How will latest changes to Volcker Rule affect non-US banks?
Kathleen A. Scott discusses the final Volcker Rule, focusing on some of the issues raised by non-US banks in their comments.
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On February 3, 2017 the European Securities and Markets Authority (ESMA) published a practical guide which summarises the main rules and practices applicable across the European Economic Area (EEA) in relation to notifications of major holdings under national law in accordance with the Transparency Directive. ESMA states that the guide is intended as an aide to market participants and may be particularly helpful to shareholders with notification obligations under national law in accordance with the Transparency Directive.
Part I of the guide sets out a summary of the main rules and practices in relation to making and publishing notifications of major holdings under national law in accordance with the Transparency Directive. The information is presented on a country-by-country basis using information provided by national regulators and the focus is on on-exchange transactions based on the assumption that these trigger the majority of notification obligations under the Transparency Directive.
Part II of the guide presents key data, including information on notification thresholds, the triggering event, the deadline for learning of the triggering event, the deadline for making a notification, permitted channels and format for the filing of notifications and the deadline for publishing a notification. The information in Part II is organised in transversal tables, making it possible to compare rules across different jurisdictions.
ESMA will update the guide as and when necessary to reflect changes to national rules and practices.
On February 7, 2017 the Financial Reporting Council (FRC) published a set of best practice guidelines for audit tenders which highlight how audit committees can approach the audit tender process to get the best outcome. These guidelines are based on experiences of audit tenders since the requirement was first introduced into the UK Corporate Governance Code in 2012. The FRC published a previous note on best practice with regard to audit tenders in July 2013.
The updated guidelines include the following:
In terms of timing of a tender, it may be beneficial to tender the audit before the last possible date, in order to have a wider choice of audit firms and audit partners. The guidance sets out factors to consider when determining the timing of the tender.
The audit committees of public interest entities (PIEs) related to PIEs in other member states, should consider co-ordination of the tender timing around the group as different member states will have differing rotation requirements. The audit committees of subsidiary PIEs will need to be involved in the tender process to discharge their responsibilities.
In some cases, such as after an acquisition or restructuring, it may not be clear when the audit engagement began. The FRC, as competent authority, can be consulted and will opine on decisions as to when engagements began in these cases. FTSE 350 companies should also consult the Competition and Markets Authority.
Companies that use several firms for different advice, should develop a long-term strategy for the procurement of professional services which ensures that at least two firms are able to participate in the audit tender process, and satisfy auditor independence requirements by the time of appointment, without unforeseen impacts on other services received by the company.
All members of the audit committee, not just its chair, should have a good understanding of the legal requirements, the mechanics of a tender process and what the company is trying to achieve from the process.
All members of the audit committee should be involved throughout the tender process.
Audit committees should ask firms for their most recent FRC Audit Quality Review report at an early stage in the process to gain an understanding of the FRC’s assessment of the firms’ audit quality.
Companies should ask firms to outline succession planning for their audit teams to get an idea of the depth of talent within the firm, and given that there is a now a legal requirement for individuals in a PIE audit team to be subject to a gradual rotation process.
Auditors should consider asking for a commitment from the firm to a five year tenure from the engagement partner and, in future years (when there is more history of tendering), requesting data on the length of time the individual partner has served in audit engagement partner roles.
In setting up a data room to provide all firms with the same information, companies should consult with the incumbent auditor in determining the most useful information to include. The incumbent auditor’s most recent audit plan and audit scope are felt by audit firms to be extremely useful.
It is best practice to make the same people/teams within the company available to all firms tendering, even if the firm did not originally make a request to see a particular team.
Audit committees should consider what insight they wish to gain from setting a technical challenge and beware of appearing to be “opinion shopping”. In this respect, a forward-looking exercise, which seeks to assess the firms’ approach to the challenge is preferable to seeking a view on a matter already included in the financial statements or decided upon.
