Q&A - Assessment of impact of Solvency II framework on consumers
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- Advice to the European Commission on review of EU legislation for occupational pensions - Quantitative impact of EIOPA’s proposals with special focus on defined benefit pensions - Best practices and recommendations for treatment of defined contribution pensions, particularly in the areas of default funds and information to members - Advice the European Commission on a framework for the activities and supervision of personal pension schemes - Increase EIOPA’s voice in international pensions fora - Embed selection and use of EIOPA’s existing tools for assessing the effects of regulatory changes: regulatory impact assessment; quantitative impact studies; stress tests; public consultation - Improve use of evidence in policy development and option selection

3. Supervisory Tasks
EIOPA is a supervisory authority that contributes to high quality supervisory standards and practices, through consistent and efficient application of the Union acts. Colleges of Supervisors (Colleges) are considered effective tools to enhance mutual understanding among supervisors and convergence of supervisory practices, with tangible benefits to undertakings, supervisors and policyholders. EIOPA has a leading role in building the position of the EEA supervisory community towards the cross-border operating insurance groups for the benefit of both group and solo supervision.

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With Solvency II coming into force group supervision and the cooperation amongst supervisors through colleges on pillar 1, pillar 2 and pillar 3 related issues becomes a legal requirement. In order to shape the overall supervisory practices EIOPA will provide tools to support the convergent implementation of Solvency II, e.g. a supervisory handbook and a centre of expertise in the field of internal models.

Strategic directions 2012-2014
- Participate in college meetings and joint on-site inspections - Support the preparation of the colleges for Solvency II with the aim that they are ready for the task by the entry into force of Solvency II - Facilitate information exchange and provide support on the discussion on risks in the colleges - Enhance functioning of colleges by collecting, defining and disseminating best practices regarding e.g. internal model pre-application assessment process, delegation of tasks - Enhance practical approach to colleges via the establishment of a Q&A procedure to practical or supervisory questions on established guidelines, recommendations and standards - Development of a supervisory handbook addressing best practises in the supervisory process - Promote consistency through sharing best practices and providing support to competent national authorities - Investigate alleged cases of breach or non-application of Union Law and address recommendations to competent authorities where necessary

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4. Consumer Protection and Financial Innovation
Under Article 9 of the EIOPA Regulation, EIOPA is already taking a leading role in promoting transparency, simplicity and fairness in the market for consumer financial products or services across the internal market. In this respect, EIOPA’s strategy in the area of consumer protection and financial innovation is to proactively create added value for consumers and enhance consumer protection in the area of insurance and occupational pensions. Moreover, EIOPA ensures convergence of regulatory practices on the basis of fundamental Union principles as follows.

Strategic directions 2012-2014
- Develop common methodologies to assess the effect of product characteristics and distribution processes on consumer protection and on the financial position of institutions - Promote transparency, simplicity and fairness for consumer financial products or services across the internal market - Collect, analyse and report on consumer trends and identifying areas where action of EIOPA can make a difference to consumers - Review and coordinate financial literacy and education initiatives by the competent authorities - Develop training standards for the industry - Contribute to the development of common disclosure rules - Coordinate regulatory and supervisory treatment of new or innovative financial activities
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- Adopt guidelines and recommendations with a view to promote safety and soundness of financial markets and convergence of regulatory practice - Issue warnings and, within the cases specified and under the conditions laid down in sectoral legislation, temporarily prohibit or restrict certain financial activities - Contribute to the assessment of the need for a European network of national insurance guarantee schemes - Lead preliminary work on the operations tasks required of EIOPA under the proposed revised Insurance Mediation Directive (IMD2) and delegated acts required under IMD2

5. Common Supervisory Culture
The EIOPA Regulation stresses the importance of a common supervisory culture in the European Union. EIOPA strongly supports the shift from regulation to common supervisory culture and plays an active role in building consistent supervisory practices, as well as ensuring uniform procedures and consistent approaches throughout the Union.

Strategic directions 2012-2014
- Establish and conducting sectoral and cross-sectoral training programmes for European insurance and occupational pensions supervisors to enhance convergence in supervisory practices - Prepare and train operational supervisors for Solvency II implementation with the view towards consistent and efficient supervision under Solvency II

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- Establish and conduct EIOPA Conferences and joint trainings for supervisors and industry representatives to reach better mutual understanding - Facilitate personnel exchanges and secondments between competent national authorities - Conduct regular thematic peer reviews across all national competent authorities to strengthen the consistency and quality of supervisory practices - Resolve disagreements between competent national authorities in Cross-border situations by way of binding and non-binding mediation - Establish mediation procedures and an independent EIOPA Mediation Panel that facilitates the mediation

6. Financial Stability
EIOPA is granted the task of enhancing European financial stability in the insurance and occupational pension fund sectors. EIOPA shall assess potential threats to the stability of the financial system and make appropriate recommendations for actions to the competent authorities concerned. It shall ensure that possible systemic risk posed by some financial institutions is taken into account when developing draft regulatory and implementing standards. The overall aim of EIOPA’s Financial Stability work is to monitor and assess market developments and their implications. In consultation with the European Systemic Risk Board (ESRB), it develops criteria for the identification and measurement of systemic risk with particular focus on the insurance and occupational pensions sector.

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Strategic directions 2012-2014
- Issue financial stability reports and report outcomes of financial stability and vulnerability analyses to the ESRB, the European Commission, the European Parliament and the Council of the European Union - Stress tests of the Insurance and Occupational Pensions sectors - Maintenance and further development of financial stability risk dashboard - Assess market impact of potential regulatory changes that influence the insurance and occupational pension sectors and developing policy options that enhance financial stability and limit possible systemic risk - Support competent national authorities with financial stability issues, including bilateral contacts and visits to the national authorities to build a better mutual understanding of risk assessment and more national specific issues - Monitor and assess financial markets and following up identified risks - Provide third parties with relevant statistical analyses and further develop the statistical framework

7. Crisis Prevention, Management and Resolution
EIOPA is empowered to take action to identify an “emergency situation” and, once such a situation is declared by the Council of the European Union, to act to deal with it. EIOPA also has a responsibility to facilitate and, where appropriate, coordinate actions taken by national supervisory authorities to deal with adverse developments threatening EU financial stability.
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Strategic directions 2012-2014
- Promote vigilance on the part of insurance and pensions supervisory authorities in EEA Member States to anticipate and prevent financial crises: o identify risk “hotspots” and feed this information back to EEA supervisory authorities o assess the risk of an “emergency situation” and make a proposal to the European Council when necessary - Raise awareness and improve preparedness of national competent authorities to deal with financial crises: o promote information exchange and development of actions to deal with crisis situations o serve as a platform for supervisory authorities to work together to deal with crisis situations o development of consistency and best practice in the area of crisis management - Facilitate and, where necessary, coordinate supervisory actions to deal with a crisis: o refine and develop EIOPA’s own capability to deal with crisis prevention and management issues o coordinate national competent authorities in their actions - Stand ready to take direct action within EIOPA’s powers: o be ready to make decisions addressed to competent authorities or financial market participants under Article 18 of the EIOPA regulation - Play a key role in the development of resolution policy for insurance in
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Europe: o work with the European Commission through its consultation process to ensure that any new legislation is well tailored for insurance o put in place whatever internal processes and structures are required to operate the new resolution regime

8. External Relations
In compliance with the powers granted by the Regulation EIOPA is playing an active role in the field of international insurance and occupational pensions. An important goal of EIOPA is to guarantee a level playing field for all market participants. To achieve this, equivalence and compatibility of the different regulatory and supervisory regimes play a key role. EIOPA furthers and contributes to the development of a global regulatory standard. In this context, EIOPA promotes a joint European approach to actively shape the global debate in international fora such as IAIS and IOPS and to get the European voice better heard to eventually make a real difference. Over the next years, EIOPA will produce sound, prudent and quality regulatory frameworks in insurance and occupational pensions. EIOPA is highly committed to involve the professional expertise, know-how and experience of its Stakeholder Groups provided through the well balanced and diverse background of their members. We strongly believe in a mutual benefit through a trustful and transparent cooperation.
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Strategic directions 2012-2014
- Provide a platform for EIOPA, EIOPA Members, EU Institutions and third country competent authorities or administrations as well as other international stakeholders to o Facilitate mutual understanding, know-how exchange and mutual learning from experience in different jurisdictions on an on_going basis o Address topics of overarching international relevance - Support, coordinate and facilitate the work in the area of Third country equivalence, in particular the Equivalence Committee as well as other projects relevant in this context - Coordinate, facilitate and support the functioning and the work of the two EIOPA Stakeholder Groups o Ensure successful delivery of the Stakeholder Group opinions to EIOPA on publicly consulted documents - Liaise and cooperate with the other ESAs and the European System of Financial Supervision (ESFS) o Support the ESA Joint Committee activities to ensure overall cross-sectoral consistency and take over chairing the Joint Committee in 2013 - Liaise with EU Institutions and other stakeholders on relevant subjects for EIOPA and contribute to those discussions

9. EIOPA Internal Organisation
After the initial set up in 2011, EIOPA will be further established in 20122014 as a fully-fledged EU Agency.
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The Authority will grow into a modern, efficient and adaptive organisation, well equipped to meet the various and challenging demands. These demands originate from EIOPA’s evolving external environment, adjustments to EIOPA’s products and services, the further implementation of the EIOPA Regulation and of the specific rules and regulations related to staff and financial matters. On the basis of the approved IT Strategy and IT Strategy implementation plan EIOPA will develop a centralised system for secure transfer and management of information within EIOPA and between EIOPA and its Members. EIOPA also implements the recommendations and benefits from contributions of the Internal Audit Services (IAS) of the European Commission and the European Court of Auditors.

Strategic directions 2012-2014
Ensure EIOPA has the required competent and motivated staff - further equip EIOPA with competent staff whose team work skills, flexibility and continuous learning abilities enable the institution to be agile and adaptive - further build on EIOPA’s identity and culture, creating a working environment where staff can thrive - promote the secondment of national experts to EIOPA Enhance EIOPA’s processes and supporting ICT solutions - further design and deploy EIOPA’s key processes, aiming at a high level of compliance, transparency, efficiency and effectiveness - create fast and secure information storage and exchange solutions supporting EIOPA’s core business activities
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- extend administrative supporting systems - ensure efficient budgetary, financial and internal control arrangements - implement best practices in the area of budgeting, ensuring budget is planned and justified from scratch each year based on actual needs - build up and enhance the financial policy framework with a focus on efficient and compliant processes - continuously improve the internal framework in order to ensure timely, efficient and economic delivery of its tasks whilst striving to deliver the highest quality of EIOPA’s products and services Contingency planning - ensure contingency if EIOPA headquarters become unavailable, by establishing alternative locations and modalities for high level meetings - ensure availability of key products and services within agreed time frames and according to the highest security and confidentiality standards EIOPA taking full corporate & social responsibility - reduce the carbon footprint by using environmental friendly solutions - set up robust working processes of communication with media and public - continue educating our youth, offering opportunities for trainees and students - build a positive EIOPA image in social media and networks

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Recent policy developments for strengthening the resilience of the financial sector
Welcoming remarks by H E Sultan Bin Nasser Al-Suwaidi, Governor of the Central Bank of the United Arab Emirates, at the 8th High-Level Meeting for the Middle East & North Africa Region on “Recent policy developments for strengthening the resilience of the financial sector”, organized by the Basel Committee on Banking Supervision (BCBS), the Financial Stability Institute (FSI) and the Arab Monetary Fund (AMF), Abu Dhabi Good morning, Excellencies, Ladies & gentlemen, Y.E. Mar Gudmundsson, Governor of Central Bank of Iceland, The Honorable, Josef Tošovský, Chairman of the Financial Stability Institute of the BIS, Y.E. Dr. Jassim Al Mannai, General Manager & Chairman of the Arab Monetary Fund, The Distinguished Speakers, It gives me great pleasure to welcome you to the UAE, especially those who travelled a long way to be here with us at the outset of this important high level meeting. The subjects that would be discussed today are familiar and current, and very much relevant to stability of the financial systems. The financial system's stability in all countries, and this region is no exception, are very important for economic stability. I will start by giving you an idea about the UAE financial system, which falls under the Central Bank supervision.

