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P a g e | 1 Inter n a tio n a l A s s oci a t ion of R isk a nd Compl i a n c e Pro f e s s io n a ls ( I A RCP) 1200 G St re e t NW Su i te 800 W a s h i ng t o n, D C 200 0 5 - 67 0 5 U SA T e l : 202 - 449 - 9750 w w w .ri s k - co m pl i a nce - a s s o c i a tion . co m.

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P age |1

InternationalAssociationofRiskandCompliance Professionals(IARCP)

1200GStreetNWSuite800Washington, DC20005-6705USATel:202-449-9750www.risk-compliance-association.com

Top10riskandcompliancemanagementrelatednewsstoriesandworldeventsthat(forbetterorforworse)shapedthe week'sagenda,andwhatisnext

DearMember,

“FedspeechesarenotlikeHollywoodmovies.”

Whosaidthat?

JohnC.Williams,PresidentandCEO,FederalReserveBankofSanFrancisco,duringhispresentationtoTownHallLosAngeles,California

Whydidhesayso?Heexplained:

“That’sbecauseI’lltellyouhowitendsrighthereatthebeginning.”

JohndoesnotlookhappywithEurope:

“EverytimeEurope’scauldronofwoesseemstobecoolingabit,somethingnewhappenstomakeitboiloveragain.”

Hecontinued:

“Thesituationwefindourselvesintodayislikedrivingacarupalong,steephill.

Tokeepthecarmovingatareasonablespeed,theFedispushingdown hardontheaccelerator.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P age |2

Astheroadgetsflatter—asthefactorsholdingbacktherecoverywane—we’llneedtolightenupontheacceleratorabit.

And,eventually,ifwefindourselvespickinguptoomuchspeed,wemayneedtoapplythebrakes.”

[Themoralofthestory:Ifyoucandriveacar,youunderstandtheFed’spolicies.]

ReadmoreatNumber8below.

Anotherinterestingspeech:

MrAnselmoTeng,ChairmanoftheMonetaryAuthorityofMacao,spokeattheMacauAssociationofBanks(ABM)SpringFestivalLuncheonGathering,Macao.

Hisintroductionissimplygreat:

“IntheChinesetradition,theNewYearcarriesaspecialconnotation;firecrackersbidfarewelltothepastyearwhiletheoldcoupletsarereplacedtogreetnewthings.

WeseetheYearoftheDragonoffandgreetthenewYearoftheSnake.OnbehalfofAMCM,Iwouldliketotakethisopportunityofgreetingthe

newYearoftheSnake,towishtheMSARaharmoniouscommunity,prosperousbusiness.”

WhatIremembernow…

About6yearsago,Igaveapresentationtothisareaoftheworld…Atthefirstbreakayoungladyapproachedmeandsaid:

“Lookatthespring.Aren’ttheflowersbeautiful?Isn’ttheweathernice?Ihopeyouenjoythespringandtheflowers…”

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


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Tocontinue:

“Ididnotunderstandyourpresentation!”

Ah,thesetraditionalniceandpoliteintroductionsinthePacificRim…Ilovethem.

Readmore(aboutthespeech,notthelady)atNumber10below.

WelcometotheTop10list.

BestRegards,

GeorgeLekatisPresidentoftheIARCP

GeneralManager,ComplianceLLC

1200GStreetNWSuite800, WashingtonDC20005,USATel:(202)449-9750

Email:[email protected]

Web:www.risk-compliance-association.comHQ:1220N.MarketStreetSuite804,WilmingtonDE19801,USA

Tel:(302)342-8828

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P age |4

ProgressreportonimplementationoftheBaselregulatoryframework

April2013

ThisupdatedProgressreportonimplementationoftheBaselregulatoryframeworkprovidesahigh-levelviewofBaselCommitteemembers'progressinadoptingBaselII,Basel2.5andBaselIII,asofendMarch2013.

IOSCOtoprogressreformagendaundernewleadership

Mr.GregMedcraft,chairoftheAustralianSecuritiesand

InvestmentsCommission,tookoveraschairoftheInternational

OrganizationofSecuritiesCommissions(IOSCO)BoardatitsmeetinginSydneyon21-22March.

PrudentialRegulation Authority(PRA)

On1April2013,thenewregulatoryregimeforfinancialservicesintheUnitedKingdomcameintoeffect.

ThePrudentialRegulationAuthority(PRA)hasbecometheUnitedKingdom’sprudentialregulatorofdeposit-takers,insurersandmajorinvestmentfirms.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P age |5

InterviewwithGabrielBernardino,ChairmanofEIOPA

conductedbyChristophBaltzer,VersicherungsWirtschaft(Germany)

“Insurersseemtobethevictimsofascenariooffinancialrepression,especiallywithlowinterestrates.Whatwould betheconsequencesofthepolicyofcheapmoneyforinsurers?

WeseethisinsomecountriesintheEUwherealowinterestrate environmentstartsbeingabigchallengeforsometypesofproducts,especiallywhenyouhavegotlongtermguarantees.”

EU-USINSURANCEDIALOGUEAGREESHIGHLEVELPROJECTPLAN

TheSteeringCommitteeoftheEU-U.S.InsuranceDialogueProjecttoincreasemutualunderstanding andenhancecooperationmetinBasel,Switzerlandandagreedonahighlevelworkplanfrom2013to2017.

Thepartiesachievedagreementonaprioritizationofobjectivesandaschedulefortheimplementationoftheinitiativespreviouslyagreedupon bytheSteeringCommitteeanddescribedinthe“WayForwardDocument”(December2012).

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


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Finalrule

Therequirementsfordeterminingwhenacompanyispredominantlyengagedinfinancialactivities

Forimmediaterelease

TheFederalReserveBoardhasannouncedapprovalofafinalrulethatestablishestherequirementsfordeterminingwhenacompanyis"predominantlyengagedinfinancialactivities."

TherequirementswillbeusedbytheFinancialStabilityOversightCouncil(FSOC)whenitconsidersthepotentialdesignationofanonbankfinancialcompanyforconsolidatedsupervisionbytheFederalReserve.

AFewObservationsinthePrivateFundSpace

DavidW.Blass,ChiefCounsel,DivisionofTradingandMarkets,U.S.SecuritiesandExchangeCommission,AmericanBar

Association,TradingandMarketsSubcommittee,Washington,D.C.

TheSecuritiesandExchangeCommission,asamatterofpolicy,disclaimsresponsibilityforanyprivatepublicationorstatementbyanyofitsemployees.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P age |7

PresentationtoTownHallLosAngelesLosAngeles,California

ByJohnC.Williams,PresidentandCEO,FederalReserveBankofSanFrancisco

TheEconomyandtheFederalReserve:RealProgress,butTooSoontoRelax

FinancialcooperationbetweenChinaandSingapore

CongratulatoryremarksbyMrRaviMenon,ManagingDirectoroftheMonetaryAuthorityofSingapore,attheinaugurationofICBCSingaporeRMBClearingBank,Singapore

BriefoverviewofMacao’seconomyin2012

SpeechbyMrAnselmoTeng,ChairmanoftheMonetaryAuthorityofMacao,attheMacau

AssociationofBanks(ABM)SpringFestivalLuncheonGathering,Macao,26February2013.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P age |8

ProgressreportonimplementationoftheBaselregulatoryframeworkApril2013

ThisupdatedProgressreportonimplementationoftheBaselregulatoryframeworkprovidesahigh-levelviewofBaselCommitteemembers'progressinadoptingBaselII,Basel2.5andBaselIII,asofendMarch2013.

Itfocusesonthestatusofdomestic

rule-makingprocessestoensurethattheCommittee'scapitalstandardsaretransformedintonationallawor

regulationaccordingtotheinternationallyagreedtimeframes.

TheCommitteebelievesthatdisclosurewillprovideadditionalincentiveformemberstofullycomplywiththeinternationalagreements.

ThisreportupdatestheCommittee'sOctober2012reporttoG20FinanceMinistersandCentralBankGovernorsonimplementationoftheBasel regulatoryframework.

ProgressreportonimplementationoftheBaselregulatoryframework,April2013

Introduction

ThisreportprovidestheadoptionstatusofBaselII,Basel2.5andBaselIIIregulationsforeachBaselCommittee1memberjurisdictionasof end-March2013.

ItupdatestheCommittee’sprevioussemi-annualprogressreportspublishedinOctober2011,April2012andOctober2012.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P age |9

In2012,theBaselCommitteeadoptedtheRegulatoryConsistencyAssessmentProgramme(RCAP)tomonitorprogressinintroducingregulations,assesstheirconsistencyandanalyseregulatoryoutcomes.

Regardingtheconsistencyofimplementation,theCommitteerecentlypublishedtheassessmentreportonSingapore’simplementationofBaselIIIbasedcapitalregulations,followingasimilarassessmentofJapan,and preliminaryassessmentsoftheEuropeanUnionandtheUnitedStates.

ThereportsareavailableatthewebsiteoftheBankforInternationalSettlements.

Currently,assessmentsofChinaandSwitzerlandareunderway,andassessmentsofAustralia,BrazilandCanadawillcommencein2013.

Regardingtheregulatoryoutcomes,theCommitteepublisheditsfirstanalysisonthemeasurementofrisk-weightedassetsfortradingbookassetsinJanuary2013.

Areportonrisk-weightingofbankingbookassetsisexpectedtobepublishedinthecomingmonths.

Theattachedtablesfocusprimarilyonthestatusofadoptionofthe

risk-basedcapitalrequirementsbytheCommitteememberjurisdictions.

TheCommitteeintends,goingforward,toexpandtheadoptionmonitoringtootherBaselIIIcomponents,includingtheLiquidityCoverageRatio,capitalchargesforglobalanddomesticsystemicallyimportantbanksandtheleverageratio.

ForjurisdictionsthatarenotmembersoftheCommittee,theFinancialStabilityInstituteoftheBankforInternationalSettlementspublishedinJuly2012theresultsofitssurveyonBaselIII’sadoptionstatus.

Scope

TheBaselIIIframeworkbuildsuponandenhancestheregulatoryframeworksetoutunderBaselIIandBasel2.5.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

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  • Thetableshereinthereforereviewmembers’regulatoryadoptionofBaselII,Basel2.5andBaselIII.

  • BaselII,whichimprovedthemeasurementofcreditriskandincludedcaptureofoperationalrisk,wasreleasedin2004andwasduetobeimplementedfromyear-end2006.

  • TheFrameworkconsistsofthreepillars:Pillar1containstheminimumcapitalrequirements;Pillar2setsoutthesupervisoryreviewprocessandPillar3correspondstomarketdiscipline.

  • Basel2.5,agreedinJuly2009,enhancedthemeasurementsofrisksrelatedtosecuritisationandtradingbookexposures.

  • Basel2.5wasduetobeimplementednolaterthan31December2011.

  • InDecember2010,theCommitteereleasedBaselIII,whichsethigherlevelsforcapitalrequirementsandintroducedanewgloballiquidityframework.9CommitteemembersagreedtoimplementBaselIIIfrom1January2013,subjecttotransitionalandphase-inarrangements.

  • InNovember2011,G20LeadersattheCannesSummitcalledonjurisdictionstomeettheircommitmenttoimplementfullyandconsistentlyBaselIIandBasel2.5byend2011,andBaselIII,startingin2013andcompletingby1January2019.

  • InJune2012,G20LeadersattheLosCabosSummitreaffirmedtheircallforjurisdictionstomeettheircommitments.ThismessagewasreiteratedinMoscowinFebruary2013bytheG20FinanceMinistersandCentralBankGovernors.

  • Methodology

  • ThedatacontainedinthisreportarebasedonresponsesfromBaselCommitteememberjurisdictions.

  • ThefollowingclassificationisusedforthestatusofadoptionofBaselregulatoryrules:

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P age |11

Draftregulationnotpublished:nodraftlaw,regulationorotherofficialdocumenthasbeenmadepublictodetailtheplannedcontentofthedomesticregulatoryrules.

Thisstatusincludescaseswhereajurisdictionhascommunicated high-levelinformationaboutitsimplementationplansbutnotdetailedrules.

Draftregulationpublished:adraftlaw,regulationorotherofficialdocumentisalreadypubliclyavailable,forexampleforpublicconsultationorlegislativedeliberations.

Thecontentofthedocumenthastobespecificenoughtobeimplementedwhenadopted.

Finalrulepublished:thedomesticlegalorregulatoryframeworkhasbeenfinalisedandapprovedbutisstillnotapplicabletobanks.

Finalruleinforce:thedomesticlegalandregulatoryframeworkisalreadyappliedtobanks.

Inordertosupportandsupplementthestatusreported,summaryinformationaboutthenextstepsandtheimplementationplansbeingconsideredbymembersarealsoprovidedforeachjurisdiction.

Inadditiontothestatusclassification,acolourcodeisusedtoindicatetheimplementationstatusofeachjurisdiction.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


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InternationalAssociationofRiskandComplianceProfessionals(IARCP)

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P age |18

  • IOSCOtoprogressreformagendaundernewleadership

  • Mr.GregMedcraft,chairoftheAustralianSecuritiesand

  • InvestmentsCommission,tookoveraschairoftheInternationalOrganizationofSecuritiesCommissions(IOSCO)Boardatitsmeetingin

  • Sydneyon21-22March.

  • HesucceedsMr.MasamichiKonooftheJapanFSA.

  • TheBoardalsoelectedOntarioSecuritiesCommissionchairmanMr.HowardI.WetstonasIOSCOvicechairfollowingtheretirementofMr.EthiopisTafara.

  • "IamdelightedtobeappointedchairofIOSCOandIsaluteandthankMasaKonoforhisleadershipofIOSCO,”Mr.Medcraftsaid.

  • “Undermystewardship,IwanttobuildonMr.Kono'sworkandensureIOSCOisproactiveandforward-lookingindeliveringthreeobjectives–workingtoensurethatgloballyinvestorsareconfidentandinformed,marketsarefairandefficientandreducingsystemicrisk."

  • Mr.MedcraftsaidthatduringhistermaschairIOSCOwouldworktowardtheseobjectivesthrough:

  • Engagementwithmembersandstakeholders;

  • Co-operationacrossitsmembershipandwithindustry;and

  • Standard-setting.

  • Mr.Wetstonsaid:"IamlookingforwardtoworkingwithGregMedcraft toadvanceIOSCO'sstandard-settingagenda,includingnewmandatesoninvestorprotectionandeducation,cross-borderregulationand deterrence.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

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P age |19

IwouldalsoliketotakethisopportunitytothankMasamichiKonoforhisleadershipandcontributionstoIOSCO."

Mr.Konosaid:“IwouldliketoexpressmygratitudetoeveryoneatIOSCOfortheirkindsupportduringmytenureaschair.

OurcollectivestrengthhasenabledIOSCOtomakeimportantheadwayoninternationalregulatoryreformandelevatedthevisibilityandrelevanceofIOSCOwithglobalstakeholders.

Iamconfidentthatfurtherprogresswillbemadeunderthemostcapableleadershipofmysuccessor.”

TheSydneyIOSCOBoardmeetingcoveredthefollowingareas:

Engagement

TheBoardmeetingunderscoredIOSCO’scommitmenttoimprovingengagementwithindustryandthebroaderIOSCOmembership.

IndustryRoundTableonEmergingRisks

ThemeetingwasprecededbyaRoundTableattendedbytheBoardandsevenfinancialservicesexecutivesfromAustralia,Asia,EuropeandNorthAmericatodiscussemergingrisks.

ThediscussionsunderscoredIOSCO´sdeterminationtoengagewithindustryindevelopingearlyandforward-lookingresponsestothechallengesthatsecuritiesmarketsfaceinarapidlyevolvingenvironment.

Participantsexchangedviewsonemergingrisksinglobalfinancialmarketsandthepossibleunintendedconsequencesofsecuritiesregulationandotherpolicymeasures,particularlyonemergingmarkets.

Someofthepotentialrisksdiscussedincludedtheglobalimbalancescausedbycapitalflows,weaknessesinfinancialmarketinfrastructure,high-frequencytrading,marketfragmentation,andcyber-attacks.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

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Boardmembersexpressedconcernoverthepotentialrisksofthecurrentlowinterestrateenvironment.

Membersgenerallyagreedthesearchforyieldcouldfuelthecreationofnewassetbubbles,particularlyinemergingmarketswithlargelyundiversifiedeconomies.

Theynotedthatasuddenupwardspikeininterestratescoulddamageglobaleconomicgrowth.

TheEmergingMarketsCommittee

TheBoarddiscussedmeasurestoenhancetheinclusivenessofEMCmembersinIOSCOpolicyandimplementationwork.

TheEMCaccountsfor75%ofIOSCOmembership,whichgivesitsignificantresponsibilityforthedevelopmentandimplementationofIOSCOstandardsonagloballevel.

Boardmembersagreedthattheemergingmarketswouldplayanincreasinglyimportantroleasasourceoffinancingfortheglobal economy.

Boardmembershipandworkingprocedures

ThemeetinghadpreliminarydiscussionsonchangestothecompositionoftheIOSCOBoardanditsworkingprocedures.

TheaimofthesechangesistoensuretheBoardisasinclusiveandrepresentativeaspossibleoftheIOSCOmembership.

TheBoardwasestablishedinMay2012throughthemergeroftheExecutiveCommittee,theTechnicalCommitteeandtheEmergingMarketCommitteeAdvisoryBoard.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

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  • TheaimistohaveinplaceapermanentbasisfordeterminingBoardmembershipbythetimeoftheAnnualmeetinginRiodeJaneiroinSeptember2014.

  • NewIOSCOmembers

  • TheBoardapprovedandwelcomedthefollowinginstitutionsasaffiliatemembersofIOSCO:

  • UnionofArabSecuritiesAuthorities(UASA)

  • JohannesburgStockExchange(JSE)

  • NigeriaStockExchange(NSE)

  • TheInternationalSwapsandDerivativesAssociation(ISDA)

  • Co-operation

  • IOSCO’songoingcommitmenttoenhancingconstructiveco-operationacrossitsmemberswasreflectedinanumberofnewinitiativesagreedat themeeting.

  • EstablishingtheIOSCOFoundation

  • TheBoarddiscussedthegovernanceframeworkfortheFoundationand discussedwhereitshouldbelocated.

  • BoardmemberssupportedphysicallylocatingtheFoundationinMadrid,aseffortscontinuetosecurefundingcommitments.

  • AfinaldecisiononallaspectsoftheFoundationwillbemadeandthenextstepsforformallyfilingtheFoundationdocumentswillbetakenaftercompletionofthepre-commitmentphaseandthoroughexaminationofalllegalissues.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

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  • Newworkstreams

  • Themeetingagreedtoestablishataskforceoncross-borderregulationandanewstandingcommitteeoninvestoreducationandprotection,andagreedontheneedforaprojectondeterrenceframeworks.

  • -TheTaskForceonCrossBorderRegulationwilldevelopatoolbox ofmeasuresinregulatingsecuritiesmarketsactivitiesthatcrossborders.

  • Ifappropriate,itwillthendevelopprinciplestoguidethecoordinateduseofthesetools.

  • Thetoolstobeconsideredmayincludesubstitutedcompliance,mutualrecognitionandsupervisoryco-operation.

  • TheTaskForce’sworkisintendedtohelppolicymakersandmemberregulatorsinaddressingthechallengestheyfaceinregulatingcross-borderactivity.

  • TheCommitteeonInvestorEducationandProtectionwillhaveabroadmandatetoleadIOSCO’sworkonretailinvestoreducationandprotection.

  • ItsaimwillbetoensureIOSCOtakesaconsistentandcomprehensiveapproachtoretailinvestmentproductsandservices.

  • ByfocusingoninvestoreducationitwillenableIOSCOmemberstosharetheirexperiencesandbuildexpertisegloballyinfinancialliteracy.

  • Themeetingconsidered(andforeshadowedapprovalof)anewmandatetodevelopprinciplesforcredibledeterrenceframeworks.

  • ThemandatecallsfortheIOSCOcommitteeonenforcementtoidentifythecoreelementsofacredibledeterrenceframeworkforsecuritiesregulation,includingstrategiesandgoodpractices.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

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Itrespondstoapublicdemandfortoughersanctionstodetermarketmisconduct.

Thefailuretopunishwrongdoersduringthecurrentfinancialcrisishaserodedpublicconfidenceincapitalmarkets.

InternationalSecondmentsRegister

TheBoardagreedtothecreationofanInternationalSecondmentsRegistertobemaintainedbytheIOSCOSecretariat,whichwillassistmembersinorganizingsecondmentswithotherIOSCOmembers.

Mr.Medcraftsaid:“Secondmentsareakeywayofbuildingunderstandingandco-operationbetweenmembers.

TheRegisterwillplayakeyroleinmakingthishappen.”

MultilateralMemorandumofUnderstandingontheexchangeofinformation

TheBoardconsideredadditionalmeasurestoencouragenon-signatorymemberstosigntheIOSCOMultilateralMemorandumofUnderstandingoncooperationandexchangeofinformation,theinstrumentusedbysecuritiesregulatorsaroundtheworldtocombatcross-borderfraudandmisconduct.

ItalsoreiteratedIOSCO’scommitmenttoprovidetechnicalassistanceandpoliticalsupporttothosenon-signatoriesthatrequireitinordertosigntheMMoU.

Earlierthismonth,theReserveBankofMalawisignedtheMMoU,bringingto94thetotalnumberofIOSCOmembersignatories.

Togetherthesemembersregulateabout95%oftheworld’ssecuritiesmarkets.

However,30membershaveyettobecomesignatories.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

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Aslongasthesejurisdictionsremainoutsidetheinternationalenforcementregime,theyofferpotentialsafehavensforwrongdoersandcreategapsinIOSCO’sinternationalenforcementnetwork.

Standard-setting

ThemeetingprogressedIOSCO’simportantstandardsettingworkforsecuritiesmarkets.

ItalsohadpreliminarydiscussionsabouthowbesttoprioritizeandrationalizeIOSCO’sworkstreamsinanefforttofocusonareasthatdeliverthemaximumbenefittotheorganizationanditsmembers.

FinancialBenchmarks

TheBoarddiscussedthedraftprinciplesonfinancialbenchmarksdevelopedbytheTaskForceonFinancialMarketBenchmarks.

Theprinciplesincludehighlevelprinciplesthatareapplicabletoallbenchmarksandadditionalprinciplesthatareappliedunderspecificcircumstances.

TheBoardagreedtoissueasecondconsultationpaperfocusingprimarilyontheadditional,moredetailedprinciples.

Theconsultationpaperisexpectedtobereleasedforafour-weekcommentperiodduringApril.ThefinalreportisexpectedtobepublishedinJune.

G20/FSBmandatestorepairthefinancialsystem

TheBoarddiscussedprogressinreformworkmandatedbytheG20LeadersandcoordinatedbytheFinancialStabilityBoard.

ThemeetingheardupdatesonOTCderivativesreforminitiativesandimplementationissues,progressonjointIOSCO-BCBS(Basel CommitteeonBankingSupervision)workonMarginRequirementsfor

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non-centrallyclearedderivatives,theneedforfurtherworkoncreditratingagenciesandoncreditdefaultswaps.

OnOTCDerivativesmembersstressedtheimportanceofassessingthecollectiveimpactofthedifferentmeasuresregardingtheregulationofOTCderivativesinanefforttostrengthenthefinaloutcomeandavoid unintendedconsequences.

BoardmembersalsodiscussedprogressonIOSCO’sworkindevelopingamethodologytoidentifynon-banksystemicallyimportantfinancialinstitutions(non-bankSIFIs),coveringmarketintermediaries,assetmanagersandhedgefunds.

TheprojectformspartofabroaderG20mandateonglobalsystemicallyimportantfinancialinstitutions(G-SIFIs)thatencompassesworkbytheBCBSandtheInternationalAssociationofInsuranceSupervisors(IAIS)onsystemicallyimportantinstitutionsinthebankingandinsurancesectors.

Membersemphasizedtheimportanceoflookingatthisissuefromtheperspectiveofnotjustinstitutions,butalsomarkets,productsandinstruments.

Entitiesinthesecuritiesspacewereconsiderablydifferentandsomeofthem,likemanyfunds,hadshock-absorbingfeatureswhichreducedratherthanexacerbatedsystemicrisk.

BoardmembersalsodiscussedtheapplicationoftheFSBKeyAttributesofeffectiveresolutionregimesforfinancialinstitutionstoentitiesinthesecuritiesspace.

Again,membersemphasizedtheimportanceofaligningthisworkwiththeprojectonidentificationofnon-bankSIFIsassomeentitieswithshockabsorbingfeaturesmightnotneedtoberesolvedinthemannerofothersystemicallyimportantentities.

MembersalsonotedtheprogressbeingmadebyIOSCOandtheCommitteeonPaymentandSettlementSystems(CPSS)workingtogether

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

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  • onrecoveryandresolutionofFinancialMarketInfrastructures,including centralcounterparties.

  • NOTES

  • IOSCOistheleadinginternationalpolicyforumforsecuritiesregulatorsandisrecognizedastheglobalstandardsetterforsecuritiesregulation.Theorganization'smembershipregulatesmorethan95%oftheworld'ssecuritiesmarketsinmorethan115jurisdictionsanditcontinuestoexpand.

  • TheIOSCOboardisthegoverningandstandard-settingbodyoftheInternationalOrganizationofSecuritiesCommissions(IOSCO),andismadeupof32securitiesregulators.

  • ThemembersoftheIOSCOboardarethesecuritiesregulatoryauthoritiesofArgentina,Australia,Belgium,Brazil,Chile,China,France,Germany,HongKong,India,Italy,Japan,Korea,Malaysia,Mexico,Morocco,theNetherlands,Nigeria,Ontario,Pakistan,Portugal,Quebec,Romania,Singapore,SouthAfrica,Spain,Switzerland,TrinidadandTobago,Turkey,UnitedKingdomandtheUnitedStates.

  • TheEmergingMarketsCommitteeisaspecializedworkinggrouprepresentingtheworld’semergingfinancialmarkets.

  • Itendeavorstopromotethedevelopmentandgreaterefficiencyofemergingsecuritiesandfuturesmarketsbyestablishingprinciplesandminimumstandards,preparingtrainingprogramsforthestaffofmembersandfacilitatingexchangeofinformationandtransferoftechnologyandexpertise.

  • IOSCOaimsthroughitspermanentstructures:

  • tocooperateindeveloping,implementingandpromotingadherencetointernationallyrecognizedandconsistentstandardsofregulation,oversightandenforcementinordertoprotectinvestors,maintainfair,efficientandtransparentmarkets,andseektoaddresssystemicrisks;

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  • toenhanceinvestorprotectionandpromoteinvestorconfidenceintheintegrityofsecuritiesmarkets,throughstrengthenedinformationexchangeandcooperationinenforcementagainstmisconductandinsupervisionofmarketsandmarketintermediaries;and

  • toexchangeinformationatbothglobalandregionallevelsontheirrespectiveexperiencesinordertoassistthedevelopmentofmarkets,strengthenmarketinfrastructureandimplementappropriateregulation.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

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PrudentialRegulation Authority(PRA)

On1April2013,thenewregulatoryregimeforfinancialservicesintheUnitedKingdomcameintoeffect.

ThePrudentialRegulationAuthority(PRA)hasbecometheUnitedKingdom’sprudentialregulatorofdeposit-takers,insurersandmajorinvestmentfirms.

AspartoftheBankofEngland,thePRAwillmakeanimportantcontributiontotheBank’sfinancialstabilityobjectiveofprotectingandenhancingthestabilityoftheUKfinancialsystem.

ThePRAhastwostatutoryobjectives:ageneralobjectivetopromotethesafetyandsoundnessofthefirmsitregulates,focusingontheadverseeffectsthattheycanhaveonthestabilityoftheUKfinancialsystem;andanobjectivespecifictoinsurancefirms,tocontributetoensuringthatpolicyholdersareappropriatelyprotected.

ThePRA’sobjectivesareunderpinnedbytheprinciplethatastablefinancialsystem,whichisresilientinprovidingthecriticalfinancialservicestheeconomyneeds,isanecessaryconditionforahealthyandsuccessfuleconomy.

Firmscanadverselyaffectthestabilityofthefinancialsystemeitherthroughthewayinwhichtheycarryontheirbusinessorbyfailinginadisorderlymanner.

Itwillnot,however,bethePRA’sroletoensurethatnofirmfails.

Rather,thePRAwillseektoensurethatanyfirmsthatfaildosoinawaythatavoidssignificantdisruptiontothesupplyofcriticalfinancialservices,andthustothePRA’sstatutoryobjectives.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

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P age |29

IwouldliketothankeveryonewhosubmittedwrittencommentsontheearlierdocumentorattendedthePRA’slaunchevents.

ThecommentswereveryconstructiveandIamparticularlypleasedwiththestrongsupportforthePRA’scommitmenttoforward-looking,judgement-basedsupervisionandtransparentdecision-making.

Withoutreplyingtoeverycomment,Iwouldliketofollowuponafewkeythemes.

PerhapsthemostcommonissueraisedbyrespondentswastheinteractionbetweenthePRAandtheFinancialConductAuthority(FCA).

Iunderstandfirms’concernsaboutthepotentialburdenof

dual-regulation,whichiswhyboththePRAandtheFCAhavecommittedtoworkingtogetherandco-ordinatingacrossarangeofareas,forexamplebylookingtoavoidduplicativedatarequests.

ThePRAandtheFCAhavedifferentobjectives,though,andthebenefitsofthenewregimewillonlybeachievedifbothinstitutionscanfocusontheirownresponsibilities.

FurtherdetailonhowthePRAwillworkwiththeFCAissetoutintheMemorandumofUnderstandingbetweenthetworegulators,andinBox3ofthisdocument.

Afewrespondentsraisedissuesaboutcapitalrequirements,includingthepotentialcompetitiveadvantageforlargerdeposit-takersofusinginternalcapitalmodelscomparedwithsmallerfirms.

Asthisdocumentsetsout,thePRAiscommittedtoapplyingtheprincipleofproportionalityinitssupervisionoffirms.

Inthiscontext,proportionalityisjudgedintermsofthethreatsthatfirmscanposetothePRA’sstatutoryobjectives.

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P age |30

Animportantfirststepinthedirectionofapplyingtheprincipleofproportionalityisdescribedintherecentpublicationonbarrierstoentryfornewfirms.

IbelievethatthisstepalsorepresentsacommitmenttoapplytheprinciplesetoutinthenewlegislationthatthePRAshouldhaveregardtominimisingadverseeffectsoncompetitionintheindustriesitregulateswhenpursuingitsstatutoryobjectives.

Finally,somerespondentshighlightedtheimportanceofregulatingcreditunionsappropriately.

ThePRArecognisesthesignificantrolethatcreditunionsplayintheUKeconomyandgiventheparticularnatureoftheirbusiness,creditunionsaresubjecttotheirownprudentialregime.

Therelativelysmallsize,lackofcomplexityandinterconnectednessof creditunionsmeansthattheywillgenerallyposefewerriskstothePRA’sobjectivesthanotherfirmsandthereforewillbesubjecttoalessintensiveformofsupervision.

ThisisagainconsistentwiththeapplicationoftheprincipleofproportionalityinthePRA’sapproach.

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P age |31

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P age |32

Workingwithotherauthorities

Co-ordinationwithotherauthoritiesisessentialtothePRA’ssuccess.

BankofEnglandandFPC

ThePRAisapartoftheBankofEngland,andisthereforeconnectedtotheBank’sotherfunctions—includingitsroleaslenderoflastresort,anditsworkonmarketintelligence,oversightoffinancialmarketinfrastructure,prudentialpolicy,financialsectorresilienceandresolution.

Thisfacilitatestheflowofinformationbetweenthesefunctions.

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P age |33

ThePRA’sobjectiveofpromotingthesafetyandsoundnessoffirms,focusingprimarilyontheharmthattheycancausetotheUKfinancialsystem,complementstheBank’swiderobjectiveto‘protectandenhancethestabilityofthefinancialsystemoftheUnitedKingdom’.

AndthePRA’sfocusonminimisingtheadverseeffectsoffirmfailurecomplementsthespecialresolutionobjectivesundertheBankingAct2009whichtheBank,asSpecialResolutionAuthority,shareswithotherauthorities.

Aneffectiveregulatoryframeworkforfinancialstabilityalsoneedstocombinefirm-specificsupervisionwithworktoprotectandenhancetheresilienceofthefinancialsystemasawhole.

ThePRAthereforeworkscloselywiththeFPC,withintheBank,whichhasstatutoryresponsibilityforreducingriskstothefinancialsystemasawhole.

TheFPCcanmakerecommendationsandgivedirectionstothePRAonspecificactionsthatshouldbetakeninordertoachievetheFPC’sobjectives.

ThePRAisresponsibleforimplementingFPCrecommendationsona

‘complyorexplain’basis,andforcomplyingwiththeFPC’sdirectionsinrelationtotheuseofmacroprudentialtools,specifiedbyHMTreasuryinsecondarylegislation.

ThePRAreportstotheFPConitsdeliveryoftheserecommendationsanddirections.

Thereisafrequenttwo-wayflowofinformationandexchangeofviewsbetweenthePRAandtheFPC.

ThePRAprovidesfirm-specificinformationtotheFPC,toassistitsmacroprudentialsupervision.

AndtheFPC’sassessmentofsystemicrisksinfluencesthePRA’sjudgementsinpursuitofitsownobjective.

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P age |34

Co-ordinationbetweenthePRAandtheFPCisassistedbythecommonmembershipoftheGovernoroftheBankofEngland,theDeputyGovernorforFinancialStabilityandtheChiefExecutiveOfficer(CEO)ofthePRAonboththePRABoardandtheFPC.

FCA

TheFCAactsasconductregulatorforthefirmsprudentiallyregulatedbythePRA.

ThePRAhasastatutorydutytoco-ordinatewiththeFCAintheexerciseofitspublicfunctions,includingpolicymakingandsupervision.

AMemorandumofUnderstanding(MoU)betweentheFCAandthePRAdescribeshowthetworegulatorsfulfilthisdutytoco-ordinateinawaythatsupportseachregulator’sabilitytoadvanceitsownobjectives.

Akeyprincipleforthisco-operation,giventheregulators’separatemandatesforprudentialandconductregulationofPRA-authorisedfirms,isthateachauthorityshouldfocusonthekeyriskstoitsownobjectives,whilebeingawareofthepotentialforconcernsoftheother.

Insomecases,thetwoauthoritieshaveadirectinterestinthesameissues,butfromdifferentperspectives,oratdifferentlevelsofdetail.

Forexample,thePRAwillwanttounderstandriskstofirms’capitalandprofitabilityifsumsaredueasredressforaconductmatter,butitwillnotneedtobeasclosetothedetailsoftheremedialactionastheFCA.

Inothercases,thereneedstobecloserco-operation.

Forexample,theFCAandthePRAwillsharetheirrespectiveviewson keyconductandprudentialissuesfacingafirm.

Publicactionssuchasenforcementcasesarecarefullyco-ordinatedtoassessthepotentialformoresignificantprudentialimplications.

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  • P age |35

  • Andfromanoperationalperspective,structureddataroutinelycollected byoneregulatorarereadilyaccessibletotheother.

  • Co-ordinationbetweenthePRAandtheFCAisassistedbythemembershipoftheirCEOsoneachother’sboard.

  • Thiscross-boardrolefocusesonareasofoverlapanddiscussionsofmaterialrelevancetoeachCEO’sownorganisation.

  • Co-ordinationbetweentheorganisationsisalsoassistedbycommonmembershipoftheirCEOsontheFPC.

  • ThePRAandtheFCAarealsopartytootherMoUswiththeBankasawholeandHMTreasuryoninternationalengagement,andtherestoftheBankontheoversightoffinancialmarketinfrastructure.