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If I may switch now to talk about one of the subjects this meeting will discuss namely: SIBs or D-SIBs, it will be worthwhile to work on a framework to identify D-SIBs in the region at the first stage. The framework should take into account: (a) the size of the bank (based on simple indicators such as total assets and the bank’s reliance on specific sectors, like the real estate sector and the GREs and counter parties), (b) the interconnectedness between banks (as indicated by deposits from and loans to), and the degree of complexity, even though this does not play a significant role in the UAE, as banks do not trade or invest in sophisticated financial products. Also, cross-border activities by banks in the region can’t be used to determine if they qualify as D-SIBs, as these activities are insignificant.

II. Issues for consideration
1. The BCBS assessment framework suggests that Local regulators are entrusted with the task to set up their own methodology for the process of identifying which banks to be considered as D-SIBs.
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Nonetheless, some general guidelines on the subject from BCBS would be helpful, and they will make the exercise more consistent region-wide. 2. Central Banks in our region could develop a peer-group approach for this exercise so they could learn from each other. 3. It seems that the D-SIBs proposal is restricted to banks.

Would Non-bank Financial Institutions (NBSFIs) be considered?
Would the assessment of systemic importance cover subsidiaries (and not

branches) of banking groups.

4. The assessment framework also suggest there will be a mix of qualitative and quantitative judgments for each D-SIB. With the general guidelines from BCBS, it would be the responsibility of the local authority to assign the appropriate weights to the qualitative vs. the quantitative judgments. 5. While waiting for the final version of BCBS document, Central Banks in our region could start working on the identification exercise of D-SIBs, taking into account local considerations, learning from countries of similar financial systems, and benefiting from peer-reviews.

III. Higher loss absorbency (HLA)
1. As in the G-SIBs framework, D-SIBs will be required to hold additional Common Equity Tier 1 Capital (CET1) to meet their HLA requirements, which eventually support capital conservation of the Basel III capital framework. It is a positive development that national regulators are given the authority to decide on the appropriate level of additional CET1, consistent with each bank’s systemic importance. However there is some concern that the proposed HLA would just duplicate the already in place country-specific prudential measures
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implemented in the region, which would mean that the D-SIB’s cost of doing business will go up. For example, in the UAE we impose the following capital ratios: – Tier 1 core capital: a minimum of 8% (actual is: 14.5%) – Tier 1 and other tiers: a minimum of 12% (actual is: 20.5%) 2. However, it is suggested that local regulators should allow identified D-SIBs a comprehensive grace period to fully comply with the HLA requirements. 3. As local debt markets are at an infancy stage in many countries in the region, this would make it difficult for potential D-SIBs to hold high-quality liquid debt instruments as “pre-emptive” liquidity buffers against early signs of stress. Hence, there is a need to find an appropriate way to deal with this issue, until debt markets in the region witness significant improvements. To conclude, it should be stressed that strengthening the banking supervision exercise in our countries is key to tackling systemic risk in D-SIBs and other financial institutions. Excellencies, Ladies & gentlemen With this I come to the end of my speech, but before I close, I would like to thank the FSI of BIS and the AMF, for holding this important high level meeting here in Abu Dhabi, UAE. I wish you all a successful meeting. Thank you for your attention.

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Suitability Requirements With Respect To the Distribution of Complex Financial Products Final Report Executive Summary
In February 2012, the IOSCO Technical Committee published a Consultation Report, entitled Suitability Requirements with respect to the Distribution of Complex Financial Products (the Consultation Report). The purpose of the Consultation Report was to discuss possible principles focusing on customer protections, including suitability and disclosure requirements, relating to the distribution by intermediaries of complex financial products to retail and non-retail customers based on a review of members’ existing regulatory frameworks, as well as the lessons learned from the financial crisis and relevant actions taken in response. This Final Report includes the following key principles relating to suitability requirements with respect to the distribution of complex financial products, taking into account the public comments to the Consultation report:

Classification of customers
Principle 1: Intermediaries should be required to adopt and apply appropriate policies and procedures to distinguish between retail and non-retail customers when distributing complex financial products. The classification of customers should be based on a reasonable assessment of the customer concerned, taking into account the complexity and riskiness of different products.
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The regulator should consider providing guidance to intermediaries in relation to customer classification.

General duties irrespective of customer classification
Principle 2: Irrespective of the classification of a customer as retail or non-retail, intermediaries should be required to act honestly, fairly and professionally and take reasonable steps to manage or mitigate conflicts of interest through implementing appropriate procedures in the distribution of complex financial products, and where there exists a potential risk of damage to the customer’s interest, the intermediaries should, where appropriate, be required to clearly disclose the risk.

Disclosure requirements
Principle 3: Customers should receive or have access to material information to evaluate the features, costs and risks of the complex financial product. Any information communicated by intermediaries to their customers regarding a complex financial product should be communicated in a fair, comprehensible and balanced manner.

Protection of customers for non-advisory services
Principle 4: When an intermediary sells a complex financial product on an unsolicited basis (no management, advice or recommendation), the regulatory system should provide for adequate means to protect customers from associated risks.

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Suitability protections for advisory services (including portfolio management)
Principle 5: Whenever an intermediary recommends the purchase of a particular complex financial product, including where the intermediary advises or otherwise exercises investment management discretion, the intermediary should be required to take reasonable steps to ensure that recommendations, advice or decisions to trade on behalf of such customer are based upon a reasonable assessment that the structure and risk-reward profile of the financial product is consistent with such customer’s experience, knowledge, investment objectives, risk appetite and capacity for loss. Principle 6: An intermediary should have sufficient information in order to have a reasonable basis for any recommendation, advice or exercise of investment discretion made to a customer in connection with the distribution of a complex financial product.

Compliance function and internal suitability policies and procedures
Principle 7: Intermediaries should establish a compliance function and develop appropriate internal policies and procedures that support compliance with suitability requirements, including when developing or selecting new complex financial products for customers.

Incentives
Principle 8:

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Intermediaries should be required to develop and apply appropriate incentive policies designed to ensure that only suitable complex financial products are recommended to customers.

Enforcement
Principle 9: Regulators should supervise and examine intermediaries on a regular and ongoing basis to help ensure firm compliance with suitability and other customer protection requirements relating to the distribution of complex financial products. The competent authority should take enforcement actions, as appropriate. Regulators should consider the value of making enforcement actions public in order to protect customers and enhance market integrity.

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President Obama discusses his nomination of Mary Jo White to lead the Securities and Exchange Commission and Richard Cordray to continue as Director of the Consumer Financial Protection Bureau.
President Obama discussed his nomination of Mary Jo White to lead the Securities and Exchange Commission and Richard Cordray to continue as Director of the Consumer Financial Protection Bureau. The President signed into law rules of the road to reform Wall Street and protect consumers, and these two individuals will be the tough cops on the beat to enforce the law and protect middle class Americans.

Remarks of President Barack Obama
Hi, everybody. Here in America, we know the free market is the greatest force for economic progress the world has ever known. But we also know the free market works best for everyone when we have smart, commonsense rules in place to prevent irresponsible behavior. That’s why we passed tough reforms to protect consumers and our financial system from the kind of abuse that nearly brought our economy to its knees. And that’s why we’ve taken steps to end taxpayer-funded bailouts, and make sure businesses and individuals who do the right thing aren’t undermined by those who don’t. But it’s not enough to change the law – we also need cops on the beat to enforce the law.
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And that’s why, on Thursday, I nominated Mary Jo White to lead the Securities and Exchange Commission, and Richard Cordray to continue leading the Consumer Financial Protection Bureau. Mary Jo White has decades of experience cracking down on white-collar criminals and bringing mobsters and terrorists to justice. At the SEC, she will help complete the task of reforming Wall Street and keep going after irresponsible behavior in the financial industry so that taxpayers don’t pay the price. Richard Cordray is a champion for American consumers. After the Senate refused to allow Richard an up-or-down vote when I nominated him in 2011, I took action to appoint him on my own. And since then, he’s helped protect Americans from predatory lenders, launched a “Know Before You Owe” campaign to help families make smart decisions about paying for college, and cracked down on credit card companies that charge hidden fees. But Richard’s appointment runs out at the end of the year, and in order for him to stay on the job, the Senate needs to finally give him the vote he deserves. As President, my top priority is simple: to do everything in my power to fight for middle-class families and give every American the tools they need to reach the middle class. That means bringing in people like Mary Jo and Richard whose job it is to stand up for you. It means encouraging businesses to create more jobs and pay higher wages, and improving education and job training so that more people can get the skills that businesses are looking for. It means reforming our immigration system and keeping our children safe from the menace of gun violence.
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And it means bringing down our deficit in a balanced way by making necessary reforms and asking every American to pay their fair share. I am honored and humbled to continue to serve as your President. And I am more hopeful than ever that four years from now – with your help – this country will be more prosperous, more open, and more committed to the principles on which we were founded. Thanks, and have a great weekend.

Inaugural Address by President Barack Obama
THE PRESIDENT: Vice President Biden, Mr. Chief Justice, members of the United States Congress, distinguished guests, and fellow citizens: Each time we gather to inaugurate a President we bear witness to the enduring strength of our Constitution. We affirm the promise of our democracy. We recall that what binds this nation together is not the colors of our skin or the tenets of our faith or the origins of our names. What makes us exceptional -- what makes us American -- is our allegiance to an idea articulated in a declaration made more than two centuries ago: “We hold these truths to be self-evident, that all men are created equal; that they are endowed by their Creator with certain unalienable rights; that among these are life, liberty, and the pursuit of happiness.” Today we continue a never-ending journey to bridge the meaning of those words with the realities of our time.