  • OtherUKbodies

  • ThePRAoftenneedstoworkwithotherUKregulators,eithertopursueitsownobjectiveortoassistthemintheirs;thismayalsoincludeotherenforcementagencies.

  • ThePRAhasagreementstosupportthesharingofinformationandjudgements,andtheco-ordinationofactions.

  • ThePRA’sgeneralapproachtothesearrangementsandtherelationshipstheyunderpinisfocusedon:

  • enablingallpartiestofocusontheirownobjectives;

  • thesubstantiveissuesofpotentialco-ordination;

  • avoidingwherepossibleadetailed,prescriptiveapproach,toensurethatjudgementandflexibilityarenotlost;and

  • provisionsforregularreview,ensuringthatMoUsremaincurrentandembeddedwithintheorganisations.

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P age |36

Internationalco-operation

Bankingisaninternationalindustry.ManyUKfirmshaveoperationsoverseas,andmanyfirmsdomiciledoverseashavesubsidiariesorbranchesintheUnitedKingdom.

Deposit-takersandinvestmentfirmsarethereforesupervisedonaco-operativeinternationalbasis,andthepolicyframeworkforthis

supervisionistoalargeextentagreedglobally,includingbytheBaselCommitteeonBankingSupervision(BCBS)andFinancialStabilityBoard(FSB),toensurethatalljurisdictionsupholdappropriatestandards

intheircollectiveinterest.

ThePRAparticipatesactivelyinglobalandEuropeansupervisoryfora,playingafullandactiverolewithitscounterpartsinsupervising

cross-borderfirms,andseekingtobeaninfluentialandpersuasive

participantininternationalpolicydebates.

Inparticular,thePRAactivelyparticipatesintheworkoftheFSBandtheBCBS.

AnditaimstoinfluenceandreflectinitsapproachtheworkoftheEuropeanSystemofFinancialSupervision,ofwhichitisapart.

TheapproachtosupervisionsetoutinthisdocumentimplementsthePRA’sinternationalobligationsandcommitments,includingtheBaselCommittee’sCorePrinciplesforEffectiveBankingSupervisionanditsConcordatonconsolidatedsupervisionandsubsequentpublicationsoninternationalsupervisoryco-ordination.

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P age |37

InterviewwithGabrielBernardino,ChairmanofEIOPA,conductedbyChristophBaltzer,VersicherungsWirtschaft(Germany)

Insurersseemtobethevictimsofascenariooffinancialrepression,especiallywithlowinterestrates.Whatwouldbetheconsequencesofthepolicyofcheapmoneyforinsurers?

WeseethisinsomecountriesintheEUwherealowinterestrateenvironmentstartsbeingabigchallengeforsometypesofproducts,especiallywhenyouhavegotlongtermguarantees.

WeatEiopahaveidentifieditalreadyin2011.

Wehaverunthefirststresstestexerciseparticularlyonlowinterestenvironment,becauseweseeitassomethingwhichisapproaching.

TheexperienceofJapanshoweduswhatcanbetheconsequencesofsuchascenario.

It’stheresponsibilityofthesupervisoryauthoritiestobeproactiveonthis.

Thisisanareawhereweneedtobeattentive.

Wehaveidentifiedcertainvulnerability:therearecompaniesthatcouldfaceproblemsifthislowinterestratescenariowillbemaintained.

TherearenumberofsupervisorsintheEUthathavealreadytakensteps,butearlierinMarchEIOPAissueditsOpinion,inwhichwerecommendacoordinatedsupervisoryresponsetothelonglastinglowinterestrates.

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P age |38

Gladly,ontheinsuranceorpensionmarketwestillhavesufficienttimetodealwithit,providedthatweidentifyriskssufficientlyinadvanceandtakenecessaryactions.

That’sadifferencecomparingtothecrisisinthebankingsector,whereyouneedtoactimmediately.

Atthesametimesomenewproductsthatwereintroducedbeforethecrisisshouldbeadoptedtotheneweconomicenvironment:insurancecompaniesshouldreflectonthetypeofproductsandthetypeofguaranteesthattheyareissuingtothemarket.

DoesSolvencyIIhelptoprepareforthisscenario?

Onemisunderstandingthatneedsclearlytobespelledoutisthatit’snotSolvencyIIthatprovokeschallengestobusiness.

It’stheeconomicenvironment.

SolvencyIImakesonedifference:Youneedtorecognizeitearlier.

Ifyouhaveamarketconsistentvaluationofassetsandliabilitiesitwillbemuchmoreclearthatyouhaveachallengeinyourportfolio.

Ifyoucontinuetohaveavaluationthatdoesnotreflectthemarket,then

youcanpretendthatthereisnoproblem.

Buttheproblemexists.

SolvencyIImakesthistransparentandthatisgoodforconsumers,forcompaniesandalsoforsupervisors.

Weneedtohaveapreventivesupervision.

Supervisionshouldnotbetheretoactwhenthefireisalreadyinyourhome.

Supervisionshouldbetheretopreventthatthefireoccurs.

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P age |39

Versicherungswirtschaftwrotein2003thatSolvencyIIwouldbeinforcein2006.DoyoubelievethatSolvencyIIwillbeinforcewhenyourtermfinishes?

Mytermfinishesin2016.

That’sadatethatisstillpossibletohaveSolvencyIIinplace.

Beforethatweneedanumberofpoliticaldecisions,butIbelievethatSolvencyIIwillbeinplace.

It’sfundamentalfromasupervisoryperspectivebecausewenowhavearegimethatdoesnotrespondtotherisks.

WehavetorememberwhywestartedSolvencyII.

Thepurposewastoincreasepolicyholderprotectionandincentivizebetterriskmanagement.

AndfromalltheworkthatwehavedoneinSolvencyIIthereisalready somepositiveevolutioninthewayinsurersmanagerisks.

Wehaveseenabankingcrisisin2008.Whatweforgetaboutistheinsurancecrisisintheyears2001until2003.Thiswascausedbyequityinvestments,reservedeficienciesandunprofitablebusinessinmanylines.DoyouthinkascenarioofthiskindwillstillbepossibleunderSolvenyII?

Noregulatoryregimecanavoidcrisis.Thereisnoperfectregime.

SolvencyIIbringsmuchmoreawarenessofrisksatanearlystage.

Fromthesideofthecompaniesit’safundamentalchangeofculturewhencompanieswhileinvestinginmarkets,needtounderstandtherisksthattheyarerunning.

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P age |40

Thesupervisorsintheirturnwillalsohavenecessarytoolsandinformationinordertolookatthecompaniesfromtherisk-basedprospective.

Isthisazerofailuresystem?No.

Therearenozerofailuresystems.Buttherehasbeenprogress.

Youmentionedthecrisisof2001until2003.

TheindustryhaslearnedfromthatandweincorporateditinSolvencyII.

Thepushforincreasedriskmanagementandforbetterunderstandingbycompanieswhentheyinvestincertaintypesofassets–thesearethelessonslearnedfromthatpast.

Thisisfundamentalrightnow:oneoftheconsequencesofthelowinterestratesisthatinsurancecompaniesaresearchingforyield.

It’sboundtohappenthattheygotoothertypesofinvestment.

Butthenit’sfundamentalthattheyhaveagoodunderstandingofthose classes.

Andthat’swhatSolvencyIIbrings.

InsurerscriticizewhattheyrefertoasartificialvolatilityinthebalancesheetsunderSolvencyII.Someeventalkaboutirrationalityofcapitalmarkets.Doyouunderstandthiscriticism?

SolvencyIIwillgivefiguresthatwillbemorevolatilethaninthecurrentsituation.

Itwasclearfromthebeginning.Everybodywasalertedtothat.

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P age |41

Whathaschangedisthemagnitudeofthisvolatility.

Wedidn’thaveashighvolatilitiesinthepastaswehadintherecentyears.

Wehavetodealwiththisvolatilityinthesystem.

That’swhatwearedoingrightnowwiththelongtermguaranteeassessment(LTGA),whichpreciselyfocusesonthat.

TheLTGAistryingtounderstandwhatkindofadjustmentsweneedtomaketotheregimetodealwithartificialvolatility.

Butnotallvolatilityisartificial.

Muchofitisrepresentativeofwhatisinthemarket.

Idon’twanttodiscusswhethermarketsarerationalornot.

Ifyouhavelongtermliabilitiesandlongtermassetsandyouhaveaverygoodmatchbetweenthem,yournumbersarelesspronetohavethisvolatility.

Ifyouhaveahugelevelofmismatchingthenontheonesideyouaretakingadvantageofopportunitiesinthemarkets,butyouhavearisk.

Butforsomelongtermliabilitiesweneedtohavesomeadjustmentstocopewiththefactthattheproductsandtheliabilitiesarelongtermandtheshorttermvolatilitiesintheassetshaveameaning,buttheydon’thaveaneconomicmeaningforthetypeofliabilitythatinsurershave.

Thisistheadjustmentthatwearetryingtoeffectrightnow.

Theregimewassincethebeginningbasedontheideathatwewanttoseethereality.

Andtherealityisthatmarketsaremorevolatilenowadays.

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P age |42

Weneedtorecognizethereality.

Whatwouldbeapositivepoliticalsolutionforthat?

AnagreementonOmnibusIIwhichispreservingthefundamental elementsofSolvencyII,preservingthemarketconsistentvaluationthatwehavegotinSolvencyIIandpreservingtheprinciplesofarobustand prudentialregimewhileconsideringalsotheeconomicnatureoftheliabilities.

Ithinkthatwehavegotsomegoodproposalsonthetable.

Governmentbondsarecategorizedasnoriskinvestments.Doyouthinkthatthisisagoodwaytotackleproblemsofstatedebt?

MorethananyothersystemSolvencyIItakesintoaccounttherealityoffinancialmarkets,includingonsovereigns.

InaSolvencyIIbalancesheet,sovereignswillbeassessedatmarketvalue.

It’smuchmoreadvancedthanotherregimes.

AnykindofinfluencethatmarketsareputtingonanykindofsovereignsinEuroperightnow,istakenintotheSolvencyIInumbersimmediately,withoutanykindofadjustments.

Thenthereistheelementofcapitalrequirementsontopofthat.Butit’simportanttounderstandthemagnitude.

Ifyoulookattechnicalprovisionsandcapitalrequirements,technicalprovisionsrepresent80to85percentofabalancesheet.

Capitalrequirementisjustasmallitemcomparedtothat.

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P age |43

Byhavingmarketconsistentevaluationinthetechnicalprovisionsandin thebalancesheets,youhavealreadyahugereflectionofalltheriskstheassetshave,includingsovereigns.

Nowtheperceptionofsovereignriskiscompletelydifferentfromwhatitwastenyearsago,whenwestartedtodevelopthesystem.

Goingforwardweneedtoconsiderthis.

Whatisalsoimportanttounderstandiswhensomethingshouldbedone,itshouldbedoneforallsectors.

Wecannothaveadifferentappreciationofsovereignriskforinsurersandforbanks.

Itneedstobedoneforthefinancialsystemasawhole.

Andit’salsoimportanttotakedueattentiontothetimewhenwearedoingthis.

It’snotagoodpolicytochangethiswhenyouarestillinacrisis.

HowdoyouevaluatetheSwissSolvencyTest?It’sinusesince2006andisinforcealreadyfortwoyears.

TheprinciplesareverymuchalignedtoSolvencyII.

Ithinkit’sverygoodthattheystartedtoimplementthesystembecauseSwitzerlandisanimportantinsurancemarketandEIOPAhasverygoodrelationshipandcloselycooperateswiththeSwissauthorityFINMA.

Wecanobservechallengesbutalsoagoodoutcomefromtheimplementationofarisk-basedregimeinSwitzerland:wehaveseensomechangesinbehaviorinthemarketsandintheproductsthatSwissinsurerssell.

Butlet’sbefrank:it’smucheasierforonecountrytoimplementaregimethantohaveadecisiononatablewith27differentapproaches.

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P age |44

WhatarethemostimportanttasksforGermaninsurerstotackleontheirwaytoSolvencyII?

Therearesomecompaniesthataremorepreparedandothersthatarelessprepared.

That’swhywearedevelopingguidelinesforthepreparationphaseforSolvencyII.

Wehavedefinedareaswherewewantsupervisorstoensurethatundertakingsareprepared:governance,riskmanagement,

pre-applicationofinternalmodels,elementsrelatedtotheOwnRiskandSolvencyAssessment(ORSA),theinformationtobeprovidedtosupervisors.

Theobjectiveoftheseguidelinesistohelpmarketsandsupervisorstohaveaclearideaofhowtopreparetothenewregime.

Forexamplethereisaneedtomakeprogressinthesystemsand processesthatarenecessarytodeliverhighqualitydatatobeprovidedbycompaniesandfurtheranalysedbysupervisors.

Thisisfundamentalfortherisk+basedenvironment.

SobyourguidelineswearenotintroducingSolvencyIIearlyon,butweexpectnationalsupervisorstostartimplementingtheseelementsina consistentandconvergentwayandtorequestfromcompaniestopreparethemselvesintheseareasinordertobeinagoodshapewhenSolvencyIIisenforced.

Itisawin-winsituationforbothcompaniesandsupervisors.

Isthereasituationwheresystemicriskbecomesaproblemforinsurersandreinsurers?

Weunderstandwhatissystemicriskinbanking.Lookingattheinsurancesectorit’salsochallenging.

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P age |45

Butthetypeofbusinessisdifferent.

Thematuritiesofbusinessaredifferent.

Ifyoutalkabouttraditionalinsurancebusiness,wedon’tseemuchevidenceofallthesefactorsthatcanbringsystemicrisk.

Butinsurerscaninvolvethemselvesinsometypesofbusinesswhichismuchmorepronetosystemicevents,forexampleexposurestocreditdefaultswaps.

Systemicriskintheinsurancemarketismoreaquestionsoftheactivitiesratherthaninsurersbythemselvesbeingsystemic.

Ifyouhaveatypeofbusinessthatismuchmoreleveraged,whereyouhavematuritytransformationslikeyouhaveonthebankingside,ifyouwalkandrunlikeabank,thenyouneedtobetreatedlikeabank.

Arethecollegesofsupervisorsabletocopewiththeirtask,especiallyifyoulookatthevastnessofsomeinsuranceenterprises.

It’simportantthatsupervisionisperformedinawaythatitcandealwithreality.

It’simportantthatwelookattherisksfromagroupperspective.

InEuropewehaverecognizedthismuchearlierthanmanyjurisdictionsaroundtheglobe.

Inthelate1990swehadaninsurancegroupdirectivewhichsaidthatit’snotsufficienttosupervisesinglecompanies,buttodosupplementarysupervisionatagrouplevel.

WithSolvencyIIwearerecognizingthereality:Thegroupsmanagetheirbusinessinamuchmorecentralisedwayandthisneedstobereflectedinsupervisioninordertoavoidduplicationsanddoubleburdensbutatthesametimeinordertohaveabetterperceptionoftherealrisksthatarerunatthegrouplevel.

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P age |46

That’swhycollegesofsupervisorsaresuchanimportanttool.Theprogressthattheyhavemadeishuge.

TheroleofEIOPAinthesecollegesistomakesurethatthereisa consistentandconvergentsupervision.

Thisisaprocess.Wehavestillsomeroomforimprovement.

Doyouthinkamorecentralizedapproachwouldbebetterforthebigfinancialinstitutions?

Therearestepsthatneedtobetakeninthisarea.

IthinkthebestwaytodothatistobuildupontheroleandresponsibilitiesgiventousbytheRegulationestablishingEIOPA.

Wecanbuildastepbystepapproachtowardsamorecentralizedsupervision.

Idon’tbelieveinruptures.

Thatneedstobeanevolutionandnotarevolution.

Wegainfromhavingmorecentralizationinsomeareas.

Forexampleinternalmodelsarefundamentalforthenewregime.

It’simportantthatthereisgoodunderstandingofhowthemodelsworkonindividualandgroups’levelHerewecouldhaveanapproachcentralizedbyEIOPAbecauseit’snotpossiblethatalltheauthoritiesinallthecountrieswhereyouhavecompanieswithinagroup,willhavethesameexperienceimmediatelytodealwithit.

Butitneedstobeastepbystepapproach.

InUKitisnowprohibitedforbrokerstotakecommissions.Doyouthinkthatthiswillimproveconsumerprotection?

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P age |47

Intermediariesarethevisiblefaceoftheindustrytowardsconsumers.Thequalityoftheinformationandadvicethatisprovidediscrucial.Thereareanumberofthingstoimprove.

Butisitallaboutdisclosure?Isdisclosurethekeyissue?

Therealityprovesthatthisisnotthecase.

Disclosureisimportantbutit’snotthepanacea.

Ithinkthisisnotfairtosay“Wegavealltheinformationtotheconsumer,buthedoesn’tunderstandit,soit’shisproblem”

ThatisnotapolicyIwouldrecommendfromaperspectiveofconsumerprotection.

Firstofalltherearedifferenttypesofintermediariesandbusinesseswearetalkingabout.

Inlifeinsuranceit’simportantthattheconsumershavegoodknowledgeofthecommissiontheintermediariesaretaking.

Thisisacontractformanyyears,soinlifeinsurancethemandatorydisclosureshouldbetherule.

Ifyoulookatthenon-lifesideyoushouldhavetherighttogettheinformation.

Buttheconditionsfornon-lifecontractscanbechangedonanannualbasis,theyarenotfundamentalforyourdecision.

Theconflictofinterestismuchlessrelevantfornon-lifeproducts.

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P age |48

Whatisimportantinconsumerprotectionthen?

Youneedtounderstandwhatconsumersareworriedabout.Evidencestellusthatinmanycasesthecommissiontheintermediary

gets,isnotfundamentalforconsumers.

Theywanttohaveagoodadvice.

Butiftheyneededtopayforthatadvicedirectly,thentheywouldnotbuytheproduct.

Butasasocietydoyouwantpeopletobelessinsured?

Sobanningthecommissionsthismeasureneedstobewellanalyzed.