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For history tells us that while these truths may be self-evident, they’ve never been self-executing; that while freedom is a gift from God, it must be secured by His people here on Earth. (Applause.) The patriots of 1776 did not fight to replace the tyranny of a king with the privileges of a few or the rule of a mob. They gave to us a republic, a government of, and by, and for the people, entrusting each generation to keep safe our founding creed. And for more than two hundred years, we have. Through blood drawn by lash and blood drawn by sword, we learned that no union founded on the principles of liberty and equality could survive half-slave and half-free. We made ourselves anew, and vowed to move forward together. Together, we determined that a modern economy requires railroads and highways to speed travel and commerce, schools and colleges to train our workers. Together, we discovered that a free market only thrives when there are rules to ensure competition and fair play. Together, we resolved that a great nation must care for the vulnerable, and protect its people from life’s worst hazards and misfortune. Through it all, we have never relinquished our skepticism of central authority, nor have we succumbed to the fiction that all society’s ills can be cured through government alone. Our celebration of initiative and enterprise, our insistence on hard work and personal responsibility, these are constants in our character. But we have always understood that when times change, so must we; that fidelity to our founding principles requires new responses to new
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challenges; that preserving our individual freedoms ultimately requires collective action. For the American people can no more meet the demands of today’s world by acting alone than American soldiers could have met the forces of fascism or communism with muskets and militias. No single person can train all the math and science teachers we’ll need to equip our children for the future, or build the roads and networks and research labs that will bring new jobs and businesses to our shores. Now, more than ever, we must do these things together, as one nation and one people. (Applause.) This generation of Americans has been tested by crises that steeled our resolve and proved our resilience. A decade of war is now ending. (Applause.) An economic recovery has begun. (Applause.) America’s possibilities are limitless, for we possess all the qualities that this world without boundaries demands: youth and drive; diversity and openness; an endless capacity for risk and a gift for reinvention. My fellow Americans, we are made for this moment, and we will seize it -so long as we seize it together. (Applause.) For we, the people, understand that our country cannot succeed when a shrinking few do very well and a growing many barely make it. (Applause.) We believe that America’s prosperity must rest upon the broad shoulders of a rising middle class. We know that America thrives when every person can find independence and pride in their work; when the wages of honest labor liberate families from the brink of hardship.
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We are true to our creed when a little girl born into the bleakest poverty knows that she has the same chance to succeed as anybody else, because she is an American; she is free, and she is equal, not just in the eyes of God but also in our own. (Applause.) We understand that outworn programs are inadequate to the needs of our time. So we must harness new ideas and technology to remake our government, revamp our tax code, reform our schools, and empower our citizens with the skills they need to work harder, learn more, reach higher. But while the means will change, our purpose endures: a nation that rewards the effort and determination of every single American. That is what this moment requires. That is what will give real meaning to our creed. We, the people, still believe that every citizen deserves a basic measure of security and dignity. We must make the hard choices to reduce the cost of health care and the size of our deficit. But we reject the belief that America must choose between caring for the generation that built this country and investing in the generation that will build its future. (Applause.) For we remember the lessons of our past, when twilight years were spent in poverty and parents of a child with a disability had nowhere to turn. We do not believe that in this country freedom is reserved for the lucky, or happiness for the few.

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We recognize that no matter how responsibly we live our lives, any one of us at any time may face a job loss, or a sudden illness, or a home swept away in a terrible storm. The commitments we make to each other through Medicare and Medicaid and Social Security, these things do not sap our initiative, they strengthen us. (Applause.) They do not make us a nation of takers; they free us to take the risks that make this country great. (Applause.) We, the people, still believe that our obligations as Americans are not just to ourselves, but to all posterity. We will respond to the threat of climate change, knowing that the failure to do so would betray our children and future generations. (Applause.) Some may still deny the overwhelming judgment of science, but none can avoid the devastating impact of raging fires and crippling drought and more powerful storms. The path towards sustainable energy sources will be long and sometimes difficult. But America cannot resist this transition, we must lead it. We cannot cede to other nations the technology that will power new jobs and new industries, we must claim its promise. That’s how we will maintain our economic vitality and our national treasure -- our forests and waterways, our crop lands and snow-capped peaks. That is how we will preserve our planet, commanded to our care by God. That’s what will lend meaning to the creed our fathers once declared. We, the people, still believe that enduring security and lasting peace do not require perpetual war. (Applause.)
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Our brave men and women in uniform, tempered by the flames of battle, are unmatched in skill and courage. (Applause.) Our citizens, seared by the memory of those we have lost, know too well the price that is paid for liberty. The knowledge of their sacrifice will keep us forever vigilant against those who would do us harm. But we are also heirs to those who won the peace and not just the war; who turned sworn enemies into the surest of friends -- and we must carry those lessons into this time as well. We will defend our people and uphold our values through strength of arms and rule of law. We will show the courage to try and resolve our differences with other nations peacefully –- not because we are naïve about the dangers we face, but because engagement can more durably lift suspicion and fear. (Applause.) America will remain the anchor of strong alliances in every corner of the globe. And we will renew those institutions that extend our capacity to manage crisis abroad, for no one has a greater stake in a peaceful world than its most powerful nation. We will support democracy from Asia to Africa, from the Americas to the Middle East, because our interests and our conscience compel us to act on behalf of those who long for freedom. And we must be a source of hope to the poor, the sick, the marginalized, the victims of prejudice –- not out of mere charity, but because peace in our time requires the constant advance of those principles that our common creed describes: tolerance and opportunity, human dignity and justice.
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We, the people, declare today that the most evident of truths –- that all of us are created equal –- is the star that guides us still; just as it guided our forebears through Seneca Falls, and Selma, and Stonewall; just as it guided all those men and women, sung and unsung, who left footprints along this great Mall, to hear a preacher say that we cannot walk alone; to hear a King proclaim that our individual freedom is inextricably bound to the freedom of every soul on Earth. (Applause.) It is now our generation’s task to carry on what those pioneers began. For our journey is not complete until our wives, our mothers and daughters can earn a living equal to their efforts. (Applause.) Our journey is not complete until our gay brothers and sisters are treated like anyone else under the law –- (applause) -- for if we are truly created equal, then surely the love we commit to one another must be equal as well. (Applause.) Our journey is not complete until no citizen is forced to wait for hours to exercise the right to vote. (Applause.) Our journey is not complete until we find a better way to welcome the striving, hopeful immigrants who still see America as a land of opportunity -- (applause) -- until bright young students and engineers are enlisted in our workforce rather than expelled from our country. (Applause.) Our journey is not complete until all our children, from the streets of Detroit to the hills of Appalachia, to the quiet lanes of Newtown, know that they are cared for and cherished and always safe from harm. That is our generation’s task -- to make these words, these rights, these values of life and liberty and the pursuit of happiness real for every American. Being true to our founding documents does not require us to agree on every contour of life.
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It does not mean we all define liberty in exactly the same way or follow the same precise path to happiness. Progress does not compel us to settle centuries-long debates about the role of government for all time, but it does require us to act in our time. (Applause.) For now decisions are upon us and we cannot afford delay. We cannot mistake absolutism for principle, or substitute spectacle for politics, or treat name-calling as reasoned debate. (Applause.) We must act, knowing that our work will be imperfect. We must act, knowing that today’s victories will be only partial and that it will be up to those who stand here in four years and 40 years and 400 years hence to advance the timeless spirit once conferred to us in a spare Philadelphia hall. My fellow Americans, the oath I have sworn before you today, like the one recited by others who serve in this Capitol, was an oath to God and country, not party or faction. And we must faithfully execute that pledge during the duration of our service. But the words I spoke today are not so different from the oath that is taken each time a soldier signs up for duty or an immigrant realizes her dream. My oath is not so different from the pledge we all make to the flag that waves above and that fills our hearts with pride. They are the words of citizens and they represent our greatest hope. You and I, as citizens, have the power to set this country’s course.

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You and I, as citizens, have the obligation to shape the debates of our time -- not only with the votes we cast, but with the voices we lift in defense of our most ancient values and enduring ideals. (Applause.) Let us, each of us, now embrace with solemn duty and awesome joy what is our lasting birthright. With common effort and common purpose, with passion and dedication, let us answer the call of history and carry into an uncertain future that precious light of freedom. Thank you. God bless you, and may He forever bless these United States of America. (Applause.)

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Private Equity Enforcement Concerns
By Bruce Karpati, Chief, SEC Enforcement Division's Asset Management Unit, U.S. Securities and Exchange Commission, Private Equity International Conference New York, N.Y. Thank you to Private Equity International for having me here today. I am grateful for the opportunity to speak about our work in the private equity space. First, let me start by saying that my comments here today are mine and mine alone, and do not represent the views of the SEC, the Commissioners, or the staff. Q1: As many are aware, in 2010 the Commission reorganized part of the Division of Enforcement into specialized units. How has the creation of the Asset Management Unit impacted the Commission’s activities in the private equity space? In 2010, the Commission created five specialized units within the Division of Enforcement to address specific areas of the financial markets where specialization would enhance the Commission’s ability to carry out its investor protection mission. The Asset Management Unit, of which I am a part, is the largest of those units and focuses on investment advisers and investment companies, which of course includes managers of private equity funds. It’s worth mentioning that we are national in scope — we have approximately 75 staff across 11 offices covering large metropolitan areas with high concentrations of private equity managers. Since its creation, the Unit has focused on generating expertise with the goal of understanding each area that we cover.
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We want to understand the structure of the industry, the customs and practices, the incentives that exist for managers, and trends and risks that could enable us to more effectively spot or investigate fraud. We’ve done a number of things to generate that expertise. First, we have hired industry specialists that have deep asset management industry experience. For example, our private equity specialist has been a deal professional executing transactions, as well as an LP performing manager selection at a large institution. These experiences enable him to help us understand and unravel complex transactions, as well as to gauge whether, for example, certain disclosures or conduct would be important to investors. In addition to private equity, we’ve hired a number of other former industry professionals, including people from hedge funds, mutual funds and due diligence firms. Also, each AMU staff member has a specialty area and has generated a detailed plan addressing either a type of investment vehicle or an investment practice. That means that when we launch an investigation, we are able to hit the ground running with an understanding of the unique characteristics of each vehicle or practice and the pertinent legal issues. Finally, we have several attorneys with practical private equity investigative experience that will be crucial to future private equity inquiries. Our expertise has also enabled us to enhance the Enforcement Division’s investigative capabilities. For instance, we are now able to identify promising cases earlier. By its nature, fraud is hidden and our ability to detect anomalies — a fee
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calculated in an odd way, a unique valuation methodology, an incomplete disclosure made to investors — has helped us to better allocate resources. Also, we are much better able to take on cases that have a variety of complex and technical issues. You won’t see the Enforcement Division or the AMU shy away from cases that involve illiquid asset valuations or that require us to dig into the operations of a portfolio company. We also collaborate across the Commission in areas where we can utilize our industry knowledge to further the Commission’s mission. One significant area of collaboration is with our National Exam Program. AMU personnel have helped train examiners and have accompanied them on exams of private equity managers. In return, the National Exam Program has enhanced our understanding of the private equity industry with observations and insights from examinations. As I mentioned before, to be effective we need to be on the leading edge of industry trends. Since many of the Commission’s interactions with the industry are through the exam staff, examiners are absolutely critical in making sure that we are aware of important issues. We also frequently engage with our Division of Investment Management colleagues on the legal aspects of private equity. IM staff assists us in addressing complex legal and contractual issues that crop up in our investigations. They also consult with us when they are writing rules that impact the private equity industry. We likewise keep them apprised of how regulation impacts the PE industry -- for example, how custody or personal transaction monitoring are affecting, and being implemented by, the private equity industry.
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Finally, we are using our industry knowledge to develop and execute on risk analytic initiatives where we use data and quantitative analysis to proactively detect fraud and identify other problematic industry practices. Q2: The Commission hasn’t traditionally brought many private equity enforcement actions. Do you expect that to change? Private equity went through a significant growth spurt in the run-up to the financial crisis and is a rapidly maturing industry. In terms of assets under management, it’s roughly equivalent to, and perhaps larger than, the hedge fund industry. Also, many private equity managers have only recently become registered investment advisers. As a result of these developments, it’s not unreasonable to think that the number of cases involving private equity will increase. Many in the private equity industry have pointed to the greater perceived alignment of interests in private equity products — for instance, in the way carried interest is paid on realizations and not on net asset values but private equity has other unique characteristics that may make the industry more susceptible to fraud, for example, the ability to control portfolio companies in a way not completely transparent to investors. Private equity funds have long lives and investors have little ability to obtain liquidity. We’ve found that as a fund ages, investors become less engaged and may devote fewer and fewer resources to monitoring the fund. This can occur for a variety of reasons — institutional investors may feel constrained in their ability to directly address issues; an investor’s strategy may have shifted and the fund may no longer be part of the investor’s core portfolio; or the investor may have already written the fund off.
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Whatever the reason, diminished investor oversight of older funds makes investors in those funds susceptible to fraud in a way that hedge funds investors — who generally make more frequent decisions about whether to increase, decrease or maintain their position in a fund — are not. The Division has been bringing more private equity cases, as well as hedge fund and registered fund cases with private equity-like issues. There are several cases that I would like to highlight as being indicative of the type of misconduct that can occur: The Matthew Crisp case concerns an individual who allegedly usurped an investment opportunity from private equity funds managed by Adams Street. Crisp was able to redirect the investment opportunity to a fund that he co-managed, the existence of which was allegedly not disclosed to Adams Street or Adams Street Investors. The Robert Pinkas case is an example of an enforcement action concerning the misallocation of expenses. Pinkas, who was the principal of private equity manager Brantley Capital, allegedly misappropriated funds from a private equity fund and applied those funds to expenses that he incurred defending himself from a different SEC action related to another Brantley Capital entity. The temptation to misallocate fund expenses is a risk we frequently cite and that we see as a form of misappropriation. The Advanced Equities case concerned alleged misstatements made to investors about the performance of a portfolio company. While this case involved a broker dealer, not an investment adviser, fund managers make representations about their portfolio companies in the course of their business and this case highlights the importance of these types of representations.

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In the Resources Planning Group case, it is alleged a private equity principal used fund assets to repay previous investors. He allegedly misrepresented his fund as a viable entity while failing to tell investors about the fund’s poor financial health and misappropriating investor funds to repay loans from other investors. In SEC v. Onyx Capital Advisors, Roy Dixon, principal of Onyx Capital, allegedly took more than $2 million from a fund purportedly as advance management fees. Numerous public pension funds had invested in the fund. The Gowrish insider trading case involved an individual who allegedly stole confidential acquisition information from his employer, TPG Capital, and sold that information to two friends who made $500,000 in illicit trading profits. Recently, the Commission filed a case against Yorkville Advisors where Yorkville allegedly inflated the values of certain illiquid assets. While Yorkville managed hedge funds, the valuation issues are very similar to ones we see in private equity.8 Finally the KCAP valuation case involved alleged overstatements of the value of certain debt securities and CLOs held in an investment portfolio, highlighting the Division and AMU’s emphasis on pursuing valuation cases. We recognize that the unique aspects of private equity may present different enforcement issues than we typically observe with other investment advisers. However, we have identified enough misconduct to know that enforcement oversight of the private equity industry is important for investor protection. Q3: What are some of the Unit’s concerns about practices in the private equity industry?
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I’d be happy to discuss what issues we think are important, but our list is always evolving, so first I’d like to discuss the process we use to assess the industry and select focus areas. We monitor the industry closely and seek to understand industry drivers, dynamics and incentives. First we look for areas of industry change and pay specific attention to areas that lack transparency, where fraud may occur undetected, or where there may be ambiguity that creates the opportunity to engage in fraud. We then combine our industry expertise with observations from exams, investigations and discussions with industry professionals to determine which risks warrant special attention by the Unit. Today, we find some of the main industry stressors to be fundraising and capital overhang. The recent rapid growth in assets under management in the private equity industry has resulted in many managers with similar strategies and return profiles. This rapid growth was followed by a contraction in the amount of capital available to new funds. At the same time, many funds still have a significant amount of uninvested capital that was raised during the boom times. This capital will expire if it’s not put to work which means that there is more capital chasing the same number of deals, which puts extra pressure on returns. Given these pressures, many managers around today will likely not be around 10 years from now — and many are even now fighting for their survival.

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These dynamics may incentivize managers to engage in aggressive marketing and may lead some to cross the line into inappropriate behavior. We also see that many private equity products lack transparency, especially into the valuation of illiquid assets and the operations of portfolio companies. Valuations, while always important, take on greater significance during the period of fund marketing. One type of manager misconduct that we’ve observed involves writing up assets during a fund raising period and then writing them down soon after the fund raising period closes. Because investors and potential investors often question the valuations of active holdings, managers may exaggerate the performance or quality of these holdings. This type of behavior highlights something that I’m sure many of you already know — that interim valuations do, in fact, matter. In the course of running their business, private equity managers often tweak strategies, change teams and raise funds of increasing size. While everyone understands that the true measure of value is a realization event, data from older realized investments may not be relevant to a decision to commit capital to a new fund and interim valuations may be the best data available to investors at any particular time. Much of the improper conduct in private equity arises out of conflicts of interest, which can lead to misappropriation, deal cherry picking and other forms of misconduct. I’d like to discuss those conflicts and talk about the types of issues they present.

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While each adviser may have a different set of conflicts, some common ones include: The conflict between the profitability of the management company and the best interests of investors. This conflict exists at all firms, but may be particularly acute at firms that have publicly listed their management company shares and may therefore feel additional pressure from their public shareholders to generate short-term results. The shifting of expenses from the management company to the funds including utilizing the funds’ buying power to get better deals from vendors — such as law and accounting firms — for the management company at the expense of the fund. Charging additional fees especially to the portfolio companies where the allowable fees may be poorly defined by the partnership agreement. Conflicts arising from managing different clients, investors and products under the same umbrella. We have observed troubling behavior caused by this conflict, for example: Broken deal expenses rolled into future transactions that may be ultimately paid by other clients. We’ve seen certain preferred clients incur no broken deal expenses at all, which are all absorbed by a core co-mingled fund. Improper shifting of organizational expenses, where co-mingled vehicles foot the bill for preferred clients. Complementary products supporting each other such as a primary vehicle making fund commitments to create deal flow for a more profitable co-investment vehicle. Conflicts with a manager’s other business which may be run in parallel with the adviser and may incentivize managers to usurp investment
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opportunities or enter into related party transactions at the expense of investors. Although conflicts of interest are a natural part of the private equity business, it is up to each manager to identify, control, and appropriately disclose material conflicts so that investors are informed and not harmed or disadvantaged. Q4: You’ve spoke before about AMU’s Risk Analytic Initiatives. What are they and are there any currently under way in the private equity industry? Risk analytic initiatives, or RAIs, seek to proactively detect problematic conduct through the use of data and quantitative methods. When designing RAIs, we use the expertise that we have created in the unit to identify high risk areas that lack transparency, are not monitored by investors, or have some other quality indicative of fraud. We then analyze how such conduct would express itself in data and from there design the analytical and investigative framework. RAIs often bring together expertise from, among others, the Asset Management Unit, the National Exam Program, the Division of Investment Management and the Division of Risk, Strategy and Financial Innovation. We have a number of active RAIs, including one targeting conduct at private equity managers. The Private Equity Initiative seeks to identify private equity managers who have assets under management but are unable to raise follow on vehicles. Our thesis for this initiative is that the rapid growth of the industry, combined with the current difficult fundraising environment and converging need for steady private equity returns, will naturally push certain managers out of the business.
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“Zombie funds” (or more accurately, “zombie managers”) result when private equity holdings are not designed for quick liquidity. Since zombie managers are unable to raise new capital, their incentives may shift from maintaining good relations with their investors to maximizing their own revenue using the assets that they have. Being a zombie manager in and of itself is of course not unlawful and most zombie managers will continue to act in the best interests of their investors. However, given the incentives to favor their own interests, we believe that there will be some problematic conduct and possible violations of the law. To launch this initiative, we used data about funds’ portfolios and looked for funds with unusually low liquidity compared to their peers. In examinations and investigations of the target funds, we look for misappropriation from portfolio companies, fraudulent valuations, lies told about the portfolio in order to cause investors to grant extensions, unusual fees, principal transactions, as well as other situations that concerned us. We think the zombie manager issue is significant and given the large amount of capital raised in 2006 and 2007, will likely become more important when those vintages reach maturity. Q5: What can a private equity COO or CFO do to reduce the risk of inquiry by the Division of Enforcement? Private equity COOs and CFOs are absolutely critical in making sure that clients’ interests are placed ahead of the interests of the management company and its principals. As you know, the Investment Advisers Act of 1940 imposes on investment advisers a broad fiduciary duty to act in the best interest of their clients.

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This means that investment advisers have “an affirmative duty of ‘utmost good faith, and full and fair disclosure of all material facts,’ as well as an affirmative obligation ‘to employ reasonable care to avoid misleading’... clients.” As a fiduciary, a private equity manager must guard against conscious and unconscious incentives that might cause him or her to provide less than disinterested advice, since an investment adviser may be faulted even when he or she does not intend to injure a client or even if a client does not suffer a monetary loss. The fiduciary duty is the lens through which the AMU looks at many of the issues it investigates, and the anti-fraud provisions of the Investment Advisers Act (including Sections 206(1) and (2) and Rule 206(4)-8)) enable the AMU to pursue breaches of fiduciary duty and other forms of misconduct. Since private equity COOs and CFOs are charged with overseeing the business of the investment manager, they are best positioned to detect and correct conduct that may not comply with the fiduciary duty standard. This job is especially important in private equity, where certain long held industry practices may be viewed as putting the manager’s interest ahead of those of investors. For instance, managers who offer co-investment opportunities only to certain favored clients may be violating their fiduciary duty to other clients who may also be interested in such opportunities. Private equity firms should integrate compliance risk into their overall risk management process and should ensure that COOs, CFOs, CCOs and other risk managers are able to proactively spot and correct situations where conflicts of interest may arise. Also, COOs, CFOs and their firms should implement a set of compliance procedures that are appropriate for their business model.
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Given the transactional focus of most private equity shops, it may make sense to assign an experienced deal professional who has some understanding of compliance issues to help review and implement some of these procedures. COOs, CFOs and CCOs should be part of the firm’s important decision making processes and should act as investor advocates. For instance, if a COO, CFO or CCO is a member of the investment committee, they can ensure that the firm executes transactions at arm’s length and in accordance with the firm’s stated strategy. They can also learn about the operation of the firm’s portfolio and use that knowledge to ensure that valuations are fairly represented and that investors are accurately informed of the status of their investment. In addition, firms may find that implementing such procedures will help attract and retain sophisticated, institutional investors. One of the best, easiest and most underutilized ways to ensure that your firm and its principals are meeting their fiduciary responsibilities and being transparent with investors is to utilize your Limited Partnership Advisory Committee. In many instances, these committees have explicit responsibility to resolve conflicts of interest but all too often may not be used. It is inevitable that conflicts will arise in the management of your businesses, and disclosing the conflict to the Advisory Committee — or better yet, having it vote on the conflict — goes far in demonstrating good faith. Also, having the organizational authority to proactively identify and resolve potential issues is significant. Some of you may discover a situation that you think has violated the trust that your investors have placed in your firm. In those cases, it is important to immediately resolve the problem.
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I would encourage everyone who comes across such a situation to consult with your internal compliance department and your counsel to determine the proper resolution. Finally, I think all investment advisers need to be alert and prepared for exam inquiries. It is important to be cooperative with exam staff while an examination takes place. It is also important to implement any necessary corrective steps if the SEC staff identifies deficiencies or possible violations. Taking these steps will help the examination process to proceed more efficiently and reduce the likelihood of more formal inquiries by the Enforcement Division or AMU staff. Thank you again for this opportunity.