ShouldpensionfundsbeobligedtofulfilltherequirementsofSolvencyII?

It’snotourintentionthatpensionfundsshouldfollowSolvencyII.

WhenweadvisedtheEuropeanCommission,wesaidthattherearesome areas,whereweseeanadvantageofapplyingthesamebasicstructurePensionfundsaredealingwiththesimilarkindofrisk,soit’simportantfortheprotectionofmembersandbeneficiariestohavegoodriskmanagement,goodgovernance,bettertransparencyetc.

ButwesaidalsothatastraightforwardapproachlikeinSolvencyIIisnot thebestsolutionforpensionfunds.

TherearedifferenttypesofsecuritymechanismsaroundEurope.It’simportantinanykindofsolvencyregimethatthecalculationof

liabilitiesandthevalueoftheassetsaretakenmorerealistically.

WemadeaQISexerciseandwewillhavepreliminaryresultsfromthistestattheendofMarchorinthebeginningofApril.

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P age |49

SomeoftheQISoptionswereconsistentwithSolvencyII,otherswerelessconsistent.

ButweneversaidthatweshouldfollowSolvencyII.

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P age |50

EU-USINSURANCEDIALOGUEAGREESHIGHLEVELPROJECTPLAN

TheSteeringCommitteeoftheEU-U.S.InsuranceDialogueProjecttoincreasemutualunderstandingandenhancecooperationmetinBasel,Switzerlandandagreedonahighlevelworkplanfrom2013to2017.

Thepartiesachievedagreementonaprioritizationofobjectivesandaschedulefortheimplementationoftheinitiativespreviouslyagreedupon bytheSteeringCommitteeanddescribedinthe“WayForwardDocument”(December2012).

Aspartofthefive-yearplan,anagreementwasreachedtomoveforwardin2013withparticularfocusonthoseinitiativesrelatingtoprofessionalsecrecy/confidentialityandreinsuranceandcollateralrequirements,aswellastobeginworkonsomeotherinitiatives

pertainingtosolvencyandcapitalrequirements,groupsupervisionandon-siteexaminationpractices.

TheSteeringCommitteeanticipatesapublicforuminlate2013toreport ontheyear'sachievements,tolaunchcollaborativeworkonsupervisorycollegesandtogivestakeholdersanopportunitytosharetheirthoughtsonbestpracticesandexperiencesregardingsupervisorycooperationandcoordination.

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P age |51

Finalrule

Therequirementsfordeterminingwhenacompanyispredominantlyengagedinfinancialactivities

Forimmediaterelease

TheFederalReserveBoardhas

announcedapprovalofafinalrulethatestablishestherequirementsfordeterminingwhenacompanyis"predominantlyengagedinfinancialactivities."

TherequirementswillbeusedbytheFinancialStabilityOversightCouncil(FSOC)whenitconsidersthepotentialdesignationofanonbankfinancialcompanyforconsolidatedsupervisionbytheFederalReserve.

UndertheDodd-FrankWallStreetReformandConsumerProtectionAct,anonbankfinancialcompanycanbedesignatedbytheFSOCforsupervisionbytheFederalReserveonlyifitis"predominantlyengagedinfinancialactivities."

Acompanyisconsideredtobepredominantlyengagedinfinancialactivitiesif85percentormoreofthecompany'srevenuesorassetsarerelatedtoactivitiesthataredefinedasfinancialinnatureundertheBankHoldingCompanyAct.

Additionally,theFSOCmayissuerecommendationsforprimaryfinancialregulatoryagenciestoapplyneworheightenedstandardstoafinancialactivityorpracticeconductedbycompaniesthatarepredominantlyengagedinfinancialactivities.

Thefinalrulelargelyadoptstheapproachintheproposedrule,withafewexceptions.

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P age |52

Forexample,thefinalrulestatesthatengaginginphysicallysettledderivativestransactionsgenerallywillnotbeconsideredafinancialactivity,achangefromtheproposal.

Thefinalrulealsodefinestheterms"significantnonbankfinancial company"and"significantbankholdingcompany."

AmongthefactorstheFSOCmustconsiderwhendeterminingwhethertodesignateanonbankfinancialcompanyforconsolidatedsupervisionbytheFederalReserveistheextentandnatureofthecompany'stransactionsandrelationshipswithothersignificantnonbankfinancial companiesandsignificantbankholdingcompanies.

Ifdesignated,thosenonbankfinancialcompanieswillberequiredtosubmitreportstotheFederalReserve,theFSOC,andtheFederalDepositInsuranceCorporationonthecompany'screditexposuretoothersignificantnonbankfinancialcompaniesandsignificantbankholdingcompaniesaswellasthecreditexposureofsuchsignificantentitiestothecompany.

Consistentwiththeproposal,afirmwillbeconsideredsignificantifithas

$50billionormoreintotalconsolidatedassetsorhasbeendesignatedbytheFSOCassystemicallyimportant.

ThefinalrulewillbecomeeffectiveonMay6,2013.

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FEDERALRESERVESYSTEM

Definitionsof“PredominantlyEngagedInFinancialActivities”and“Significant”NonbankFinancialCompanyandBankHoldingCompany.

AGENCY:BoardofGovernorsoftheFederalReserveSystem(“Board”).

ACTION:Finalrule.

SUMMARY:TheBoardisadoptingthisfinalruletoestablishforpurposesofTitleIoftheDodd-FrankWallStreetReformandConsumerProtectionAct(the“Dodd-FrankAct”or“Act”)

therequirementsfordeterminingifacompanyis“predominantlyengagedinfinancialactivities”and

definitionsoftheterms“significantnonbankfinancialcompany”and“significantbankholdingcompany.”ThesetermsarerelevanttovariousprovisionsofTitleIoftheDodd-FrankAct,includingsection113,whichauthorizestheFinancialStabilityOversightCouncil(“Council”)todesignateanonbankfinancialcompanyforsupervisionbytheBoardiftheCouncildeterminesthatthenonbankfinancialcompanycouldposeathreattothefinancialstabilityoftheUnitedStates.

DATES:ThefinalrulewillbecomeeffectiveonMay6,2013.

Background

TheDodd-FrankActestablishedtheCouncil,which,amongotherauthoritiesandduties,maysubjecta“nonbankfinancialcompany”tosupervisionbytheBoardandconsolidatedprudentialstandardsiftheCouncildeterminesthatmaterialfinancialdistressatthenonbankfinancialcompany,orthenature,scope,size,scale,concentration,interconnectedness,ormixofthecompany’sactivities,couldposeathreattothefinancialstabilityoftheUnitedStates.

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NonbankfinancialcompaniesthataredesignatedbytheCouncilundersection113oftheDodd-FrankActarereferredtoas“nonbankfinancialcompaniessupervisedbytheBoard.”

TheauthorityoftheCounciltosubjectanonbankfinancialcompanytoconsolidatedprudentialsupervisionbytheBoardisanimportantcomponentofrecentlegislativeandregulatorychangesdesignedtoaddressgapsandweaknessesinthefinancialregulatorysystemthatbecameevidentduringthefinancialcrisis.

ThesegapsoftenallowedfinancialfirmswhosefailurecouldposesubstantialriskstothefinancialstabilityoftheUnitedStatestoavoid prudential,consolidatedsupervision.

TitleIoftheDodd-FrankActdefinesa“nonbankfinancialcompany”toincludebothaU.S.nonbankfinancialcompanyandaforeignnonbankfinancialcompany.

Thestatute,inturn,definesa“U.S.nonbankfinancialcompany”asacompany(otherthanabankholdingcompanyandcertainotherspecifiedtypesofentities)thatis

incorporatedororganizedunderthelawsoftheUnitedStatesoranyState;and

predominantlyengagedinfinancialactivities.

A“foreignnonbankfinancialcompany”isdefinedasacompany(otherthanacompanythatis,oristreatedas,abankholdingcompany)thatis

incorporatedororganizedoutsidetheUnitedStates;and

predominantlyengagedinfinancialactivities.

ForpurposesofTitleIoftheDodd-FrankAct,acompanyisconsideredtobe“predominantlyengaged”infinancialactivitiesifeither

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theannualgrossrevenuesderivedbythecompanyandallofitssubsidiariesfromfinancialactivities,aswellasfromtheownershipor controlofaninsureddepositoryinstitution,represent85percentormoreoftheconsolidatedannualgrossrevenuesofthecompany;or

theconsolidatedassetsofthecompanyandallofitssubsidiariesrelatedtofinancialactivities,aswellasrelatedtotheownershiporcontrolofaninsureddepositoryinstitution,represent85percentormoreoftheconsolidatedassetsofthecompany.

TheDodd-FrankActrequirestheBoardtoestablishtherequirementsfordeterminingifacompanyis“predominantlyengagedinfinancialactivities.”

Section165(d)(2)oftheDodd-FrankActalsorequiresnonbankfinancial companiessupervisedbytheBoardandbankholdingcompanieswithtotalconsolidatedassetsof$50billionormoretodisclosethenatureandextentof

thecompany’screditexposuretoothersignificantnonbankfinancial companiesandsignificantbankholdingcompanies;and

thecreditexposureofsuchsignificantentitiestothecompany.

Theterms“significantnonbankfinancialcompany”and“significantbankholdingcompany”areusedinsection113oftheDodd-FrankActaswell,whichspecifiesthattheCouncilmustconsidertheextentandnatureofanonbankcompany’stransactionsandrelationshipswithother“significantnonbankfinancialcompanies”and“significantbankholdingcompanies,”amongotherfactors,indeterminingwhethertodesignateanonbankfinancialcompanyforsupervisionbytheBoard.

TheActdoesnotdefinetheterms“significantnonbankfinancial company”or“significantbankholdingcompany,”butinsteaddirectstheBoardtodefinethosetermsbyrule.

OnFebruary11,2011,theBoardinvitedcommentonaproposedrulethatwouldhave

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establishedtherequirementsfordeterminingifacompanyis“predominantlyengagedinfinancialactivities”forpurposesofTitleIoftheActand

definedtheterms“significantnonbankfinancialcompany”and“significantbankholdingcompany”(“FirstNPR”).

InresponsetotheFirstNPR,theBoardreceived23comments,includingcommentsrelatedtothedefinitionofactivitiesthatarefinancialforpurposesofTitleI.

Amongotherthings,thesecommentsindicatedthatsomecommentersbelievedthatafirmengagedinfinancialactivitiescouldavoid designationsimplybychoosingnottocomplywiththeconditionsimposedonthemannerinwhichthoseactivitiesmustbeconductedbybankholdingcompanies.

Afterconsideringthosecomments,aswellasthelanguageandlegislativeintentandhistoryoftheDodd-FrankActandtheBankHoldingCompanyAct(“BHCAct”),asamendedbytheGramm-Leach-BlileyAct(“GLBAct”),onApril2,2012,theBoardinvitedcommentonanamendmenttotheFirstNPRtoclarifythat,consistentwiththepurposeofTitleI,anyactivityreferencedinsection4(k)oftheBHCActwillbeconsideredtobeafinancialactivitywithoutregardtoconditionsthatdonotdefinewhetheranactivityisitselffinancialbutwereimposedonbankholdingcompaniestoensurethattheactivityisconductedbybankholdingcompaniesinasafeandsoundmannerortocomplywithanotherprovisionoflaw(“SecondNPR”).

IntheSecondNPR,theBoardproposedanappendixofthelistoftheactivitiesthatwouldbeconsideredtobefinancialactivitiesasofApril2,2012,togetherwithconditionstheBoardbelievednecessarytodefinetheactivityasafinancialactivityandexcludingconditionsthattheBoard believedwererelatedtothesafeandsoundconductoftheactivity,compliancewithotherlaw,orotherfactorsnotrelatedtowhethertheactivitywasfinancial,forpurposesofdeterminingwhetheracompanyispredominantlyengagedinfinancialactivities.

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  • InresponsetotheSecondNPR,theBoardreceived12comments.

  • ExplanationofFinalRule

  • ThefinalruleprovidesclarityforpurposesofdeterminingwhetherparticularcompaniesqualifyasnonbankfinancialcompaniesunderTitleIoftheDodd-FrankAct.

  • ThisisimportantbothinthecontextofCouncildesignationaswellasforlargebankholdingcompaniesandnonbankfinancialcompaniesthatarerequiredtoreporttheircreditexposurestoothersignificantnonbankfinancialcompaniespursuanttosection165(d).

  • Indevelopingthisfinalrule,theBoardhasconsideredthecommentsreceivedonboththeFirstandSecondNPRsandthelanguageandpurposesoftherelevantstatutoryprovisions.

  • Inaddition,theBoardconsultedwiththeotherCouncilmembersandmemberagencies.

  • Afterthisreview,theBoardhasdeterminedtoadopttheattachedfinalrule,whichincludesseveralmodificationsoftheearlierproposalsto addressmattersraisedbycommenters.

  • A.PredominantlyEngagedinFinancialActivities

  • 1.Two-YearTestBasedonConsolidatedFinancialStatements

  • TheFirstNPRprovidedthatacompanywouldbeconsideredtobepredominantlyengagedinfinancialactivitiesif:

  • Theconsolidatedannualgrossfinancialrevenuesofthecompanyineitherofitstwomostrecentlycompletedfiscalyearsrepresent85percentormoreofthecompany’sconsolidatedannualgrossrevenues(asdeterminedinaccordancewithapplicableaccountingstandards)inthatfiscalyear;or

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  • Theconsolidatedtotalfinancialassetsofthecompanyasoftheendofeitherofitstwomostrecentlycompletedfiscalyearsrepresent85percentormoreofthecompany’sconsolidatedtotalassets(asdeterminedinaccordancewithapplicableaccountingstandards)asoftheendofthatfiscalyear.

  • Severalcommentersassertedthatthe85percentthresholdintherevenueandassettestswastoohighandthatacompanyshouldbeconsideredtobe“predominantlyengagedinfinancialactivities”ifalowerpercentageofthecompany’srevenuesarederivedfrom,oralowerpercentageofitsassetsarerelatedto,activitiesthatarefinancialinnature.

  • ThestatutorylanguageoftheActestablishesthatacompanywillbeconsideredtobepredominantlyengagedinfinancialactivitiesifeither85percentofitsrevenuesarederivedfrom,or85percentofitsassetsarerelatedto,financialactivities.

  • TheBoarddoesnothavethediscretiontolowerthe85percentthresholdestablishedbyCongress.

  • Therefore,thefinalruleretainstherevenueandassettestsdescribedaboveasproposedintheFirstNPR.

  • Thefinalrulealsoretainstheproposeddefinitionof“consolidatedannualgrossfinancialrevenues”ofacompany.

  • Acompany’sconsolidatedannualgrossfinancialrevenueswouldbedeterminedinaccordancewithapplicableaccountingstandards,andarethatportionoftheconsolidatedannualgrossrevenuesderiveddirectlybythecompany,orindirectlybyanyofitsconsolidatedsubsidiaries,from:

  • activitiesthatarefinancialinnature;or

  • theownership,control,oractivitiesofaninsureddepositoryinstitutionoranysubsidiaryofaninsureddepositoryinstitution.

  • Similarly,thefinalruleretainstheproposeddefinitionof“consolidatedtotalfinancialassets”ofacompany,whichisthatportionofthe

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company’sconsolidatedtotalassets,asdeterminedinaccordancewithapplicableaccountingstandards,thatarerelatedto

activitiesthatarefinancialinnature,or

theownership,control,oractivitiesofaninsureddepositoryinstitutionoranysubsidiaryofaninsureddepositoryinstitution.

AsintheFirstNPR,thefinalruleprovidesthatcomputationofassetsandrevenuesforpurposesofdeterminingifacompanymeetsthestatutorythresholdwouldbebasedontherelevantcompany’sannualfinancialrevenuesin,orfinancialassetsattheendof,eitherofitstwomostrecentfiscalyears.

ThismethodologyisdesignedtoaccountfortransitoryfluctuationsinassetsandrevenuesthatmaynotbeindicativeofanysubstantivechangeinthefinancialnatureofthecompanyoritspredominantactivitiesandtoallowtheCounciltoeffectivelyfulfillitsimportantresponsibilitiesofdesignating(andreviewingexistingdesignationsof)thosenonbankfinancialcompanieswhosematerialfinancialdistresscouldposeathreattothefinancialstabilityoftheUnitedStates.

2.ActivitiesthatareFinancialinNature

TheDodd-FrankActprovidesthatfinancialactivitiesarethoseactivitiesthathavebeendefinedasfinancialinnatureinsection4(k)oftheBHCAct.

InresponsetoissuesraisedbycommentsreceivedontheFirstNPR,theBoardinvitedcommentintheSecondNPRonaproposalthatanyactivitydescribedinsection4(k)oftheBHCActwouldbeconsideredfinancialin natureunderTitleIregardlessofwhethertheactivityisconductedinconformancewithconditionsimposedonbankholdingcompaniesconductingtheactivitythatdonotdefinethefinancialactivityitself,suchasconditionsrelatedtosafetyandsoundnessorrelatedtocompliancewithanotherprovisionoflaw,suchastheGlass-SteagallAct.

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TheSecondNPRincludedanappendixthatenumeratedtheactivitiesandrelatedconditionstheBoardproposedtoretainaspartofthedefinitionsoffinancialactivitiesundersection4(k)oftheBHCAct.

TheBoardreceivedseveralcommentsontheapproachtakenintheSecondNPR.

OnecommenterexpressedsupportfortheapproachproposedintheSecondNPR,whileothersraisedquestionsregardingtheapproach.

ThefinalrulegenerallymaintainstheapproachsetforthintheSecondNPR,withcertainmodificationsthataddressmattersraisedbycommenters,includingtherestorationofseveralconditionstheBoard proposedtoremoveintheSecondNPR.

TheBoardalsoreceivedseveralcommentsontheFirstNPRrequestingclarityregardingtherelationshipbetweencertaintypesofassetsandrevenuesandfinancialactivities.

ThesecommentsandtheBoard’sresponsesaredescribedingreaterdetailbelow.