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Recommendation on the development of recovery plans 1. Executive Summary
1. The attached recommendation on the development of recovery plans is based on the duty of the European Banking Authority (EBA) according to Article 25 (1) of Regulation EU No. 1093/2010 (hereinafter referred as “EBA regulation”) to contribute to and participate actively in the development and coordination of effective and consistent recovery and resolution plans. The EBA’s Board of Supervisors agreed that until the adoption and publication of the Commission’s proposal for a directive establishing a framework for the recovery and resolution of credit institutions and investment firms (so called crisis management directive hereinafter referred as “CMD”), the most effective means for the fulfilment of this duty is the issuance of the attached recommendation towards national competent authorities on the development of recovery plans, in compliance with Article 16 of the EBA regulation. 2. Considering that at least 15 banks within the Union have already started drafting recovery plans following the initiative of the Financial Stability Board (FSB), and other national initiatives are under way, the aim of the recommendation is to ensure consistency across the Union and convergence on the highest standards, by extending the development of recovery plans to the European credit institutions identified in the annex to the recommendation and making sure that the plans are discussed within the respective supervisory colleges, which are closely monitored by the EBA. 3. For this purpose, group recovery plans should be drafted in accordance with the international standards agreed under the auspices of the
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Financial Stability Board and consistently with the template attached in Annex 2 (“the template”) which, following the EBA Discussion paper (DP) on recovery plans published on 15 May 2012, covers the key elements and essential issues that should be addressed in a recovery plan.

2. Background and rationale
4. Several banks in different Member States are currently drafting recovery plans, following initiatives undertaken at the international level as well as within the European Union (EU). 5. On the global stage the initiatives on recovery and resolution planning – endorsed by the G-20 leaders at the Pittsburgh Summit in 2009 – are being coordinated under the auspices of the Financial Stability Board (FSB), which in its Key Attributes of Effective Resolution Regimes for Financial Institutions (KAs) identifies the essential elements of recovery and resolution plans (RRPs), and recommends recovery and resolution plans (RRPs) to be in place for all global systematically important financial institutions (G-SIFIs) and for other firms which could have an impact on financial stability in the event of failure. 6. At the EU level, following the Conclusions of the Council of the European Union on Crisis Prevention, Management and Resolution of 18 May and 7 December 2010 which fostered the development of RRPs at least for credit institutions for which a Cross-Border Stability Group (CBSG) is contemplated, the European Commission adopted on 6 June 2012 a proposal for a directive to establish a framework for crisis management and resolution (so called crisis management directive hereinafter referred as “CMD”). Inter alia the proposal details the nature and content of RRPs, clarifies the scope of their application, and further defines the role and powers of the EBA and national competent authorities (NCAs). 7. However, several Member States have already introduced or started drafting specific legislation on RRPs.
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In a number of cases, these initiatives are addressing specific requests to reform resolution regimes within the context of the IMF/EU financial assistance program. On the other hand, several NCAs have engaged directly in the RRP drafting process, even where they have no specific legislation on this issue, due to their involvement as FSB members in the international work on SIFIs. 8. Besides the EBA’s powers and tasks which will be defined by the CMD, Article 25 of the EBA regulation already assigns generally to the EBA the task to contribute to and participate actively in the development and coordination of effective and consistent RRPs. In light of this task, and considering the developments on the international and national stages, the EBA decided to elicit discussion and gather stakeholder opinions at an early stage of the process which will introduce recovery plans as a general European legislative requirement. 9. For this purpose, on 15 May 2012 the EBA published a discussion paper on recovery plans (hereinafter referred as “DP”) which presented the key elements and essential issues that should be addressed in a recovery plan, in line with the FSB KAs. For this purpose the DP included a possible “template for recovery plan”. All together the EBA has received 25 responses to the DP (of which 5 were not published on the EBA website due to requests of the respondents), which overall provided positive feedback on the structure and content of the template. 10. The DP represents a useful basis for the EBA regulatory tasks envisaged in the CMD, in order to ensure that recovery plans are drafted and assessed in a consistent way across the Union. However, a common European reference for NCAs will not be provided until the legislative process for the CMD is completed.
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11. In order to fill this time gap, and spur the development of recovery plans while providing guidance to ensure convergence on highest standards, the EBA prepared the attached recommendation that is addressed to the NCAs which are the home supervisors for the credit institutions listed in an annex 1 to the recommendation. It recommends them to ensure that by the end of 2013 group recovery plans are drafted and presented to supervisory authorities. As for the content of the recovery plans, the recommendation states that the plans have to be consistent with the FSB framework and with the standards envisaged in the template attached to the recommendation. As regards the assessment of the recovery plans, it requires that these group recovery plans are presented and discussed in the supervisory colleges, which should get to a common assessment.

3. EBA Recommendation on the performance of an EU wide recovery plan exercise Status of this Recommendation
1. This document contains a recommendation issued on the combined legal basis of Article 16(1) and Article 25(1) of the EBA Regulation. In accordance with Article 16(3) of the EBA Regulation, competent authorities must make every effort to comply with the recommendations. 2. The recommendation sets out the EBA’s view of appropriate supervisory practices within the European System of Financial Supervision in the area of the development and coordination of effective and consistent recovery planning with the aim of minimising the potential systemic impact of any failure. The EBA therefore expects all competent authorities to whom the recommendation is addressed to comply with it.
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Competent authorities to whom the recommendation applies should comply by incorporating it into their supervisory practices as appropriate (e.g. by amending their legal framework or their supervisory processes).

Reporting Requirements
3. According to Article 16(3) of the EBA Regulation, competent authorities must notify the EBA as to whether they comply or intend to comply with the recommendation, or otherwise with reasons for non-compliance, by 23 March 2013. In the absence of any notification by this deadline, competent authorities will be considered by the EBA to be non-compliant. Notifications should be sent by submitting the form provided at Section 5 to compliance@eba.europa.eu with the reference ‘EBA/REC/2013/02’. Notifications should be submitted by persons with appropriate authority to report compliance on behalf of their competent authorities. 4. Notifications will be published on the EBA website, in line with Article 16(3).

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EBA Recommendation on the development of recovery plans
THE BOARD OF SUPERVISORS OF THE EUROPEAN BANKING AUTHORITY, Having regard to Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC, and in particular Article 16(1) and Article 25(1) thereof, Having regard to Decision EBA DC 001 of the European Banking Authority (“EBA”) of 12 January 2011 adopting the Rules of Procedure of the EBA Board of Supervisors, and in particular Article 3(5) and Article 14(2) thereof,

Has adopted this recommendation:
1. The competent authorities listed in Annex 1, as the national home state authorities with lead responsibility for supervising the credit institutions listed within Annex 1, are recommended to ensure that those credit institutions develop and present group recovery plans to their competent authorities by 31 December 2013. 2. Group recovery plans should be drafted in accordance with the template attached in Annex 2 (the template) which is consistent with the international standards agreed under the auspices of the Financial Stability Board (FSB). 3. The template should be treated as guidance informing the process of developing and drafting of the necessary group recovery plans. 4. Any divergence from the standards set out in the template should be objectively justified, with reasons documented by the credit institution. 5. The competent authorities listed in Annex 1 should discuss the development of the group recovery plans, and the group recovery plan
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presented to them, with other competent authorities participating within the relevant college of supervisors, duly considering the recovery plans of the credit institutions which are part of the group, if the latter have been prepared. Where Crisis Management Groups (CMGs) have been set up under the auspices of the FSB, the discussion within the relevant college of supervisors should take into account the relevant outputs of the CMGs. 7. All competent authorities participating in colleges of supervisors should take the necessary measures to ensure confidentiality of information relating to the group recovery plans. 8. Competent authorities participating in the college should strive towards securing a common agreement on the assessment of the information provided by credit institutions as part of their group recovery plans. 9. Competent authorities listed in Annex 1 should apply this recommendation and seek to ensure that the credit institutions specified in point 1. of this recommendation comply with it effectively, in order to facilitate the timely development and evaluation of appropriate group recovery plans.

Annex 1
The following list identifies the credit institutions and the competent authorities with primary supervisory responsibility over them which are subject to this Recommendation.

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Annex 2 Template for recovery plan
The template is split into three main chapters. The first (A) provides general but comprehensive information on the institution, on the governance structure with regard to the group recovery plan, as well as summarizes the main conclusions of the plan. The second (B) includes the core of the group recovery plan, namely the assumptions behind the list of options available in a crisis situation and an assessment of their execution and impact.
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The third (C) identifies measures that the institution plans to implement to facilitate the follow-up of the group recovery plan, its update or its implementation in crisis times.

A. General overview
The General overview forms an integral part of the recovery plan. It should provide a summary of the plan, background information on the structure of the group and on the governance of the plan.

a) Summary of the plan:
In this section, the institution is expected to summarize the main conclusions of its recovery plan. The summary should include at least the following elements: ■ the key elements presented in the different sections of the plan ; ■ the main changes since the last update, if applicable; ■ a general overview of the steps that need to be undertaken before the finalisation/update of the plan.

b) Description of the group:
The first element of this part of the recovery plan is of a general overview of the institution’s legal structure (including significant branches), its activities, and the interdependencies between the different entities within the group. This section should identify the main activities performed by the institution, the core businesses it operates, and map them into the legal structure. In addition, it should provide an overview of interdependencies within the group.
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It should comprise at least a section providing: ■ a general description of main activities, including a discussion of the overall global strategy of the institution, its business model, the identification of the main core business lines and the reasons supporting this identification, and the main jurisdictions in which the institution is active. ■ a mapping (and detailed description): ► of the legal and operational structures (which should also include an organisational chart showing business units, the legal entities in which these business units are located and activities conducted as well as a breakdown of employees by business unit); ► of the legal and financial structures (with a breakdown of turnover, cash flows, liquid assets, funding needs, large exposures, P&L, and Tier-1 capital by legal entity) The mapping should not include all the different entities but should rather focus on the significant branches and legal entities. A significant branch or legal entity is defined as any entity: ► that substantially contributes to the profit of the group or its funding, or that holds an important share of its assets or capital; or ► that performs key commercial activities, core business lines, critical functions; or ► that centrally performs key operational, risk or administrative functions (e.g. IT); or ► that bears substantial risks that could, in a worst-case scenario, jeopardize the survival of the group; or ► that cannot be disposed of or liquidated without triggering a major risk for the group as a whole; or
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► that is important for the financial stability of the country in which it operates. There is no need to provide detailed information regarding entities that have no material impact on the operations, capital structure or governance of the group and that are not systemically important in the country in which they are located. ► a description of intra-group financial links between the different legal entities. This includes a discussion of all existing material intra-group exposures and funding relationships, a description of the capital mobility within the group, as well as of intra-group guarantees existing both in normal and in crisis times. ► a description of critical or systemically relevant functions performed by the group. This primarily concerns external functions, such as payment systems and services provided to other institutions, but also include centralised functions that are critical for the group, such as treasury, collateral management, IT, access to market infrastructures (as recipient and as provider), administrative, operational, outsourcing.

c) Discussion of internal governance
Discussion of internal governance with regard to the design of the recovery plan, the approval process and the governance process in case it needs to be implemented in a crisis situation. This section should at least provide a description of: ■ how the plan was developed: including the identification of persons responsible for developing the different sections of the plan, a discussion of how the plan is integrated and incorporated in the corporate governance framework and the overall risk management framework of the group taking into account the risk appetite of the group, (and of potential links with the stress testing framework of the group).

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■ by whom the current version of the plan was approved: including the involvement of senior management, whether the plan was presented to the internal and/or external auditor and/or the risk committee. A confirmation should be provided by the group stating that the recovery plan has been approved by the Board of Directors and/or Supervisory Board. ■ the governance of the recovery options in a crisis situation: the document needs to explain how the escalation process (if any) is designed. It should also clearly describe the decision making process with regard to the activation of the plan. This includes a discussion of who is involved in this process, in which conditions the plan will be activated, the procedures that need to be followed, the criteria that will determine which option will be implemented, and a description and assessment of how management information systems are managed and whether they will be able to provide the necessary information on short notice. ■ how the institution intends to update the group plan: this includes a description of who is responsible for keeping the plan up-to-date, the frequency with which the plan will be updated, and a description of the process in case the plan needs to be updated to respond to material changes affecting the institution or its environment.

B. Core of recovery plan
The objective of a recovery plan is not to forecast the factors which could prompt a crisis but rather to assess if options available to counter a crisis are sufficiently robust and if their nature is sufficiently varied to face a wide range of shocks of different natures. A key component of the recovery plan is, therefore, a strategic analysis that identifies the firm's core businesses and sets out the key actions to be
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taken in relation to them and the remaining components of the firm in a stress situation. Consistently with this objective this second chapter aims to provide a "menu of options" which consists of a range of possible recovery options to respond to financial stress, whether idiosyncratic or systemic, and to assess their feasibility and impact. We expect at least the following information to be provided in this section.

a) General overview of recovery options
The purpose of this section is to give a general description of all available recovery options that could be available and the actions that would be taken to enable the early execution of such options (i.e. when recovery indicators materialise). The following paragraphs would then assess the extent to which these recovery options could be implemented in the different scenarios/assumptions

b) Recovery indicators
Recovery indicators determine the moment in time when an institutions start to consider and determine which specific recovery option (if any) it may need to apply in reaction to the actual situation that has materialised. Since each crisis is different, recovery indicators do not automatically activate a specific recovery option but rather an early identification of the best way forward with the recovery plan. They should not be understood as thresholds leading to a compulsory pre-identified reaction but rather as the point in time at which the efficiency of the different recovery options is reassessed and their potential implementation envisaged.
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Recovery indicators are thus a key part of the escalation and decision-making process. The institution should provide in this part of the recovery plan also a detailed information how the recovery indicators are incorporated into the institutions’ overall risk management frameworks and how the recovery indicators are aligned with existing liquidity or capital contingency plan triggers as well as aligned with the institution’s risk appetite framework. The institution is expected to specify these specific recovery indicators (including examples and metrics), in particular, the institution should determine quantitative or qualitative recovery indicators: ■ relating to its solvency position ■ relating to its liquidity situation ■ relating to stress scenarios and the deterioration of the conditions in which it operates

c) Assumptions and scenarios
The objective of this section is for the institution to define several stress scenarios and tentatively assess their potential impact. The objective of this section is not to identify the next crisis but, rather, to define a set of scenarios under which the efficiency of the different recovery options will be assessed. This will allow testing of the sensitivity of the efficiency of the different recovery options, which need to be fit to achieve their goals (i.e. to restore long-term viability) also in situations other than the identified scenarios and assumptions. The institution is expected to specify several scenarios which should cover at least the following types of financial stress (in each case, the institution is required to differentiate slow and fast moving financial stress):
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► Idiosyncratic shock ► Systemic shock ► A combination of the above Each of the scenarios considered should be severe enough to have a serious, negative impact on the institution. The institution should choose scenarios judged to be relevant for triggering several recovery options in the recovery plan and believed to be sufficiently likely to occur. The institution is expected to tentatively assess the impact on each of these scenarios on the solvency, liquidity, funding, profitability, and operations of the main entities, businesses, etc., identified in the organisational description (Section A).

d) Recovery options
This section lists and assesses the different recovery options. The recovery options are not business-as-usual measures but should be extraordinary in nature. Options that can be considered include an external recapitalisation, the divestment of assets, subsidiaries, or business units, or the institution as a whole, a voluntary restructuring of liabilities, a reduction in the size of the balance sheet, or a strengthening of the liquidity position. For each recovery option identified, the institution is expected to describe the measure in a general way and to identify the possible obstacles to its implementation. In addition, the institution is expected to provide the following analyses for each option: ■ Impact assessment of the recovery options comprising at least an assessment of the:
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► financial and operational impact: i.e. the impact foreseen on the solvency, liquidity, and funding positions, on profitability and on operations. This impact should be tentatively assessed both in a normal situation and in the different stress scenarios. In addition, it should clearly identify the different entities of the group which may be affected by the option or involved in its implementation. ► external impact: the impact foreseen on critical or systemically relevant functions performed by the institution as well as on other market participants, customers, employees, creditors and shareholders. The impact assessment should clearly mention the valuation assumptions and all other assumptions made, concerning inter alia the marketability of assets, the behaviour of other financial institutions, etc. ■ Risk assessment: for each option, the institution is expected to make an analysis of the risk associated with it. This includes both the risks that the option cannot be implemented (feasibility) and the risk resulting from its implementation (systemic consequences): ► Feasibility: the institution should provide answer to the following questions: (i) what is the estimated success rate on a scale, and why; (ii) which factors could reduce its effectiveness and how could they be mitigated, (iii) which factors could make it impossible to implement the option. These factors should at least consider legal, operational, business,

financial, and reputational risks (including risk of rating downgrade).
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The bank is also invited to discuss its potential experience in executing such an option or similar ones. ► Systemic consequences: the institution should identify any potential system-wide implications associated with the implementation of the option, as well as its impact on any future resolution in case recovery options would not be effective. When substantial obstacles or hurdles have been identified, the institution is invited to outline solutions for overcoming these potential problems. ■ Decision making process: the institution needs to describe the internal decision making process in case the option needs to be implemented, including the steps to be followed, the timing and parties involved, up to the point of implementing the option. If the timing is uncertain, estimated ranges may be provided, together with reference to factors that would affect these ranges.

e) Operational contingency plan
For each of these recovery options the institution is expected to provide an operational contingency plan, which explains how the continuity of its operations can be maintained in a recovery phase if the recovery option is implemented. This includes at least an analysis of both its internal operations (e.g. its IT systems, its suppliers, and its HR operations) and its access to market infrastructure (e.g. clearing and settlement facilities, payment systems, additional requirements in terms of collateral). Where the option involves the separation of an entity from the group, the institution is also expected to demonstrate that separated entities can continue to operate without any group support.

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f) Communication plan
The institution is expected to provide a detailed communication plan as well as an analysis of how this communication plan can be implemented in a recovery phase and for each of the different recovery options, providing an assessment of the potential impact on the business and on financial stability in general. This communication plan should address both: ■ internal communication to staff, trade unions, etc. ; and ■ external communication towards shareholders, counterparts, financial markets/investors, market infrastructures, public/depositors, and authorities (including the supervisory college)

g) Information management
The institution is expected to describe its general policy with regard to information management. In particular, the institution should describe how the group ensures that the right information is available within a short time frame for decision-making in a stress situation. A specific analysis is required for each recovery option in which the institution should define the information needs specific to this option and should demonstrate its capacity to deliver the necessary information. In addition, the bank should also describe how it can provide, in a crisis situation, in a timely manner, the information that is necessary for authorities to assess the situation. Such information includes for example: ■ actual intra-group exposures through intra-group guarantees and loans; ■ actual trades booked on a back-to-back basis;
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■ actual amounts of liquid assets in the parent bank and subsidiaries; ■ off-balance sheet activities; ■ the bank's actual largest exposures towards other financial institutions as well as corporations.

C. Follow-up
The recovery plan is not only a plan but a whole process which should be integrated into the governance of the institution. The experience may require changes in the organisation either to facilitate the update of the plan and its implementation in the future, to monitor recovery indicators, or because the process has identified some impediments complicating the implementation of recovery options. The organisation is likely to need to think about follow-up or corrective actions. The objective of this section is to describe precisely these actions. The following measures should be considered in the drafting of this section: - Preparatory measures that can be taken in advance for a successful execution of the recovery options (e.g. shortening execution time, maximising benefit) - Areas for improvement (including new assumptions, new recovery options, changes to group/institution organisation, governance, training of staff, simulation exercises, etc.) For each follow-up or corrective measure, the institution is expected to specify the reason why the measure is currently being considered and a timeframe for implementation.
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4. Feedback on the public consultation
On the requirement provided by Article 16 of the EBA Regulation to carry on an open public consultation process before the issuance of a recommendation, it is to be recalled that an EBA Discussion Paper (DP) has already been published on the same topic and stakeholders have provided their remarks, which are published on the EBA website and are partially reflected in the revised template attached to the recommendation. Given that Article 16 specifies that the consultation should be carried “where appropriate” (see Article 16(2) of EBA regulation), and considering that the opinions expressed on the EBA DP by stakeholders were largely positive and the remarks which have been assessed more appropriate are now reflected in the revised template, the EBA concluded that it would not be appropriate to carry out another open public consultation. Indeed, the attached template was the subject of the above mentioned DP and therefore a public consultation would not provide any value added, while delaying the issuance of the recommendation and the starting of the EU wide exercise.

5. Confirmation of compliance with guidelines and recommendations
Date: Member/EEA State: Competent authority: Guidelines/recommendations: Name: Position: Telephone number: E-mail address:

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Review of Requirements on Investment Activities of Insurers Important parts
MAS adopts a principles-based approach on the regulation of the investment activities of insurers. All insurers are expected to observe MAS’ Guidelines on Risk Management and maintain sound investment practice. With the growth of assets and corresponding increase in the investment activity of direct general insurers and reinsurers over the years, MAS proposes to extend the scope of these additional requirements to include direct general insurers and reinsurers.

EXTENSION OF REQUIREMENTS IN MAS NOTICE 317 TO DIRECT GENERAL INSURERS AND REINSURERS
MAS Notice 317 sets out the basic principles which govern the oversight of the asset management process of life insurance funds. There is no equivalent MAS Notice for direct general insurers and reinsurers. With the growth of assets and corresponding increase in the investment activity of these insurers, MAS proposes to extend the requirements in MAS Notice 317 to these insurers. Key requirements would include the need for an investment policy and an investment committee.

Investment Policy
Insurers will be required to have an investment policy.
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An insurer may adopt their Head Office’s/ Parent Company’s investment policy when meeting the requirements of the new Notice, as long as the investment policy is relevant to the Singapore operations. In particular, there has to be an assessment by the insurer on whether the Head Office’s/ Parent Company’s investment policy is relevant to the local operations, and such assessment should be documented. The applicable Head Office’s/ Parent Company’s investment policy, if adopted for the Singapore entity, would also have to be Board-approved.