ScopeofFinancialActivities

SomecommentersassertedthattheBoarddoesnothavetheauthoritytoissueregulationsregardingthescopeofactivitiesthatarefinancialin natureforpurposesofTitleI.

Onecommenterassertedthat,whiletheDodd-FrankActexpresslyprovidestheBoardwithrulemakingauthorityregardingtherequirementsfordeterminingwhetheracompanyispredominantlyengagedinfinancialactivities,theBoard’srulemakingauthorityislimitedtoestablishingtechnicalguidelinesforcalculatingacompany’sfinancialrevenuesorassetsinassessingwhetheraparticularcompanyanditsactivitiesfallwithinthedefinedtermsof“predominantlyengaged”and“financialactivities,”suchasidentifyingtheaccountingmethodsthatmaybeusedinthesecalculations.

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TheBoardbelievesthattheapproachtakenintheSecondNPRisauthorizedundertheDodd-FrankAct’sgrantofauthoritytotheBoardinsection102(b)toestablish,byregulation,therequirementsfordeterminingifacompanyispredominantlyengagedinfinancialactivities,asdefinedinsection102(a)(6)oftheDodd-FrankAct.

Section102(a)(6)providesthatacompanyis“predominantlyengagedin financialactivities”ifmorethan85percentofthecompany’sanditssubsidiaries’annualgrossrevenuesarederivedfrom,ormorethan85percentofthecompany’sanditssubsidiaries’consolidatedassetsarerelatedto,“activitiesthatarefinancialinnature”asdefinedinsection4(k)oftheBHCAct.

Theidentificationofthescopeofactivitiesthatare“financialinnature”asdefinedinsection4(k)oftheBHCActisanecessaryrequirementfordeterminingwhetheracompanyispredominantlyengagedinfinancialactivitiesand,thus,iswithintheBoard’srulemakingauthorityundersection102(b).

Asnoted,section102(a)(6)refersto“activitiesthatarefinancialinnature(asdefinedinsection4(k)oftheBankHoldingCompanyActof1956)).”

Section4(k)oftheBHCAct,addedbytheGLBAct,authorizesbankholdingcompaniesthatqualifyas“financialholdingcompanies”toengageinawiderangeoffinancialactivities.

Section4(k)definesas“financial”alistofCongressionally-authorized activitiesaddedbytheGLBActandactivitiespreviouslyapprovedbytheBoardforbankholdingcompaniespursuanttosections4(c)(8)and(13)oftheBHCAct,whichareincorporatedbyreference.

Section4(k)andtheBoard’srulesimplementingsections4(c)(8)and(13)alsoimposeconditionsontheconductofsomeofthoseactivitiesforsafetyandsoundnessreasonsortocomplywithotherprovisionsoflaw.

SomeoftheCongressionally-authorizedactivitiesforfinancialholdingcompanies,suchaslending,overlapcompletelywithactivitiesthathad beenauthorizedbytheBoardforbankholdingcompanies.

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OthersexpandedtheauthorizationofactivitiespreviouslyapprovedbytheBoardforbankholdingcompanies,suchascertaininsuranceactivities,byremovingtheconditionsthatapplytobankholdingcompaniesengagingintheactivity.

BankholdingcompaniesthatarenotfinancialholdingcompaniesmayonlyengageinactivitiespreviouslyapprovedbytheBoardundersections4(c)(8)and4(c)(13)oftheBHCActandaresubjecttotherelatedconditions.

WhiletheBHCActisclearastothetypeandscopeofactivitiesthatarepermissibleforeachcategoryofbankholdingcompany,section102(b)oftheDodd-FrankActissilentastohowtheoverlappingdefinitionsoffinancialactivitiesandrelatedconditionsincorporatedinsection4(k)shouldbeappliedindeterminingwhethercompaniesthatarenotbankholdingcompaniesarepredominantlyengagedinfinancialactivitiesforpurposesofTitleI.

Becausesection102doesnotaddresshowtoapplytheseoverlappingandsometimesinconsistentdefinitionsoffinancialactivitiesorhowtoapplytherelatedconditionsincorporatedinsection4(k)inassessingthefinancialactivitiesofnonbankfirms,thereferenceinsection102oftheDodd-FrankActtofinancialactivities“asdefinedinsection4(k)”isambiguous.

Astheagencywithsoleauthorityto“establish,byregulation,therequirementsfordeterminingifacompanyispredominantlyengagedinfinancialactivities,asdefinedinsection102(a)(6),”itisappropriatefortheBoardtoresolvethisambiguity.

UnderSupremeCourtprecedent,astatutorytermdefinedbycross-referencetoanotherstatuteisnotaloneevidenceofclear

Congressionalintentthattheimplementingagencyconstruetheterm

identically.

InEnvironmentalDefensev.DukeEnergyCorp.(“Duke”),theCourtheldthatthegeneralpresumptionofstatutoryconstruction“thatthesametermhasthesamemeaningwhenitoccurshereandthereina

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singlestatute,”maybeovercomewherecontextindicatesthatthetermwasintendedtobeconstrueddifferently.

ConsistentwiththeCourt’sanalysisinDuke,theBoardbelievesthatneitherthetext,thecontextinwhichthetextappears,northelegislativepurposeorhistoryoftheDodd-FrankActsuggeststhatCongressintendedthatanonbankcompanymustengageinfinancialactivitiesincompliancewithalltheconditionsandrequirementsimposedundersection4(k)andtheBoard’simplementingregulationsinorderforthecompanytobeconsideredtobeengagedintherelevantfinancialactivity.

AreadingofTitleIthatlimitedthescopeofcompaniesconsideredtobe“predominantlyengagedinfinancialactivities”toonlythosecompaniesthatconductactivitiesincompliancewiththeconditionsapplicabletobankholdingcompanieswouldunderminethepurposeofTitleIandtheauthoritygrantedbyCongresstotheCounciltoprotectU.S.financialstability.

DefiningfinancialactivitiesforpurposesofTitleItoincludealloftheconditionsimposedontheconductoftheactivitiesbybankholdingcompanieswouldleadtotheabsurdresultthatsomecompaniesthatarepredominantlyengagedinfinancialactivitiescouldavoidconsiderationfordesignationbytheCouncilsimplybychoosingnottoabidebyoneormoreconditionsthatwereimposedonbankholdingcompaniestoensurethesafeandsoundconductoftheactivityorcompliancewithotherlegalrestrictionsunrelatedtowhethertheactivityisafinancialactivity.

TheBoard’sproposedapproachtoaddressingthescopeofactivitiesisconsistentwithCongressionalintentasreflectedinTitleIaswellthelegislativehistoryoftheDodd-FrankAct.

OthersectionsofTitleIsupporttheviewthatCongressintendedthatcompaniescouldbeeligiblefordesignationbytheCouncilregardlessofwhetherthesecompaniescompliedwiththenon-definitionalconditionsappliedtobankholdingcompaniesintheimplementationofsection4(k).

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Forinstance,section167(a)providesthatanonbankfinancialcompanysupervisedbytheBoardisnotrequired“toconformitsactivitiestotherequirementsofsection4oftheBHCAct.”

ThissectiondemonstratesthatCongressrecognizedthatnonbankfinancialcompaniesdonotconducttheiractivitiesincompliancewiththerequirementsapplicabletobankholdingcompanies.

ItwouldbeillogicaltoconcludethatacompanywouldbeeligibleforCouncildesignationonlyifitconducteditsfinancialactivitiesinconformancewiththerequirementsimposedonbankholdingcompanies’conductoffinancialactivitiessetforthinsection4(k),butwouldnotberequiredtoconformitsfinancialactivitiestotheconditionsimposedonbankholdingcompaniesbysection4(k)afterbeingdesignatedbytheCouncilforBoardsupervision.

Inaddition,theCouncil’santi-evasionauthoritydemonstratesCongress’sintenttogivetheCounciltheauthoritytoconsiderabroadrangeofnonbankfinancialcompaniesfordesignation.

Section113(c)oftheDodd-FrankActgivestheCounciltheauthoritytosubjectthefinancialactivitiesofanycompanytosupervisionbytheBoardiftheCouncildetermines,eitheronitsownorpursuanttoarecommendationbytheBoard,that:

thecompanyisorganizedandoperatesinsuchamannertoevadeapplicationofTitleIoftheDodd-FrankAct;and

materialfinancialdistressrelatedto,orthenature,scope,size,scale,concentration,interconnectedness,ormixof,thecompany’sfinancialactivitieswouldposeathreattothefinancialstabilityoftheUnitedStates.

Companiesthatareengagedinactivitiesthatarefinancialinnature,but thatalterthemannerinwhichtheyconductthoseactivitiessuchthattheyevadedesignationbytheCouncilundersection113andsupervisionbytheBoardmaybesubjecttodesignationbytheCouncilunderthespecial anti-evasionauthorityinsection113(c).

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ThelegislativehistoryoftheDodd-FrankActdemonstratesthatCongressbelievedthatthestatutorydefinitionofa“nonbankfinancialcompany”wouldmakeeligibleforCouncildesignationcompaniesthatwerenotbankholdingcompaniesbutthatengagedinabroadrangeoffinancialactivities.

Forinstance,severalmembersofCongressindicatedthat,whileintheirviewdesignationmaynotbeappropriateformutualfunds,theactivitiesconductedbymutualfunds,whichtypicallydonotconformtotheprudentialconditionsimposedontheinvestmentadvisoryormanagementactivitiesofbankholdingcompanies,werefinancialactivitiesforpurposesofTitleI.

Inaddition,section165oftheDodd-FrankAct,whichsetsforththeenhancedprudentialstandardsapplicabletononbankfinancialcompaniesdesignatedbytheCouncil,furtherillustratesthatCongressbelievedthattheactivitiesofinvestmentcompanieswerefinancialactivities.

Section165(b)(1)(A)(i)requirestheBoardtoimposerisk-basedcapitalrequirementsandleveragelimitsonnonbankfinancialcompaniesdesignatedbytheBoardandcertainbankholdingcompanies,“unlesstheBoardofGovernors,inconsultationwiththeCouncil,determinesthatsuchrequirementsarenotappropriateforacompanysubjecttomorestringentprudentialstandardsbecauseoftheactivitiesofsuchcompany(suchasinvestmentcompanyactivitiesorassetsundermanagement)orstructure,inwhichcase,theBoardofGovernorsshallapplyotherstandardsthatresultinsimilarlystringentriskcontrols.”

ThisstatutoryrequirementindicatesthatCongressbelievedthatinvestmentcompanyactivitieswerefinancial.

Moreover,referencesinsection4(k)itselfdistinguishbetweenfinancialactivitiesandtheconditionsimposedonthoseactivities.

Amongtheactivitiesthatsection4(k)definesasbeing“financialinnature”arealloftheactivitiesthattheBoardhaddetermined,by regulationororder,priortoNovember12,1999,tobe“socloselyrelatedto

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bankingormanagingorcontrollingbanksastobeaproperincident thereto(subjecttothesametermsandconditionscontainedinsuchorderorregulation,unlessmodifiedbytheBoard)”undersection4(c)(8)oftheBHCAct.

ByrecognizingthattheBoardcouldmodifythetermsandconditionsin theordersandrulesauthorizingtheseactivities,section4(k)itselfrecognizesthatthesetermsandconditionsdonotnecessarilydeterminewhethertheactivityisafinancialactivity.

Pursuanttosection4(k),anactivityauthorizedundersection4(c)(8)isafinancialactivityregardlessoftheconditionsimposedbyruleororder—allofwhichmaybemodifiedorremoved.”

OnecommenterexpressedsupportfortheBoard’sproposaltoconsiderfinancialactivitieswithoutregardtotheconditionsimposedontheconductoftheactivitiesbybankholdingcompanieswhenconsideringwhetheracompanyispredominantlyengagedinfinancialactivitiesforpurposesofTitleI.

ThecommenterarguedthatdefiningfinancialactivitiesforpurposesofTitleItoincludealloftheconditionsimposedontheconductoftheactivitiesbybankholdingcompanieswouldenablesomecompaniesthatarepredominantlyengagedinfinancialactivitiestoavoidconsiderationfordesignationbytheCouncilsimplybychoosingnottocomplywithconditionsimposedforprudentialorotherreasonsonthemannerinwhichtheactivitiesmustbeconductedbybankholdingcompanies.

SomecommentersquestionedtheapproachtakenintheSecondNPRtotheextentthatitappearedthattheapproachmightcoveractivitiesroutinelyconductedbynon-financialfirmssuchasmanufacturersorretailers.

Inthesecommenters’view,anoverlybroadinterpretationofthedefinitionoffinancialactivitiessubvertsthe“85-percent”testimposedbystatute.

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Inthefinalrule,theBoardhasaddressedcommenters’concernsthatactivitiesroutinelyconductedbynon-financialcompaniescouldbeconsideredfinancialthroughrestorationofsomeoftheconditions.

Descriptionof“FinancialActivities”

Indeterminingwhetherornottoincludeaconditionimposedonthescopeofanactivityorthemannerinwhichanactivitymaybeconducted,theBoardconsideredmanyfactors,includingtheinformationandviewspresentedbycommenters.

TheBoardalsoreviewedthestatutorylanguageofsection4(k)oftheBHCActandtheBoard’sreleasesrelatedtotheactivitiesthatarefinancialinnatureundersection4(k).

Inaddition,theBoardreviewedthelegislativehistoryoftheGLBAct,whichitselfremovedormodifiedmanyoftheconditionsapplicabletotheconductoffinancialactivitiesbybankholdingcompaniesandfinancialholdingcompanies.

Asaninitialmatter,theBoardnotesthattheonlyroleofthisrulemakingistodefineactivitiesthatarefinancial.

ThisrulemakingdoesnotdesignateanyspecificentityforenhancedsupervisionunderTitleIoftheDodd-FrankAct.AuthoritytodesignateanentityforenhancedsupervisionrestsexclusivelywiththeCouncil.

Thus,clarityregardingwhetheranyspecificentitywillbedesignated underTitleImustcomefromotheragencies.

IntheSecondNPR,theBoardnotedthatthelistoffinancialactivitiesauthorizedundersection4(k)includedoverlappingandredundantactivities,andinvitedcommentonwhetheroverlappingorredundantfinancialactivitiesshouldbecombinedorremoved,asappropriate,solelyforpurposesofdeterminingwhetheranonbankcompanyispredominantlyengagedinfinancialactivities,inordertoreducetheambiguitycreatedbytheseoverlappingandsometimesinconsistentactivitiesandtosimplifytheproposedappendix.

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TheBoarddidnotreceivecommentonthisrequest,and,consistentwiththeSecondNPR,theBoardhasmaintainedthecompletelistoffinancialactivitiesauthorizedundersection4(k),includingtheoverlappingandredundantactivities,inordertoensurecompletenessandtoavoidconfusionbasedonthespecificstatutoryauthorityreliedonindefining anactivity.

Toreducetheambiguitycreatedbytheoverlappingandredundantdescriptionsoffinancialactivitiesincludedintheappendix,acompanythatengagesinaparticularactivityinamannerthatdoesnotcomplywiththenarrowerdefinitionoftheparticularactivitywillbeconsideredtobeengagedinafinancialactivityifitsactivitiesarecapturedbythebroaderdescriptionoftheactivity.

Thefollowingdiscussiondescribestheactivitiesenumeratedintheappendixtothefinalrulethatarefinancialinnatureasdefinedinsection4(k)oftheBHCActforpurposesofdeterminingwhetheracompanyispredominantlyengagedinfinancialactivities.

Thediscussionalsoidentifiestheconditionsimposedinsection4(k)orbytheBoard’simplementingregulationspursuanttosections4(c)(8)and

(13)thatarenotreflectedintheappendixbecausetheywereimposedfor

safetyandsoundnessconsiderationsortocomplywithotherprovisionsoflawand,thus,arenotrelevantfordeterminingwhethertheseactivitiesare consideredfinancialforpurposesofdeterminingwhetherafirmispredominantlyengagedinfinancialactivities.

Asnotedpreviously,thefinalrulereinstatesseveralconditionsthattheBoardproposedtoremovefromthedefinitionsoffinancialactivitiesintheSecondNPR.

Thefinalruleretainsalloftheconditionssetforthinthedescriptionoffinancialactivitiesspecificallyenumeratedundersection4(k),otherthantwoconditionswithrespecttotheactivityofinvestingaspartofa

bonafideunderwritingormerchantorinvestmentbankingactivity,andoneconditionwithrespecttoinsurancecompanyportfolioinvestments,whichdonotdefinetheactivityitselfandwereimposedforsafetyand

soundnessreasonsandtoensurecompliancewithotherprovisionsoflaw.

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AFewObservationsinthePrivateFundSpace

DavidW.Blass,ChiefCounsel,DivisionofTradingandMarkets,U.S.SecuritiesandExchangeCommission,AmericanBarAssociation,TradingandMarketsSubcommittee,Washington,D.C.

TheSecuritiesandExchangeCommission,asamatterofpolicy,disclaimsresponsibilityforanyprivatepublicationorstatementbyanyofitsemployees.

TheviewsexpressedhereinarethoseoftheauthoranddonotnecessarilyreflecttheviewsoftheCommissionorthestaffoftheCommission.

Thankyouverymuch,Dana[Fleischman,ChairoftheTradingandMarketsSubcommittee]foryourkindwordsandforinvitingmetospeakwithyoutoday.

IhavehadthegreatpleasureoverthelastyearorsotoworkwithDanaandothermembersoftheTradingandMarketsSubcommitteeandotherABAgroupsonanumberofinitiativessurroundingonebroadandoftentimestrickyquestion:whenisapersonrequiredtoregisterwiththeSECasabroker-dealer?

NotexactlyaprimesubjectforaTEDTalk,butthisgroupknowshowvitallyimportantitistosettlesomeofthequestionsthathavebeenopen foradecadeormoreaboutwhoneedstoregisterwiththeSECasabroker-dealer.

Iandmystaffhavealreadybeguntalkingwithyouaboutsuchperennialhitsasplacementagents,so-called“finders,”andbusinessorM&Abrokers.

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P age |70

Mostrecently,wehavehadlengthydiscussionswithvariousmembersofthissubcommitteeaboutRule15a-6,theruleexemptingfromregistrationcertainnon-U.S.residentpersonsengagedinbusinessasabrokerordealerentirelyoutsidetheU.S.

Thesediscussionsledthestafftopublishresponsestofrequentlyaskedquestionsabouttheruletoaddresssomeoftheissuesthatyouhavetold ushavebeenasourceofconfusion.

WeviewtheFAQsasaninitialsetofstaffguidanceaboutissuesthatcommonlyariseunderRule15a-6.

Theydonotbreaknewground,butIbelievetheyareimportanttoensuringthatregulatorsandmarketparticipantsareoperatingunderacommonunderstandingofhowtheruleworks.

WeareverymuchopentoexploringopportunitiesforadditionalguidancethroughsubsequentFAQs.

WealsohavehadbroaderdiscussionswithmanyofyouaboutRule15a-6,includingwhetherthereareopportunitiestomorefundamentallyupdatetherule,whichwasadoptedin1989whentheglobalizationofthesecuritiesmarketswasjustemerging.

Iapproachthistopicwithanopenmind,andalsoabeliefthatRule15a-6shouldbecomplementaryto—thoughnotnecessarilyidenticalto—thecross-borderapproachthattheSECmaytakewithrespecttothe

security-basedswapsmarket.

WhileRule15a-6isaperennialtopic,sotooareothersthatwehavebeendiscussingwithvariousmembersandcommitteesoftheABA,aswellasotherinterestedgroups.

Ihaveinmindthebroker-dealerregistrationrequirementsastheyapplytothegroupImentionedearlier—placementagents,finders,andbusinessorM&Abrokers.

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P age |71

Thestaffhasbeenconsideringawidespectrumofoptionsforcertainofthesemarketparticipants,rangingfrompotentialrecommendationsforexemptionstoworkingcollaborativelywithFINRAonamorecustomizedapproachforregulationofmarketparticipantswhoperformonlylimitedbrokerfunctions.

Thestaff’sconsiderationofthislatterapproach,whichhasthepotentialbenefitofremovingsomebarrierstoentry,hasbeengreatlyfacilitatedbytheworkbeingdonefortheregulationoffundingportals.

IntroducedbytheJOBSAct,fundingportalsareintendedtoperformlimitedfunctionsforcrowdfundingofferings.

Becausetheirfunctionsarelimited(forexample,theydonotcomeintopossessionofcustomerfundsorsecuritiesorprovideinvestmentadvice),fundingportalsreceivelighterregulatorytreatment,includingbeingsubjecttoacustomizedsetofrulesunderFINRA’srulebook(ascomparedtofullyregisteredbroker-dealers)andreceivinganexemptionfrombrokerregistrationwiththeSEC.

Needlesstosay,thestaffiscontinuingtothinkthroughtheappropriateregistrationandregulationstructureforfundingportals,andlearningfromthatexperiencetoseeifthereareopportunitiestoextendtheapproachtoothertypesofbrokerswhoseactivitiesarelimited.

Today,Iwouldliketoaddanewtopicofdiscussionthatrefersbacktoourbroadthemeofbroker-dealerregistration.

Theissuearisesintheprivatefundadviserworld.

BeforeIgetstartedonthattopic,though,pleaseletmeremindyouthatmyremarksrepresentmyownviews,andnotthoseoftheCommission,anyindividualCommissioner,oranyothermembersofthestaff.

Asyouarewellaware,privatefundshavebecomeanincreasinglylargepartofthefinancialmarketplaceinthelastcoupleofdecades.

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P age |72

TheirsignificancewasrecognizedintheDodd-FrankAct,andrelatedSECrules,whichimposenewregistrationandreportingrequirementsonprivatefundadvisers.

Followingsuit,thestaffisputtinganincreasedexaminationfocuson privatefundadvisers,bothduetothenewregulatoryrequirementsandourownobservationsintheprivatefundspace.

ManyprivatefundadvisersarequiterightlycomingtotermswiththerequirementsundertheInvestmentAdvisersActof1940thatarenewly applicabletothemandareprobablyfocusedonrecentenforcementactionsunderthatActandconcernsexpressedbytheSEC’sseniorenforcementandexaminationteams.

WhileitisabsolutelyrightandappropriatethatprivatefundadvisersdevotetheirresourcestocomplyingwiththerequirementsundertheAdvisersAct,IwouldliketobesurethattheprivatefundadvisercommunityisnotoverlookingsignificantareaofconcernundertheSecuritiesExchangeActof1934—activitythatcouldcauseaprivatefundadvisertoberequiredtoregisterasabroker-dealer.

ThereasonIfocusonthebroker-dealerissueinthiscontextisbecauseofsomepracticesthatthestaffhasobservedinconnectionwithnewlyregisteredprivatefundadvisers.

Thisisanissuethatwarrantssomeattentionbeforeexaminersarrive.

Todate,theissuehascomeintwoflavors.

Iwilldescribetheseinmoredetailshortly,butthefirstflavor(let’scallitplainvanilla)involvesafundadviserthatpaysitspersonnel

transaction-basedcompensationforsellinginterestsinafundorthathas

personnelwhoseonlyorprimaryfunctionsaretosellinterestinthefund.

Inthesecondflavor(abitmoreunusual,saydarkchocolatewithasubtleinfusionofhabanero),theprivatefundadviser,itspersonnel,oritsaffiliatesreceivetransaction-basedcompensationforpurported

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  • investmentbankingorotherbrokeractivitiesrelatingtooneormoreofthefund’sportfoliocompanies.

  • Thestaffunderstandsthatthissecondpracticeiscommonatadvisersof certaintypesoffunds,suchasprivateequityfundsthatexecutealeveragedbuyoutstrategy.

  • Ishouldnotethattheseissuesarenotuniquetoadviserstoprivateequityfundsorevenadviserstoprivatefunds.

  • Adviserstoothertypesoffunds,includingbusinessdevelopmentcompanies,alsowillwanttothinkthroughtheirpractices.

  • Salesofinterestsinaprivatefund

  • Inaspeechseveralyearsago,theDirectoroftheDivisionofInvestmentManagementatthetimeexpressedconcernthatsomeparticipantsintheprivatefundindustrymaybeinappropriatelyclaimingtorelyonexemptionsorinterpretiveguidancetoavoidbroker-dealerregistration.

  • Asthisgroupknowsquitewell,absentanavailableexemptionorotherrelief,apersonengagedinthebusinessofeffectingtransactionsinsecuritiesfortheaccountofothersmustgenerallyregisterunderSection15(a)oftheExchangeActasabroker.

  • Thetestforbroker-dealerregistrationisbroadanddependsonvariousactivitiesapersonperformsinoneormoresecuritiestransactions.

  • Someexamplesofactivities,orfactors,thatmightrequireprivatefundadviserpersonneltoregisterasabroker-dealerinclude:

  • Marketingsecurities(sharesorinterestsinaprivatefund)toinvestors,

  • Solicitingornegotiatingsecuritiestransactions,or

  • Handlingcustomerfundsandsecurities.

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Theimportanceofeachoftheseactivitiesisheightenedwheretherealsoiscompensationthatdependsontheoutcomeorsizeofthesecuritiestransaction—inotherwords,transaction-basedcompensation,alsoreferredtoasa“salesman’sstake”inasecuritiestransaction.

TheSECandSECstaffhavelongviewedreceiptoftransaction-basedcompensationisahallmarkofbeingabroker.

Thismakessensetomeasthebrokerregulatorystructureisbuilt,atleast inlargepart,aroundmanagingtheconflictofinterestarisingfromabrokeractingasasecuritiessalesman,ascomparedtoaninvestmentadviserwhichtraditionallyactsasafiduciaryandwhichshouldnothavethatsametypeofconflictofinterest.

Withthisbackdrop,aprivatefundadviser(orcounseltoaprivatefundadviser)shouldthinkthroughhowtheadvisergoesaboutobtainingnewinvestorsandretainingexistinginvestors.

Thatisnottosaythatallinvestment-raisingbyaprivatefundadviserresultsintheadviserbeingabroker-dealer.

Wedonotlookattheworldthroughthattypeofprism.

Basedonmyownexperience,however,Ibelievethatprivatefundadvisersmaynotbefullyawareofalloftheactivitiesthatcouldbeviewedassolicitingsecuritiestransactions,ortheimplicationsofcompensationmethodsthataretransaction-based.

AnexampleofthisareaoffocusistherecentRanieriPartnersenforcementaction.

Justlastmonth,theSECsettledchargesinconnectionwithallegedviolationsofSection15(a)oftheExchangeActagainstRanieriPartners,whichisaNewYork-basedprivateequityfirm,andalsowithaformerseniorexecutiveofRanieriPartnersandanindependentconsultanthired byRanieriPartners.

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P age |75

TheCommission’sorderfoundthatRanieriPartnerspaidtransaction-basedfeestotheconsultant,whowasnotregisteredasa

broker,forthepurposeofactivelysolicitinginvestorsforprivatefundinvestments.

TheCommission’scasesdemonstratethatthereareseriousconsequencesforactingasanunregisteredbroker,evenwheretherearenoallegationsoffraud.

Itisimportant,Ibelieve,formarketparticipantstokeepinmindthatthewillingnessforonetoactasanunregisteredbrokercanbeastrongindicatorofotherpotentialmisconduct,especiallywheretheunregistered broker-dealercomesintopossessionoffundsandsecurities.

Inordertohelpprivatefundadvisersthinkthroughthisalittlemore,andtogivesomespecificexamples,IthoughtIwouldrunthroughsomequestionsprivatefundadvisersmightwanttoaskthemselveswithrespect toactivitiesorservicesthattheymayperform.

Determiningwhetherapersonisabroker-dealercanbefairlyfactintensiveandthesequestionsarethetypesweaskourselveswhenmakingthatkindofdetermination.

Forexample,theadvisermightwanttoconsiderthefollowing:

Howdoestheadvisersolicitandretaininvestors?

Irecommendsomethinkinggointothedutiesandresponsibilitiesofpersonnelperformingsuchsolicitationormarketingefforts.

Thisisanimportantconsiderationbecauseadedicatedsalesforceofemployeesworkingwithina“marketing”departmentmaystronglyindicatesthattheyareinthebusinessofeffectingtransactionsintheprivatefund,regardlessofhowthepersonnelarecompensated.

Doemployeeswhosolicitinvestorshaveotherresponsibilities?

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  • Ifso,considerwhatthoseresponsibilitiesare(i.e.,aretheprimaryfunctionsoftheseemployeestosolicitinvestors).

  • Howarepersonnelwhosolicitinvestorsforaprivatefundcompensated?Dothoseindividualsreceivebonusesorothertypesofcompensationthat

  • islinkedtosuccessfulinvestments?

  • Aspreviouslynoted,acriticalelementtodeterminingwhetheroneisrequiredtoregisterasabroker-dealeristheexistenceof

  • transaction-basedcompensation.

  • Doyouchargeatransactionfeeinconnectionwithasecuritiestransaction?

  • Inadditiontoconsideringcompensationofemployees,advisersalsoneedtoconsiderthefeestheychargeandinwhatway,ifany,theyarelinkedtoasecuritytransaction(moreonthistopicbelow).

  • Someaskusabouttheso-called“issuerexemption”inthecontextofprivatefundadvisers.

  • Thatexemption,foundinExchangeActRule3a4-1,providesanonexclusivesafeharborunderwhichassociatedpersonsofcertainissuerscanparticipateinthesaleofanissuer’ssecuritiesincertainlimitedcircumstanceswithoutbeingconsideredabroker.

  • Asyouallknow,Rule3a4-1generallyisnotusedbyprivatefundadvisers.

  • Furthermore,andjustbywayofexample,apersonmustsatisfyoneofthreeconditionstoclaimtheissuerexemptionfrombroker-dealerregistration:

  • thepersonlimitstheofferingandsellingoftheissuer’ssecuritiesonlytobroker-dealersandotherspecifiedtypesoffinancialinstitutions;

  • thepersonperformssubstantialdutiesfortheissuerotherthaninconnectionwithtransactionsinsecurities,wasnotabroker-dealeror

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P age |77

anassociatedpersonofabroker-dealerwithinthepreceding12months,anddoesnotparticipateinsellinganofferingofsecuritiesforanyissuermorethanonceevery12months;or

-thepersonlimitsactivitiestodeliveringwrittencommunicationbymeansthatdonotinvolveoralsolicitationbytheassociatedpersonofapotentialpurchaser.

Itcouldbedifficultforprivatefundadviserstofallwithintheseconditions.

Iamkeenlyawarethatmanyadvisers,particularlysmalleradvisers,maynotbeabletoaffordorbeabletoeitherhireabroker-dealerorregisterasbroker-dealersthemselves.

ByraisingtheissuesthatIhavejustdescribed,Iamnotsayingthattheyneedtodothatinallcircumstances.

Thereisawidearrayofoptionsavailabletoprivatefundadviserstoraisefundswithouttriggeringbrokerregistrationconcerns.

Mypurposeistoassistadvisersinreviewingtheiractivitiestobesuretheyarealignedwithexistinglegalrequirements.

Iwouldalsobeinterestedinhearingfromthisgroupandotherswhetherabroker-dealerregistrationexemptionwrittenspecificallyforprivatefundadvisersisneededorwouldbehelpful.

Ihaveinmindapotentialexemptionliketheissuerexemption,butonewrittenspecificallyforprivatefundadvisers.

Certainly,thereceiptoftransaction-basedcompensationisaproblematicpracticeinthiscontext,butwhatotherparametersmightapplyifthere wasanexpressexemptionwrittenspecificallyforprivatefundadvisers?

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P age |78

Broker-dealerissuesarisingfromprivateequityfundpractices

Onarelatednote,thestaffhasobservedthatthatadviserstosomefunds

—forexample,adviserstoprivateequityfundsexecutingaleveragebuyoutstrategy—mayalsocollectmanyotherfeesinadditionto advisoryfees,someofwhichcallintoquestionwhetherthoseadvisersareengaginginactivitiesthatrequirebroker-dealerregistration.

Examplesincludefeesthemanagerdirectsaportfoliocompanyofthefundtopaydirectlyorindirectlytotheadviseroroneofitsaffiliatesinconnectionwiththeacquisitionordisposition(includinganinitialpublicoffering)ofaportfoliocompanyorarecapitalizationoftheportfoliocompany.

Thefeesaredescribedascompensatingtheprivatefundadviseroritsaffiliatesorpersonnelfor“investmentbankingactivity,”includingnegotiatingtransactions,identifyingandsolicitingpurchasersorsellersofthesecuritiesofthecompany,orstructuringtransactions.

Lookingbacktotheearlieranalysisofwhatmakesoneabroker,thispracticeappearstoinvolvetransaction-basedcompensationthatislinkedtothemanagereffectingasecuritiestransaction.

Thecombinationofsuccessfeeswhichcausetheadvisertotakeonasalesman’sstakeandtheactivitiesinvolvedineffectingsecuritiestransactionsappear,atleastontheirface,tocausesuchanadvisertofallwithinthemeaningoftheterm“broker.”

IunderstandthatthepracticeofchargingthesetransactionfeesmightbecommonamongsomeprivatefundadviserandIamverymuchopentotalkingoverourbrokeranalysiswithinterestedparties.

Forexample,wehavebeentoldthatonerationaleadvisersmightputforthforwhytheseactivitiesandpaymentschemesdonotraisebroker-dealerstatusissuesiswherethepaymentsoffsetorotherwisereducetheamountoftheadvisoryfeepayablebythefund.

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P age |79

Totheextenttheadvisoryfeeiswhollyreducedoroffsetbytheamountofthetransactionfee,onemightviewthefeeasanotherwaytopaytheadvisoryfee,which,inmyview,initselfwouldnotappeartoraise

broker-dealerregistrationconcerns.

Anotherrationalethathasbeenbroughttothestaff’sattentionfocusesontherecipientofthefee.

Here,thegeneralpartnerofthefund(wherethegeneralpartnerisalsotheadvisertothefundoranaffiliateoftheadviser)directlyorindirectly receivesthetransactionfee.

Wearetoldthatthegeneralpartnershouldbeviewedasthesamepersonasthefund,sotherearenotransactionsfortheaccountofothers.

Thisexplanationdoesnotseemplausibletome—ifthegeneralpartner andthefundarethesame,whyisitthatthefeeispaidtoanyoneotherthanthefund.

Thatthefeeispaidtosomeoneotherthanthefund—herethegeneralpartner—makescrystalcleartomethat,atleastforpotential

broker-dealerstatusquestions,thefundandthegeneralpartnerare

distinctentitieswithdistinctinterests.

Othershavequestionedwhythestaffwouldwanttorequireaprivateequityfundmanagerstoregisterasabroker-dealer.

Whilecertainlyaninterestingpolicyquestion,Iapproachthisissuefromanotherperspective.

Unlesspreparedtoregisterasabroker,apersonshouldnotengageinactivitiesthattriggerregistration.

Tomyknowledge,thereisnoexemptionorotherreliefavailablefortheactivitythatIdescribedabove.

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Takingtheactivityoutoftheprivateequityspaceandapplyingitinothercontextswouldleavelittlequestionabouttheneedforbroker-dealerregistration.

Investorsinthefund,furthermore,mayormaynotbeinapositiontomonitortheadviser’sactivityandfees.

Itdoesnotappeardifficulttomeforaprivateequityfundadvisertochangeitspracticessoitisnotengaginginactivitiesthatraisebroker-dealerstatusquestions.

Again,thestaffisinterestedintalkingtheseissuesover,butIencourageadviserstoprivatefundstothinkthroughthesepractices.

Closingremarks

Iraisealltheseissuestobringthemtotheattentionofprivatefundadvisersandtheircounsel,sotheycangrapplewiththemhopefullyinadvanceofavisitfromtheSEC’sexaminers.