Investment Committee
A direct life insurer is required to establish an Investment Committee that includes the Principal Officer (“PO”), Appointed Actuary (“AA”) and Chief Investment Officer (or an officer in a similar capacity responsible for investment functions). MAS proposes that direct general insurers and reinsurers be similarly required to establish an investment committee, that includes the PO and Chief Investment Officer (or an officer in a similar capacity responsible for investment functions). However, MAS would leave it to the insurers to decide whether to include the Certifying Actuary (“CA”) as a member of the investment committee. This recognises that most direct general insurers’ and reinsurers’ CA are external consultants. Also, given the long-term nature of life business, there is greater need for the AA of direct life insurers to be involved in the development of an investment strategy for more effective asset-liability management. At the minimum, the CA of direct general insurers and reinsurers should advise the PO and Board of Directors on matters for which his expertise and experience would be useful, such as investment policy and risk management, in line with the proposed expanded roles and responsibilities of the CA.
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Proposed New MAS Notice
For the purpose of this Notice: (a) “investments” means the investments of the insurance funds and, in the case of an insurers established or incorporated in Singapore, includes the investments of the shareholders’ funds. (b) “hedging” means the reduction of investment risk through engaging in a transaction for a derivative on an investment where there is a high degree of negative correlation between the changes in value of the derivative and changes in value of the hedged investment; (c) “efficient portfolio management”, in relation to a derivative transaction, has the meaning ascribed in paragraph 21 below; (d) “economic capital” means the capital needed by the insurer to satisfy its risk tolerance and support its business plans and which is determined from an economic assessment of the insurer’s risks, the relationship of these risks and the risk mitigation in place; and (e) “liquid assets” means assets which are readily converted into cash at a value close to its fair price under normal market conditions.

Board of Directors and Senior Management Oversight
The responsibility for the formulation, approval and establishment of the investment policy of the insurer must rest ultimately with its Board of Directors. The insurer shall ensure that its Board of Directors, at all times, exercises added oversight to ensure that the interests and rights of policy owners are not compromised. For the purpose of the insurer’s investment activities, the insurer shall establish a committee (the "Investment Committee") that includes the chief executive and chief investment officer (or an officer in a similar
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capacity responsible for the investment functions) and seek approval from its Board of Directors for the establishment of the Investment Committee. For a direct life insurer, the Investment Committee shall also include the Appointed Actuary (“AA”). A direct general insurer and reinsurer should consult the Certifying Actuary (“CA”) or the AA, as the case may be, on investment related matters for which the CA’s or the AA’s expertise and experience would be useful. At least annually, the insurer shall ensure that its Board of Directors reviews the adequacy and relevance of its investment policy - in terms of overall risk tolerance, long term risk-return requirements and solvency position - in the light of the insurer's activities and risk profile.

Reports to the Board of Directors
The insurer shall ensure that the Investment Committee reports regularly, but no less than once every quarter, to the Board of Directors and ensures that the reports on investment activities are prepared in a timely manner. If the Board of Directors delegates authority to the Investment Committee to make investment decisions on its behalf, the insurer shall ensure that the Investment Committee reports to each meeting of the Board on any and all decisions of material consequence made since the last meeting of the Board of Directors, but such report shall be no later than three months of making the decision of material consequence. In addition to the above reports, the insurer shall ensure that the Investment Committee also prepares reports for the Board of Directors, as and when any investment-related activity of material consequence arises, with details of the various issues and the impact on the funds and the insurer.

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FSA statement on Basel III rules on capital requirements for exposures to CCPs
In July 2012 the Basel Committee on Banking Supervision (BCBS) agreed a revised Regulatory rules text on the capital requirements for bank exposures to central counterparties. These rules set out the capital treatment for bank exposures to qualifying central counterparties (QCCP). A QCCP is defined as 'an entity that is licensed to operate as a CCP (including a license granted by way of confirming an exemption), and is permitted by the appropriate regulator/overseer to operate as such with respect to the products offered. This is subject to the provision that the CCP is based and prudentially supervised in a jurisdiction where the relevant regulator/overseer has established, and publicly indicated that it applies to the CCP on an ongoing basis, domestic rules and regulations that are consistent with the CPSS-IOSCO Principles for Financial Market Infrastructures'. BCBS FAQs published at the end of 2012 clarified that 'during 2013, if a CCP regulator has not yet implemented the CPSS-IOSCO Principles for Financial Market Infrastructures (PFMIs), but has publicly stated that it is working towards implementing these principles, the CCPs that are regulated by the CCP regulator may be treated as QCCPs. However, a CCP regulator may still declare a specific CCP non-qualifying.' The FSA is working towards implementing the PFMIs. The FSA reserves the right to declare a specific CCP to be non-qualifying. However, currently all recognised clearing houses based in the UK and prudentially supervised by the FSA may be treated as QCCPs for a transitional period that, unless extended, expires on 31 December 2013.
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CCPs in the UK are subject to the Regulation on OTC Derivatives, central counterparties and trade repositories (EMIR), which entered into force across the EU in August 2012. EMIR follows the recommendations developed by CPSS-IOSCO PFMIs as established on 16 April 2012, and directs the European Securities and Markets Authority (ESMA) to consider both the existing principles and their future developments when drawing up or revising the regulatory technical standards, guidelines and recommendations foreseen in EMIR (see recital 90). The FSA’s supervision is currently focused on preparing domestic CCPs to meet the requirements of EMIR, and we anticipate that UK CCPs will apply for authorisation under EMIR during 2013. From 1 April 2013, responsibility for the supervision of CCPs will pass to the Bank of England. The Bank of England has made clear in its recent document The Bank of England’s approach to the supervision of financial market infrastructures that 'the UK regulatory framework, and requirements and rules set within it, will be consistent with the minimum standards in the Principles”. Let’s remember the paper:

Capital requirements for bank exposures to central counterparties July 2012 An overview Regulatory rules text on the capital requirements for bank exposures to central counterparties
The interim framework for determining capital requirements for bank exposures to central counterparties is being introduced via additions and amendments to the International Convergence of Capital Measurement and Capital Standards: A Revised Framework - Comprehensive Version, June 2006 (hereinafter referred to as “Basel II”).
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General terms and scope of application
Annex 4, Section I, A. General Terms – the following terms are added: • A central counterparty (CCP) is a clearing house that interposes itself between counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer and thereby ensuring the future performance of open contracts. A CCP becomes counterparty to trades with market participants through novation, an open offer system, or another legally binding arrangement. For the purposes of the capital framework, a CCP is a financial institution. • A qualifying central counterparty (QCCP) is an entity that is licensed to operate as a CCP (including a license granted by way of confirming an exemption), and is permitted by the appropriate regulator/overseer to operate as such with respect to the products offered. This is subject to the provision that the CCP is based and prudentially supervised in a jurisdiction where the relevant regulator/overseer has established, and publicly indicated that it applies to the CCP on an ongoing basis, domestic rules and regulations that are consistent with the CPSS-IOSCO Principles for Financial Market Infrastructures. As is the case more generally, banking supervisors still reserve the right to require banks in their jurisdictions to hold additional capital against their exposures to such CCPs via Pillar 2. This might be appropriate where, for example, an external assessment such as an FSAP has found material shortcomings in the CCP or the regulation of CCPs, and the CCP and/or the CCP regulator have not since publicly addressed the issues identified. Where the CCP is in a jurisdiction that does not have a CCP regulator applying the Principles to the CCP, then the banking supervisor may make the determination of whether the CCP meets this definition.
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In addition, for a CCP to be considered a QCCP, the terms defined in paragraphs 122 and 123 of this Annex for the purposes of calculating the capital requirements for default fund exposures must be made available or calculated in accordance with paragraph 124 of this Annex. • A clearing member is a member of, or a direct participant in, a CCP that is entitled to enter into a transaction with the CCP, regardless of whether it enters into trades with a CCP for its own hedging, investment or speculative purposes or whether it also enters into trades as a financial intermediary between the CCP and other market participants. • A client is a party to a transaction with a CCP through either a clearing member acting as a financial intermediary, or a clearing member guaranteeing the performance of the client to the CCP. • Initial margin means a clearing member’s or client’s funded collateral posted to the CCP to mitigate the potential future exposure of the CCP to the clearing member arising from the possible future change in the value of their transactions. For the purposes of this Annex, initial margin does not include contributions to a CCP for mutualised loss sharing arrangements (ie in case a CCP uses initial margin to mutualise losses among the clearing members, it will be treated as a default fund exposure). • Variation margin means a clearing member’s or client’s funded collateral posted on a daily or intraday basis to a CCP based upon price movements of their transactions. • Trade exposures (in section IX) include the current2 and potential future exposure of a clearing member or a client to a CCP arising from OTC derivatives, exchange traded derivatives transactions or SFTs, as well as initial margin. • Default funds, also known as clearing deposits or guaranty fund contributions (or any other names), are clearing members’ funded or unfunded contributions towards, or underwriting of, a CCP’s mutualised loss sharing arrangements.
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The description given by a CCP to its mutualised loss sharing arrangements is not determinative of their status as a default fund; rather, the substance of such arrangements will govern their status. • Offsetting transaction means the transaction leg between the clearing member and the CCP when the clearing member acts on behalf of a client (eg when a clearing member clears or novates a client’s trade).

Annex 4, Section II. Scope of application.
Paragraph 6 is replaced by the following: 6(i) Exposures to central counterparties arising from OTC derivatives, exchange traded derivatives transactions and SFTs will be subject to the counterparty credit risk treatment laid out in paragraphs 106 to 127 of this Annex. Exposures arising from the settlement of cash transactions (equities, fixed income, spot FX and spot commodities) are not subject to this treatment. The settlement of cash transactions remains subject to the treatment described in Annex 3. 6(ii) When the clearing member-to-client leg of an exchange traded derivatives transaction is conducted under a bilateral agreement, both the client bank and the clearing member are to capitalise that transaction as an OTC derivative. Annex 4, new section IX on central counterparties is added:

IX. Central Counterparties
106. Regardless of whether a CCP is classified as a QCCP, a bank retains the responsibility to ensure that it maintains adequate capital for its exposures. Under Pillar 2 of Basel II, a bank should consider whether it
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might need to hold capital in excess of the minimum capital requirements if, for example, (i) its dealings with a CCP give rise to more risky exposures or (ii) where, given the context of that bank’s dealings, it is unclear that the CCP meets the definition of a QCCP. 107. Where the bank is acting as a clearing member, the bank should assess through appropriate scenario analysis and stress testing whether the level of capital held against exposures to a CCP adequately addresses the inherent risks of those transactions. This assessment will include potential future or contingent exposures resulting from future drawings on default fund commitments, and/or from secondary commitments to take over or replace offsetting transactions from clients of another clearing member in case of this clearing member defaulting or becoming insolvent. 108. A bank must monitor and report to senior management and the appropriate committee of the Board on a regular basis all of its exposures to CCPs, including exposures arising from trading through a CCP and exposures arising from CCP membership obligations such as default fund contributions. 109. Where a bank is trading with a Qualifying CCP (QCCP) as defined in Annex 4, Section I, A. General Terms, then paragraphs 110 to 125 of this Annex will apply. In the case of non-qualifying CCPs, paragraphs 126 and 127 of this Annex will apply. Within three months of a central counterparty ceasing to qualify as a QCCP, unless a bank’s national supervisor requires otherwise, the trades with a former QCCP may continue to be capitalised as though they are with a QCCP.