Also,whilesomeouttheremightthinkthatactingasanunregisteredbroker-dealershouldbeviewedasonlyatechnicalviolation,Iwanttotakeamomentandcautionthatengagingintheseactivitieswithoutregisteringcanhaveseriousconsequences.

InadditiontobeingsubjecttosanctionsbytheSEC,anotherpossibleconsequenceofactingasanunregisteredbroker-dealeristhepotentialrighttorescission.

Inotherwords,securitiestransactionsintermediatedbyaninappropriatelyunregisteredbroker-dealercouldpotentiallyberenderedvoid.

Giventhesignificantconsequencesofactingasanunregistered

broker-dealerandtheincreasedattentionbeinggiventothisissuebytheSECstaff,privatefundadvisersshouldconsiderreviewingtheirpractices

todeterminewhetheranyactivitiesthatmaybeapproachingorcrossing

thelinewouldrequirebroker-dealerregistration.

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Inclosing,IwanttothankonceagaintheABA’sTradingandMarketsSubcommitteeandothersattheABAfortheirwillingnesstoengageinafruitfuldialogueonanumberofissuessurroundingbroker-dealerregistrationrequirements.

Withnewoversightofprivatefundadviserscomestheopportunitytotakeproactivestepstoavoidproblems.

Thesestepscanincludereviewingthestandardsforbroker-dealerregistrationandpreviousstaffguidanceandtoreviewbusinessactivitieswiththesestandardsinmind.

Theyalsocanincludeadialoguewithusaboutthepotentialneedforreliefwithappropriateconditionsorotherparameters.

Iappreciatetheopportunitytosharemythoughtsontheseimportantissueswithyou.

AsI’msureyouareaware,thestaffattheSECisfullycommittedtoourmissionofprotectingthenation’sinvestorsandweviewmaintaininganongoingdialoguewithmarketparticipantsascriticaltocarryingoutthismission.

Thankyou,andIwouldbehappytoansweranyquestionsyoumighthave.

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PresentationtoTownHallLosAngelesLosAngeles,California

ByJohnC.Williams,PresidentandCEO,FederalReserveBankofSanFrancisco

TheEconomyandtheFederalReserve:RealProgress,butTooSoontoRelax

Thankyouverymuch.It’sgreattobewithyouinLosAngelestoday.

Asyou’vejustheard,I’mpresidentoftheFederalReserveBankofSanFrancisco,oneof12regionalBanksintheFederalReserveSystem.

ThedistrictcoveredbyourBankisgeographicallythelargestandthemostpopulousintheFed.

And,ofcourse,LosAngelesisthebiggestcityinthedistrict,andaneconomicpowerhouseandculturaltrendsetterforpeoplearoundtheworld.

ThisisthesecondtimeI’vespokenataTownHallLosAngelesevent.Infact,twoyearsago,IgavemyfirstspeechasSanFranciscoFed

presidentbeforethisgroup.

Theeconomiclandscapehaschangedsignificantlysincethen.Butsomethingsremainthesame.

Mostnotably,despitesubstantialimprovementintheeconomy,

unemploymentisstillfartoohigh.

Thingsstillhaveawaytogobeforewecansaywe’vefullyrecoveredfromtheworstfinancialcrisisandrecessionsincethe1930s.

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Today,I’lltalkabouthowIseetheeconomynowandwhereIthinkit’sheaded.

I’lloffermyforecastforthenextfewyearsanddiscusswhattheFederalReserveisdoingtoboosttherecovery.

Ofcourse,FedspeechesarenotlikeHollywoodmovies.

That’sbecauseI’lltellyouhowitendsrighthereatthebeginning.

MymessageisthatI’mhopefulthattheeconomyhasfinallyshiftedintohighergear.

Therearestillobstaclestoourprogress,includingtheeffectsofbudgetcutscomingoutof Washingtonandthesluggishrecoveryplaguingmanyofour

tradingpartnersabroad,especiallyinEurope.

Inthisenvironment,continuedprogressdependscriticallyonsupportfromtheFederalReserve.

Evenbeforetherecentrecessionbegan,theFedstartedtoputinplacemeasurestostimulatetheeconomy.

Thesemeasurespushedinterestratesdowntoexceptionallylowlevelsandmadebuyingahouse,acar,orotherbig-ticketitemsmoreaffordable.

TheFed’sforcefulpolicieshelpedavoidarepeatoftheGreatDepression.

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Andnowthey’reanimportantreasonwhytheeconomymaybepickingupaheadofsteam.

Wecan’tforgetthatthedownturnwewentthroughwasunusuallydeepandtherecoveryhasbeendisappointinglyweak.

It’svitalthatwekeepthoseextraordinaryFedmeasuresinplaceforsometimetomakesureunemploymentandinflationgetbacktohealthylevels.

AndthisiswhereIshouldsaythatIamexpressingmyownviewsandnotnecessarilythoseofothersintheFederalReserveSystem.

Let’sstartwithalookattheeconomy.

Sincetherecessionendednearlyfouryearsago,economicgrowthhasbeendiscouraginglyslow.

Considerthebroadestmeasureofeconomicactivity:grossdomesticproduct,orGDP,whichincludesthenation’sentireoutputofgoodsandservices.

Sincetheendoftherecession,GDPhasgrownatanaveragerateofonlyabout2percentperyear,adjustedforinflation.

Indeed,whenyouaccountforpopulationgrowth,GDPperpersonisactually1.5percentlowernowthanfiveyearsago.

SouthernCaliforniahasdoneevenworse.

In2011—thelatestdataavailable—outputperpersonwasmorethan7percentbelowthepeakreachedfiveyearsearlier.

Theharshdownturnandsubparrecoveryhavehitthejobmarkethard.Thenationalunemploymentrateis7.7percent.

That’sdownsignificantlyfromtherecentpeakof10percentregisteredthree-and-a-halfyearsago.

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Butit’sstillhigherthananyreasonableestimateoffullemployment.

GiventheextraordinaryamountofmonetarystimulusthattheFedhasputinplace,whyhasn’ttheeconomybouncedbackmorestrongly?

Fourfactorshaveplayedakeyroleinslowingtherecovery.

First,therecessionwastriggeredbyahousingcrashandafinancialcrisis,anddownturnscausedbysucheventstendtobelonglasting.

Inthiscase,lendersseverelytightenedtheflowofcredittoconsumersandbusinesses.

Meanwhile,homeownerssawthevalueoftheirhousesplummetandcouldnolongertapintohomeequity.

Allthisputadamperonconsumerspending,whichaccountsforabout70percentofallU.S.economicactivity.

Asecondreasonfortheslowrecoveryhasbeenaweakglobaleconomy.

EuropeisamajormarketforU.S.goodsandservices,andthesituationtherehasbeenparticularlytroubling.

Amongthecountriesthatusetheeuro,financialcrisisandeconomicstagnationhavebeenintensifiedbyconcernsthatsomeofthemmayeventuallydropthecommoncurrency.

EverytimeEurope’scauldronofwoesseemstobecoolingabit,somethingnewhappenstomakeitboiloveragain.

Mostrecently,abankingcrisisinCypruspromptedpanickycitizenstoyanktheirmoneyfromthatcountry’sfinancialinstitutions.

Ishouldstressthatafull-fledgedEuropeanfinancialcollapseisunlikely.

Buteconomicweaknessislikelytopersist,andthataffectsushereintheUnitedStatesaswell.

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Cutbacksinstate,local,andfederalgovernmentspendingrepresentathirdobstacletorecovery.

Overthepastfewyears,stateandlocalgovernmentshavehadtocutspendingand,insomecases,raisetaxestobalancebudgets.

Morerecently,thefederalgovernmenthasalsomovedtowardausterity.

Forexample,thecutinthepayrolltaxthatfundsSocialSecurityexpiredatthestartoftheyear.

Andnow,ofcourse,wehavesequestration.

Overthenextfewyears,governmentausteritymeanslessincomefor consumers,smallergovernmentpayrolls,andlessworkforgovernmentcontractors.

Atypicalestimateisthatsequestrationspendingcutsalonewilltrimabouthalfapercentagepointfromeconomicgrowththisyear.

ThefactorsI’vejustmentionedarerelatedtoafourththingholdingtheeconomyback—uncertainty,whichmightbecalledthe“fearfactor.”

Adeeprecession,financialcrisesathomeandabroad,andnaggingdisputesabouttaxandspendingpolicieshaveeatenawayattheconfidenceofconsumersandbusinesses,makingthemhesitanttospendandinvest.

ResearchersattheSanFranciscoFedhavefoundthatheightened uncertaintyslowseconomicgrowthandraisesunemployment.

Theyestimatethatuncertaintyhasboostedtheunemploymentratebyonetotwopercentagepointssince2008.

Ihearthesamethingfrombusinessowners,whotellmetheyarenervousaboutthefutureandarepostponinghiring.

Andtheyoftenwaitfortheperfectcandidatetofillanopening.

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Thesefourfactorshavebeenholdingbacktherecoveryoverthepastfewyears.

Althoughallfourcontinuetoweighontheeconomytoday,we’reseeingencouragingsignsofimprovement.

Householdsandfinancialinstitutionshavemadeconsiderableprogressinrepairingtheirfinancialconditions,whichhadbeentatteredbythehousingcrashandcrisis.

Thenation’sbankingsectorismuchstrongertodaythanithasbeeninyears,andcreditconditionshaveimprovedalot.

Uncertaintyaboutthefutureisstillelevated.

Butitappearstohaverecededfromlatelastyearwhenworriesabouttheloomingfiscalcliffshookconfidence.

Overall,theviewaheadisdefinitelybetterthanwhatweseethroughtherearviewmirror.

Takehousing,forexample.It’soneofthekeysectorsbenefitingfromthelowinterestratestheFedhashelpedengineer.

Nationwide,more-affordablemortgageshavebeenaboonforthehousingmarket.

Newhomesaleshaveclimbed10percentoverthepastyearandhousingstartshavesoaredmorethan25percent.

Housesavailableforsaleareinshortsupply.

Asaresult,homepricesareagainontheupswing,risingover8percentlastyear.

Thisrejuvenationofthehousingmarketbringswithitallkindsofhappyeffects.

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Fewerhomeownersareunderwater,whichistosaythatfewerofthemare carryingmortgageslargerthanthevalueoftheirproperties.

Andfewerhomesaregoingintoforeclosure.

Risinghousepricesalsomeanthatmorehomeownersareabletorefinance,freeingcashforotherpurposes.

Lendersoftenrequirealoan-to-valueratioof80percentorlessbeforetheywillmakeorrefinanceamortgage.

Let’stakeL.A.Countyasanexample.

Atthebeginningof2009,roughlyoneoutofthreefirst-lienmortgagesin

L.A.Countywereabovethis80percentlevel.

Butrisinghomevalueshavebeenpushingloan-to-valueratiosdown.

Bytheendof2012,onlyaboutoneoutoffourL.A.Countymortgageswereabovethe80percentthreshold,whichmeansthatmorehomeownersqualifytorefinance.

Autosaleshavealsobenefitedfromfallingrates.

They’reupmorethantwo-thirdsfromtherecessionlowpoint.Automakershaverespondedtoincreaseddemandbyraisingproduction.

Andtheeffectsofgainsinmotorvehiclesandhousingarebeginningtospilloverintoothersectors.

Businessconfidenceisrising,andthat’sshowingupinmorehiringandincreasedbusinessinvestment.

Allthishelpsfuelavirtuouscycle.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

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P age |89

Risingproductionandemploymentmeanmorehouseholdincome,whichshould,inturn,raiseconsumerconfidence,andleadtofurtherspendingincreases,whichleadstomorehiring,andsoon.

WhenIthroweverythingintothemix,IexpecttheU.S.economytogrowsteadilythisyearandforgrowthtopickupin2014.

Tobespecific,Iseeinflation-adjustedGDPexpandingroughly2½percentthisyearandabout3¼percentin2014.

Suchgrowthshouldcreateenoughjobstograduallybringtheunemploymentratedownoverthenextfewyears.

Iexpecttheunemploymentratetoedgedowntoalittlebelow7percentbylate2014andfallbelow6½percentinthemiddleof2015.

Evenwiththeunemploymentratecontinuingtocomedown,itwilllikelyremainabove“normal”levelsforquitesometime.

Mybestestimateisthatthelonger-run“normal”rateofunemploymentisaround5½percent.

Idon’texpecttheactualunemploymentratetoreachthatleveluntil2016.

Slackinthelabormarketwillprobablykeepwagesandothercostpressuressubduedforthenextfewyears.

Inaddition,pricesofmanycommoditiesandotherimportshavebeencomingdown.

Asaresult,Ianticipatethatinflationwillrunatabouta1½percentratethisyearandnext,accordingtotheFed’spreferredinflationindex.

That’sroughlythesameaslastyearandbelowtheFed’s2percentlong-runinflationtarget.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

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P age |90

Lookingfurtheroutintothefuture,astheeconomycontinuestoimproveandtheunemploymentratereturnstoitslonger-runnormallevel,Iexpectinflationtoedgeupto2percent.

Withallthisasabackdrop,I’dliketodescribewhattheFedisdoingtostrengthentherecoveryandkeepinflationclosetoour2percent

longer-rungoal.

CongresshasassignedtheFedtwoobjectives:maximumemploymentandpricestability.

AsI’vesaid,we’restillfarfrommaximumemployment.

Andinflationisbelowthelevelwebelieveconsistentwithourmaximumemploymentandpricestabilityobjectives.

Inthesecircumstances,theappropriatedirectionofmonetarypolicyisclear.

Wemustcarryoutpoliciesthatwillmoveustowardourtwomandatedgoals.

Normally,inasituationlikethis,westimulatetheeconomybylowering ourbenchmarkshort-terminterestrate,thefederalfundsrate.

Butwecan’tlowerthefederalfundsrateanymorebecausewealreadypusheditclosetozerolatein2008,anditcan’treallygomuchlower.

Sowe’vehadtothinkoutsidetheboxtofindotherwaystoboosttheeconomyandkeepinflationfromsinkingtoolow.

Theresultisthatwe’vecomeupwithseveralunconventionalmonetarypolicyprograms.

Ourunconventionalinitiativescomeintwomaintypes,bothaimedatloweringlonger-terminterestrates.

Youcanbroadlythinkofthemintermsofwhatwedoandwhatwesay.

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P age |91

I’llstartwithwhatwedo.

Sincelate2008,we’vecarriedoutaseriesofprogramsinwhichwe’veboughtwellover$3trillion—that’strillionwithaT—inlonger-termTreasuryandmortgage-relatedsecurities.

YoumayhaveheardthefinancialpresscallthesepurchasesQE1,2,and3,withtheQEstandingforquantitativeeasing.

Thesepurchasesworkthroughthelawofsupplyanddemandtolowerlonger-terminterestrates.

Whenwebuythesesecuritiesonalargescale,itboostsdemand,bidsuptheirprices,andlowerstheiryields.

Inturn,loweryieldsongovernmentsecuritiesspillovertoprivate-sectorborrowingmarketsandpushlonger-terminterestratesdownacrosstheboard.

Thesecondtypeofunconventionalmonetarypolicyinvolveswhatwesay.We’veadoptednewwaysofcommunicatingwiththepublictoletpeople

knowthedirectionourpolicyislikelytotakeinthefuture.

Weusethephraseforwardguidancetodescribethisapproachtopolicycommunication.

Howdoesforwardguidancework?

Here’sanexample:AfterourpolicymeetinginAugust2011,weissuedastatementsayingweexpectedtokeepthefederalfundsrateexceptionallylowatleastthroughmid-2013.

ThatmarkedthefirsttimetheFedhadeverexplicitlysaidjusthowlongitexpectedtokeepthefederalfundsrateatacertainlevel.

Wheninvestorsknowshort-terminterestratesarelikelytostaylowforasettime,they’rewillingtopaymoreforlonger-termfixed-ratesecurities.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

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P age |92

Andthatpushesdownlonger-terminterestrates.

Togetanideaoftheeffectsoftheseunconventionalpolicies,let’scomparetheconventionalmortgageratetodaywithwhatitwaswhentheFedfirststartedthemattheendof2008.

Sincethen,themortgageratehasdeclinedabout1½percentagepoints.NotallthisdropisduetoFedpolicies.

But,byanymeasure,thosepolicieshavehadasignificanteffect.

Andthat1½percentagepointreductioninmortgageratesmakesabigdifferenceforhomebuyers.

InSouthernCalifornia,themedian-pricedhousecostsabout$320,000.

An80percentmortgageonthathousewouldbe$256,000.

GiventhedeclineininterestratessinceJanuary2009,theannualinterestpaymentonthatmortgagetodaywouldbeabout$3,000lower.

That’s$3,000peoplecanusetospendonotherthingsorsave.

Bothoursecuritiespurchasesandforwardguidanceprogramshaveevolvedaswe’velearnedmoreandeconomiccircumstanceshavechanged.

Ourearlysecuritiespurchaseprogramswereforfixeddollaramounts.

Bycontrast,we’velinkedthecurrentprogramtoeconomicdevelopments.Specifically,we’vestatedthatweexpecttocontinuebuyingTreasuryand

mortgage-backedsecuritiesatarateof$85billionamonthuntiltheoutlookforthejobmarketimprovessubstantiallyinacontextofprice

stability.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

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P age |93

Westillhaveawaytogobeforewepassthissubstantial-improvement test.

Ianticipatethatoursecuritiespurchaseswillbeneededwellintothesecondhalfofthisyear.

Asforforwardguidance,firstwepushedbackthedateweexpectedto keepourbenchmarkrateexceptionallylowuntilatleastmid-2015.

Then,atourDecember2012meeting,wetookadifferenttackbydroppingthereferencetoaspecificcalendardate.

Instead,wespelledouteconomicthresholdstoreachbeforebeginningto raiseinterestrates.

Specifically,wesaidweexpectedtokeeptherateexceptionallylowatleastaslongas,one,“theunemploymentrateremainsabove6½percent”;

two,“inflationbetweenoneandtwoyearsaheadisprojectedtobenomorethanahalfpercentagepointabovetheCommittee’s2percentlonger-rungoal”;

andthree,longer-terminflationexpectationsremainincheck.

Thischangeimprovestheeffectivenessofourforwardguidanceinanimportantway.

ThenewlanguageallowsthepublictoadjustitsexpectationsoffutureFedpolicybasedonitsviewoftheeconomicoutlook.

Ineffect,thepublicisdoingsomeoftheworkofstabilizingtheeconomy.

Forexample,ifprospectsforreachinga6½percentunemploymentrateweretomovefurtherawayintime,thenpeoplewouldmostlikelyexpect theFedtokeepitsbenchmarkratelowforlonger.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

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P age |94

Marketinterestrateswouldfall,providingaboosttoeconomicgrowth,andtherebyhelpingusachieveourmonetarypolicygoals.

Theseunconventionalpolicieshavebeenhighlyeffectiveatreducinglong-terminterestratesandimprovingfinancialconditionsmoregenerally.

Inthatway,theyhelpusattheFedworktowardsourpricestabilityandmaximumemploymentmandates.

Atthesametimethough,wewanttobecarefulnottooverstimulatetheeconomy.

Thus,we’llneedtodialdownourmonetarystimulusastheeconomycontinuestoimprove.

Thesituationwefindourselvesintodayislikedrivingacarupalong,steephill.

Tokeepthecarmovingatareasonablespeed,theFedispushingdown hardontheaccelerator.

Astheroadgetsflatter—asthefactorsholdingbacktherecoverywane—we’llneedtolightenupontheacceleratorabit.

And,eventually,ifwefindourselvespickinguptoomuchspeed,wemayneedtoapplythebrakes.

Alongtheroad,we’llfaceimportantpolicychoices.Whenshouldwestopaddingtooursecuritiesholdings?

When,andhowquickly,shouldweraisethefederalfundsrate?

Letmestartwiththefirstquestion.InthestatementissuedfollowingtheMarchmeeting,ourpolicycommittee,theFederalOpenMarketCommittee,orFOMC,statedthatitwouldcontinueitssecurities

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

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P age |95

purchases“untiltheoutlookforthelabormarkethasimprovedsubstantiallyinacontextofpricestability.”

Italsostatedthat“indeterminingthesize,pace,andcompositionofitsassetpurchases,theCommitteewillcontinuetotakeappropriateaccountofthelikelyefficacyandcostsofsuchpurchasesaswellastheextentofprogresstowarditseconomicobjectives.”

So,whatdoesthatmean?Iseethebenefitsofourassetpurchasescontinuingtooutweighthecostsbyalargemargin.

Iexpectthatcontinuedassetpurchaseswillbeappropriatewellintothesecondhalfofthisyear.

Inmakingthisassessment,Idon’thaveaspecificunemploymentorjob-gainthresholdinmindforcuttingbackorendingthesepurchases.

Instead,I’mlookingforconvincingevidenceofsustained,ongoingimprovementinthelabormarketandeconomy.

Thelatesteconomicnewshasbeenencouraging.

Butitwilltakemoresolidevidencetoconvincemethatit’stimetotrimourassetpurchases.

Animportantruleinbothforecastingandpolicymakingisnottooverreacttowhatmayturnouttobejustablipinthedata.

But,assumingmyeconomicforecastholdstrue,Iexpectwewillmeetthetestforsubstantialimprovementintheoutlookforthelabormarketbythissummer.

Ifthathappens,wecouldstarttaperingourpurchasesthen.Ifallgoesashoped,wecouldendthepurchaseprogramsometimelatethisyear.

It’simportanttonotethattaperingourpurchasesandevenendingthepurchaseprogramdoesn’tmeanthatweareremovingallthemonetarystimulusthatcomesfromourlonger-termsecuritiesholdings.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

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P age |96

Instead,evenaswecutbackourpurchases,we’restilladdingmonetaryaccommodationandexertinggreaterdownwardpressureoninterestrates.

Economictheoryandreal-worldevidenceindicatethatit’snotthepaceatwhichwebuysecuritiesthatmattersforinfluencingfinancialconditions.

Rather,it’sthesizeandcompositionoftheassetsweholdonourbalancesheet.

So,evenwhenwestopaddingtoourportfolio,itdoesn’tmeanwe’retighteningpolicy.

Ofcourse,eventually,itwillbeappropriatetotightenpolicy.

TheFOMC’sforwardguidancethatIdiscussedearlierprovidesaclearframeworkforwhenthatprocesswillstart.

Whenthetimedoescome,I’mconfidentthattheFedhasthetoolstoengineerasuccessfultransitiontomorenormalconditions.

Inmyfewremainingminutes,IwouldliketoaddressaquestionthatIoftenhearandreadaboutinthemedia.

Somecommentatorssuggestthatlowinterestratesaredangerousbecausetheyencourageinvestorstotaketoomuchrisk.

Forinstance,lowyieldsonTreasurysecuritiesmayleadtoincreasedinvestmentinriskierassets,suchasjunkbondsorstocks.

Thatcouldpotentiallythreatenfinancialstability.

IwanttoemphasizethattheFedwillnottolerateseriousthreatstofinancialstability.

We’reconstantlyengagedinthoroughandrigorousanalysisofanddiscussionsaboutpotentialriskstothefinancialsystem.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

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P age |97

Basedonthisanalysis,Isimplydon’tseethisasaseriousrisknow.Theremaybeexcessesinsomeisolatedmarkets.

Forexample,pricesforfarmlandintheMidwesthavegonethroughthebarnroof.

Butwedon’tfaceaneconomy-wideproblemoflandprices,orotherbubbles,forthatmatter.

Overall,marketsarestillmoreinarisk-aversemodethanarisk-lovingmode.

Tosummarize,theeconomyisonthemend,helpedinpartbytheverystimulatorystanceofmonetarypolicy.

Inmakingmonetarypolicy,onehastoweighcarefullythecostsand benefitsofactions,recognizingthatwealwaysoperateinanuncertainworld.

I’mconvincedwehavetherightpoliciesinplacetoleadustowardbothmaximumemploymentandpricestability.

Thankyou.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

www.risk-compliance-association.com


P age |98

  • FinancialcooperationbetweenChinaandSingapore

  • CongratulatoryremarksbyMrRaviMenon, ManagingDirectoroftheMonetaryAuthorityofSingapore,attheinaugurationofICBCSingaporeRMBClearingBank,Singapore

  • MrJiangJianqing,ICBCChairman,

  • MrDaiBing,distinguishedguests,ladiesandgentlemen,goodmorning.

  • Iamhappytojoinyouatthismorning’sceremonyinauguratingtheIndustrial&CommercialBankofChinaastheRenminbiclearingbankinSingapore.

  • Today’seventmarksakeymilestoneinthefinancialcooperationbetweenChinaandSingapore.

  • ItisthefruitofastrongandsubstantivecollaborationbetweentheMonetaryAuthorityofSingaporeandthePeople’sBankofChina.

  • MASextendedQualifyingFullBank(QFB)privilegestoICBCandBankofChinainOctober2012aspartoftheChina-SingaporeFreeTradeAgreement.

  • PBCthennamedICBCSingaporeastheRMBclearingbankinSingapore.

  • Lastmonth,MASandPBCdoubledthesizeoftheirbilateralcurrency swapfacilityfromRMB150billiontoRMB300billion.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

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  • P age |99

  • ThescopeoftheswapfacilitywasexpandedtoallowMAStoprovideRMBliquiditytobanksinSingapore.

  • 3.SingaporeisthefirstregionalfinancialcentreoutsideGreaterChinatohaveaRMBclearingbank.

  • OffshoreRMBactivitiesinSingaporewillbeunderpinnedbythestrong andgrowingtradeflowsbetweentheregionandChina.

  • Singapore’sbilateraltradewithChinaexceedsUS$80billion.

  • TradebetweenASEANandChinaisatarecordUS$400billion.

  • ThislargeandgrowingcrossbordertradewillfuelgreaterRMBtradesettlementactivityinSingaporeovertime.

  • TheRMBclearingbankwillbeanimportantchannelforRMBliquiditytocirculatebetweenSingaporeandChina.

  • Singapore’sdeepandliquidcapitalmarketswillbeabletosupportRMBfinancingneedsintheregion.

  • WehavealreadyseencompanieshereissuingRMB-denominatedbonds.

  • TheSingaporeExchangehasannouncedthatitisreadytoquote,trade,clearandsettleRMB-denominatedsecurities.

  • WecanexpecttherangeofRMB-denominatedproductofferingstoexpand,asregionalcorporatesraiseRMBfinancingthroughbondissuancesandequitylistings,totaponthestronginvestorbaseintheregion.

  • TherewillalsobestrongandgrowingdemandforRMBtradeservices.

  • ThereisacriticalmassofinternationaltradingcompaniesbasedinSingaporethatwilldemandsuchservices.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

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P age |100

WiththenewRMBclearingarrangements,wecanexpectfinancialinstitutionsbasedinSingaporetoreachouttolocalandregionalcorporatesandinvestors,andencouragegreaterparticipationintheoffshoreRMBmarket.

6.MASisdelightedtohaveICBCSingaporeasourRMBclearingbank.ICBCSingaporehasconsiderableexperienceinRMBbusinessandis

wellplacedtolaunchareliableandefficientRMBclearingservice.

WiththeQFBprivilegesitnowenjoys,ICBCiscommittedtogrowingitsbusinessinSingapore.

Iunderstandthatamongotherthings,itintendstodesignateSingaporeasitsSoutheast-AsianhubforRMBbusinessandwillmake

SingaporeitswealthmanagementhubcoveringSoutheastAsiaandSouth

Asia.

ICBCandSingaporecantogetherplayabigroleinpromotingthegreateruseoftheRMBfortradesettlementsandothereconomicactivitieswithinAsia,andparticularlyinSoutheastAsia.

IcongratulateICBCforitscommencementasSingapore’sRMBclearingbank.

Thankyou

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

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P age |101

BriefoverviewofMacao’seconomyin2012

SpeechbyMrAnselmoTeng,ChairmanoftheMonetaryAuthorityofMacao,attheMacau

AssociationofBanks(ABM)SpringFestivalLuncheonGathering,

Macao,26February2013.

TheHonourableMr.TamPakYuen,SecretaryforEconomyandFinance,MSAR,TheHonourableMs.GaoYan,DeputyDirector,LiaisonOfficeoftheCentralPeople’sGovernment,TheHonourableMr.YeYixin,ChairmanoftheMacaoAssociationofBanks,HonourableFriendsoftheBankingSector,HonourableGuests,

IntheChinesetradition,theNewYearcarriesaspecialconnotation;firecrackersbidfarewelltothepastyearwhiletheoldcoupletsarereplacedtogreetnewthings.

WeseetheYearoftheDragonoffandgreetthenewYearoftheSnake.OnbehalfofAMCM,Iwouldliketotakethisopportunityofgreetingthe

newYearoftheSnake,towishtheMSARaharmoniouscommunity,

prosperousbusiness.

Moreover,thrivingbusinessopportunitieswillfallonthebankingsectorandourpractitionerswillelevatetoahigherlevelintheirladderofcareeradvancement.

Inthepastyear,althoughadverselyaffectedbyoutsideenvironmental factors,theoveralleconomyofMacaohasscoredflyingcoloursagainunderthecooperationofallsectorsofthecommunity.

Thebankingsectorhasexhibitedstabledevelopment,anotherrecordhasbeencreated.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

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P age |102

Ithasneverbeenbetter.

Accordingtoinitialstatisticsavailable:asattheendofDecember2012,totalassetsofthebankingsystemstoodatMOP796.2billion,ayear-on–yearincreaseof21%;totaldepositsamountedtoMOP554.2billion,ayear-on-yearincreaseof32.7%;totalloansoutstandingwerevaluedatMOP407billion,ayear-on-yearincreaseof26.2%.

Althoughbankassetsneverceasetogrow,thequalityofassetshasremainedfine,non-performingloanratiowasonly0.19%whileCapitalAdequacyRatio(CAR)stoodat14.6%,basicallytieronecorecapital.

Liquidityratiowasmaintainedataratherhighlevel.

For2012asawhole,totalprofitsofthebankingsystemamountedtoMOP5.7billion,ayear-on-yearincreaseof25%.

Therecenttrendshowsthattheinternationalfinancialsituationisdisplayingclearersignsofrecovery.

Itishowevernotedthattherearestillhiddenexternaluncertainties.Weshouldcontinuetopayattention,stayvigilantandexerciseour

prudence.

Weshouldbewellpreparedtotakeontherisksandadverseeffectsarisingfromexternalenvironmentalchanges.

Theymayinflictharmsonoureconomyandfinancialsystem.

Asthefinancialregulator,AMCMkeepssupervisingbanksoperatingintheMSARsoastomaintainsecurityandstabilityoftheMacaofinancialsystem.

Allalong,oursupervisoryworkhashadthesupportandcoordinationoffriendsofthesector.

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P age |103

Assuch,IdulyrepresentAMCMtoexpressourcandidappreciationtoourpractitionersfortheirsupportandcooperationandtheirincessantendeavourinmaintainingthefinancialstabilityandhealthydevelopmentofMacao.

Lookingforward,AMCMwillimplementitsdutyinaccordancewiththelegislationstomaintainthestabilityandsecurityofthesystem,continuetoenhancethefinancialregulationstocopewiththeneedsofmarketdevelopmentandalignmentwithinternationalsupervisoryrequirements.

Ontheotherhand,itwillprompttheindustrytofurtherdevelopbyactuatingitspractitioners.

Itwillactivelyparticipateinregionalfinancialcooperation,particularlythedeepeningGuangdong-Macaofinancialcooperation,withaviewtoexploringwiderbusinessscopeandhigherinnovativevision.

Inthisway,wecanfurtherexploitourspecialfeaturesandcompetitiveedgestorealizeourowngrowthanddevelopmentwhilecontributingtothecontinuedstabilityandprosperityoftheMacaofinancialsectorand promoteappropriatediversificationoftheeconomyofMacao.

Again,IdulyrepresentAMCMtowishyouprogressintheYearoftheSnake,goodhealth,prosperousbusinessandhappyfamily.

Thankyou.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

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P age |104

Disclaimer

TheAssociationtriestoenhancepublicaccesstoinformationaboutriskand compliancemanagement.

Ourgoalistokeepthisinformationtimelyandaccurate.Iferrorsarebroughttoourattention,wewilltrytocorrectthem.

Thisinformation:

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isofageneralnatureonlyandisnotintendedtoaddressthespecific

circumstancesofanyparticularindividualorentity;

-

shouldnotbereliedonintheparticularcontextofenforcementorsimilar

regulatoryaction;

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isnotnecessarilycomprehensive,complete,oruptodate;

-

issometimeslinkedtoexternalsitesoverwhichtheAssociationhasnocontrol

andforwhichtheAssociationassumesnoresponsibility;

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isnotprofessionalorlegaladvice(ifyouneedspecificadvice,youshould

alwaysconsultasuitablyqualifiedprofessional);

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isinnowayconstitutiveofaninterpretativedocument;

- doesnotprejudgethepositionthattherelevantauthoritiesmightdecidetotakeonthesamemattersifdevelopments,includingCourtrulings,weretoleadittorevisesomeoftheviewsexpressedhere;

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doesnotprejudgetheinterpretationthattheCourtsmightplaceonthematters

atissue.

Pleasenotethatitcannotbeguaranteedthattheseinformationanddocumentsexactlyreproduceofficiallyadoptedtexts.

Itisourgoaltominimizedisruptioncausedbytechnicalerrors.

Howeversomedataorinformationmayhavebeencreatedorstructuredinfilesorformatsthatarenoterror-freeandwecannotguaranteethatourservicewillnotbeinterruptedorotherwiseaffectedbysuchproblems.

TheAssociationacceptsnoresponsibilitywithregardtosuchproblemsincurredasaresultofusingthissiteoranylinkedexternalsites.

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P age |105

CertifiedRiskandComplianceManagementProfessional (CRCMP)distancelearningandonlinecertificationprogram.

CompanieslikeIBM,Accentureetc.considerthe CRCMPapreferred certificate.Youmayfindmoreifyousearch (CRCMPpreferred certificate) usinganysearchengine.

Theall-inclusivecostis $297.

Whatisincludedintheprice:

Theofficialpresentationsweuse

inourinstructor-ledclasses(3285slides)

The2309slidesareneeded fortheexam,asallthequestionsare basedontheseslides.Theremaining976slidesareforreference.

Youcanfindthecoursesynopsisat:

www.risk-compliance-association.com/Certified_Risk_Compliance_Training.htm

Upto3OnlineExams

Youhaveto passoneexam.

Ifyoufail,youmuststudytheofficial

presentationsandtryagain, butyoudonotneedto spend money.Upto 3examsareincludedintheprice.

Tolearnmoreyoumayvisit:

www.risk-compliance-association.com/Questions_About_The_Certification_And_The_Exams_1.pdf

www.risk-compliance-association.com/CRCMP_Certification_Steps_1.pdf

PersonalizedCertificateprintedinfullcolor

Processing,printing,packingandposting toyourofficeorhome.

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P age |106

D.TheDoddFrankActandthenew RiskManagementStandards(976slides,includedinthe3285slides)

TheUSDodd-Frank WallStreetReform andConsumerProtectionActis the mostsignificant pieceoflegislation concerningthefinancialservicesindustryinabout80years.

Whatdoesitmeanforriskandcompliancemanagementprofessionals?Itmeansnewchallenges,newjobs,newcareers,andnew opportunities.

Thebillestablishesnewrisk managementandcorporategovernance principles,setsupanearly warning

system to protecttheeconomyfromfuturethreats,andbringsmore

transparencyandaccountability.

ItalsoamendsimportantsectionsoftheSarbanesOxley Act. Forexample,itsignificantlyexpandswhistleblowerprotectionsunderthe SarbanesOxleyActandcreatesadditionalanti-retaliation requirements.

Youwill findmoreinformation at:

www.risk-compliance-association.com/Distance_Learning_and_Certification.htm

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