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After that time, the bank’s exposures with such a central counterparty must be capitalised according to paragraphs 126 and 127 of this Annex.

Exposures to Qualifying CCPs A. Trade exposures (i) Clearing member exposures to CCPs
110. Where a bank acts as a clearing member of a CCP for its own purposes, a risk weight of 2% must be applied to the bank’s trade exposure to the CCP in respect of OTC derivatives, exchange traded derivative transactions and SFTs. Where the clearing member offers clearing services to clients, the 2% risk weight also applies to the clearing member’s trade exposure to the CCP that arises when the clearing member is obligated to reimburse the client for any losses suffered due to changes in the value of its transactions in the event that the CCP defaults. 111. The exposure amount for such trade exposure is to be calculated in accordance with Annex 4 using the IMM, 3 CEM or Standardised Method, as consistently applied by such bank to such an exposure in the ordinary course of its business, or Part 2, Section II, D3 together with credit risk mitigation techniques set forth in Basel II for collateralised transactions. Where the respective exposure methodology allows for it, margining can be taken into account. In the case of IMM banks, the 20-day floor for the margin period of risk (MPOR) as established in the first bullet point of Annex 4, paragraph 41(i) will not apply, provided that the netting set does not contain illiquid collateral or exotic trades and provided there are no disputed trades. This refers to exposure calculations under IMM, or the IMM short cut method of Annex 4, paragraph 41, and for the holding periods entering the exposure calculation of repo-style transactions in paragraphs 147 and 181.
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112. Where settlement is legally enforceable on a net basis in an event of default and regardless of whether the counterparty is insolvent or bankrupt, the total replacement cost of all contracts relevant to the trade exposure determination can be calculated as a net replacement cost if the applicable close-out netting sets meet the requirements set out in: • Paragraphs 173 and, where applicable, also 174 of the main text in the case of repo-style transactions, • Paragraphs 96(i) to 96(iii) of this Annex in the case of derivative transactions, • Paragraphs 10 to 19 of this Annex in the case of cross-product netting. To the extent that the rules referenced above include the term “master netting agreement”, this term should be read as including any “netting agreement” that provides legally enforceable rights of set-off. If the bank cannot demonstrate that netting agreements meet these rules, each single transaction will be regarded as a netting set of its own for the calculation of trade exposure.

(ii) Clearing member exposures to clients
113. The clearing member will always capitalise its exposure (including potential CVA risk exposure) to clients as bilateral trades, irrespective of whether the clearing member guarantees the trade or acts as an intermediary between the client and the CCP. However, to recognise the shorter close-out period for cleared transactions, clearing members can capitalise the exposure to their clients applying a margin period of risk of at least 5 days (if they adopt the IMM); or multiplying the EAD by a scalar of no less than 0.71 (if they adopt either the CEM or the Standardised Method).

(iii) Client exposures
114. Where a bank is a client of a clearing member, and enters into a transaction with the clearing member acting as a financial intermediary
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(ie the clearing member completes an offsetting transaction with a CCP), the client’s exposures to the clearing member may receive the treatment in paragraphs 110 to 112 of this Annex if the two conditions below are met. Likewise, where a client enters into a transaction with the CCP, with a clearing member guaranteeing its performance, the client’s exposures to the CCP may receive the treatment in paragraph 110 to 112 if the following two conditions are met: (a) The offsetting transactions are identified by the CCP as client transactions and collateral to support them is held by the CCP and/or the clearing member, as applicable, under arrangements that prevent any losses to the client due to: (i) the default or insolvency of the clearing member, (ii) the default or insolvency of the clearing member’s other clients, and (iii) the joint default or insolvency of the clearing member and any of its other clients. The client must be in a position to provide to the national supervisor, if requested, an independent, written and reasoned legal opinion that concludes that, in the event of legal challenge, the relevant courts and administrative authorities would find that the client would bear no losses on account of the insolvency of an intermediary clearing member or of any other clients of such intermediary under relevant law: - the law of the jurisdiction(s) of the client, clearing member and CCP; - if the foreign branch of the client, clearing member or CCP are involved, then also under the law of the jurisdiction(s) in which the branch are located; - the law that governs the individual transactions and collateral; and - the law that governs any contract or agreement necessary to meet this condition (a).
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(b) Relevant laws, regulation, rules, contractual, or administrative arrangements provide that the offsetting transactions with the defaulted or insolvent clearing member are highly likely to continue to be indirectly transacted through the CCP, or by the CCP, should the clearing member default or become insolvent. In such circumstances, the client positions and collateral with the CCP will be transferred at market value unless the client requests to close out the position at market value. 115. Where a client is not protected from losses in the case that the clearing member and another client of the clearing member jointly default or become jointly insolvent, but all other conditions in the preceding paragraph are met, a risk weight of 4% will apply to the client’s exposure to the clearing member. 116. Where the bank is a client of the clearing member and the requirements in paragraphs 114 or 115 above are not met, the bank will capitalise its exposure (including potential CVA risk exposure) to the clearing member as a bilateral trade.

(iv) Treatment of posted collateral
117. In all cases, any assets or collateral posted must, from the perspective of the bank posting such collateral, receive the risk weights that otherwise applies to such assets or collateral under the capital adequacy framework, regardless of the fact that such assets have been posted as collateral. Where assets or collateral of a clearing member or client are posted with a CCP or a clearing member and are not held in a bankruptcy remote manner, the bank posting such assets or collateral must also recognise credit risk based upon the assets or collateral being exposed to risk of loss based on the creditworthiness of the entity holding such assets or collateral. 118. Collateral posted by the clearing member (including cash, securities, other pledged assets, and excess initial or variation margin, also called overcollateralisation), that is held by a custodian, and is bankruptcy
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remote from the CCP, is not subject to a capital requirement for counterparty credit risk exposure to such bankruptcy remote custodian. 119. Collateral posted by a client, that is held by a custodian, and is bankruptcy remote from the CCP, the clearing member and other clients, is not subject to a capital requirement for counterparty credit risk. If the collateral is held at the CCP on a client’s behalf and is not held on a bankruptcy remote basis, a 2% risk-weight must be applied to the collateral if the conditions established in paragraph 114 of this Annex are met; or 4% if the conditions in paragraph 115 of this Annex are met.

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Commission adopts technical standards for the Regulation on OTC derivatives, central counterparties and trade repositories
The European Commission has adopted nine regulatory and implementing technical standards to complement the obligations defined under the Regulation on OTC derivatives, central counterparties (CCPs) and trade repositories (the so-called European Markets Infrastructure Regulation - EMIR) which was adopted on 4 July and entered into force on 16 August 2012 (see MEMO/12/232). They were developed by the European Supervisory Authorities and have been endorsed by the European Commission without modification. The adoption of these technical standards finalises requirements for the mandatory clearing and reporting of transactions, in line with the EU's G20 commitment made in Pittsburgh in September 2009. Internal Market and Services Commissioner Michel Barnier said: "The adoption of these technical standards is the final step in achieving the mandatory clearing and reporting of OTC derivatives and in meeting our G20 commitments. This will improve transparency in the trading of derivatives." The technical standards will enter into force on the twentieth day following publication in the EU's Official Journal. As with any other EU Regulation, their provisions will be directly applicable (i.e. legally binding in all Member States without implementation into national law) from the day of entry into force. One technical standard submitted by the European Securities and Markets Authority (ESMA) on the specific point of colleges for central counterparties was not endorsed because of concerns as to the legality of
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some of the provisions. The European Commission will ask ESMA to redraft the standard and it will be adopted at a later stage. However, this will not affect the timing of the clearing obligation, or the timing of authorisation of CCPs under EMIR, since the provisions of this technical standard are not a prerequisite for CCPs to begin applying for authorisation under EMIR.

Key elements of the technical standards adopted:
With regard to OTC (over-the-counter) derivatives, the regulatory technical standards specify the provisions of the European Market Infrastructure Regulation (EMIR) related to indirect clearing arrangements, the clearing obligation procedure, the public register, access to a trading venue, non-financial counterparties, and risk mitigation techniques for OTC derivatives contracts not cleared by a CCP. With regard to central counterparties, the regulatory technical standards specify the provisions of EMIR related to the requirements for CCPs, as well as the capital, retained earnings and reserves of a CCP. The implementing technical standards specify the format of the records to be maintained by CCPs. With regard to trade repositories, the regulatory technical standards specify the provisions of EMIR related to the minimum details of the data to be reported to trade repositories, the details of the application for registration as a trade repository, as well as the data to be published and made available by trade repositories and operational standards for aggregating, comparing and accessing the data. The implementing technical standards specify the format and frequency of trade reports to trade repositories and the format of applications for registration of trade repositories.
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The regulatory technical standards will be published in the Official Journal of the European Union immediately following the receipt of 'non-objection' from the European Parliament and Council. The European Parliament and Council have one month to exercise their right of scrutiny, with this period extendable by an additional one month at their initiative. The regulatory technical standards will then enter into force on the twentieth day following that of their publication. The implementing technical standards are not subject to the right of scrutiny of the European Parliament and Council. They will therefore be published in the Official Journal of the European Union right after their adoption and will enter into force on the twentieth day following that of their publication. Nevertheless, the provisions under the implementing technical standards will only take effect once the associated regulatory technical standards enter into force, since the provisions defined in the implementing acts complement provisions defined in the related regulatory technical standards and are not stand-alone obligations.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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Certified Risk and Compliance Management Professional (CRCMP) distance learning and online certification program.
Companies like IBM, Accenture etc. consider the CRCMP a preferred certificate. You may find more if you search (CRCMP preferred certificate) using any search engine. The all-inclusive cost is $297. What is included in the price:

A. The official presentations we use in our instructor-led classes (3285 slides)
The 2309 slides are needed for the exam, as all the questions are based on these slides. The remaining 976 slides are for reference. You can find the course synopsis at: www.risk-compliance-association.com/Certified_Risk_Compliance_ Training.htm

B. Up to 3 Online Exams
You have to pass one exam. If you fail, you must study the official presentations and try again, but you do not need to spend money. Up to 3 exams are included in the price. To learn more you may visit: www.risk-compliance-association.com/Questions_About_The_Certif ication_And_The_Exams_1.pdf www.risk-compliance-association.com/CRCMP_Certification_Steps_ 1.pdf

C. Personalized Certificate printed in full color
Processing, printing, packing and posting to your office or home.

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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D. The Dodd Frank Act and the new Risk Management Standards (976 slides, included in the 3285 slides)
The US Dodd-Frank Wall Street Reform and Consumer Protection Act is the most significant piece of legislation concerning the financial services industry in about 80 years. What does it mean for risk and compliance management professionals? It means new challenges, new jobs, new careers, and new opportunities. The bill establishes new risk management and corporate governance principles, sets up an early warning system to protect the economy from future threats, and brings more transparency and accountability. It also amends important sections of the Sarbanes Oxley Act. For example, it significantly expands whistleblower protections under the Sarbanes Oxley Act and creates additional anti-retaliation requirements. You will find more information at: www.risk-compliance-association.com/Distance_Learning_and_Cert ification.htm

_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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