Best practice is that the whole audit committee attend the firms’ presentations and audit committees should be prepared to give comprehensive feedback to the firms on the reasons for the decision made.
The audit committee of a PIE is required to make a recommendation to the board for appointment of an auditor. The audit committee must validate or approve a report on the tendering and appointment process. That report is to allow the audited entity to demonstrate to the FRC that the process has been carried out independently and fairly, and in accordance with legislative requirements. It is a decision for the board of the audited entity if it wishes to make such a report public. The FRC considers that the legislative requirements can be satisfied by a combination of some or all of: (i) the paper prepared for the audit committee to support its deliberations and recommendation to the board for appointment; (ii) the board paper which sets out the audit committee’s assessment and recommendations; and (iii) material contained in the report of the audit committee in the company’s annual report, as that will set out the main areas of focus of the audit committee during the year being reported upon.
On February 8, 2017, the Investment Association published guidelines setting out the expectations of its members when companies tender their audit. The guidelines cover planning the tender, tender candidates, the tender process and the tender decision. The guidelines are aimed at companies whose shares are admitted to the Premium and Standard segment of the Official List of the UK Listing Authority, to trading on AIM, and to the High Growth Segment of the London Stock Exchange’s Main Market.
Planning the tender
The guidelines state that the audit committee should direct the planning and oversee the process of the tender, including identifying candidates, setting the criteria for selection and the interviews and that the whole of the audit committee should be involved, not just the chair of the audit committee. The tender process should be planned carefully and well in advance since managing a mix of non-audit services is now more complex and likely to need time and input from a range of stakeholders. A company planning to enter into a tender should issue an RNS announcement so that its investors can, if they wish, engage with it on the process and major shareholders should be engaged on the timetable and process, how the audit committee intends to assess audit quality, the selection criteria and assessment mechanism to be applied and the conclusion reached. In relation to giving advance notice of a tender and the timetable, standardised disclosure should be avoided and the company should explain why it is proposing to tender at that time, particularly if it is re-tendering well within the new statutory limit.
The guidelines point out that audit committees need to consider the range of firms invited to tender, ensure that they are objective and independent and also whether the incumbent is to be included. The guidelines note that investors expect a wide range of audit firms to be invited to tender and, where practical, firms other than the four largest should be included. Depending on each group’s circumstances, the guidelines state that investors believe only the larger multi-national groups may have to restrict their choice to the four largest audit firms. Any conflicts or perceived conflicts of interest between audit committee members and firms tendering need to be managed. The guidelines state that investors generally prefer that at least three years should have elapsed from when a company director was a partner in, or employed by, an audit firm before the firm can be considered for appointment as auditor. Where the incumbent auditor is being invited to tender, the tender process should address any potential advantage the incumbent firm, or an audit firm with a substantial business relationship with the company, may have and ensure there are appropriate mitigating factors and there should be transparency about how the audit committee decided on the candidates to be invited to tender.
The tender process
The guidelines state that for the tender process to be successful and focused, clear objectives should be set as to what it wants to achieve and what is looked for in an auditor. When the interviews are held or presentations given, the interviewee/presenters from the audit firm should be the same individuals that will be working on the audit if their firm is appointed and the guidelines set out a number of factors which audit committees should consider when deciding on the preferred candidate. The guidelines state that investors would appreciate audit committees disclosing the selection criteria used, for example, audit quality, cultural fit, industry expertise and transition experience.
The tender decision
The guidelines state that it is important that the audit committee ensures that in making its recommendation to the board as to the preferred firm, it puts audit quality as its main criterion. While fees should be reasonable, they should not be the main deciding factor, particularly in the early stages of the tender process. Major investors’ views should be sought before the appointment is made, particularly if there are issues they want to discuss and at the time the decision is confirmed, there should be an RNS announcement rather than delaying any announcement until the final annual report and accounts is issued. If investor input is received, then the report of the audit committee in the annual report should consider explaining how it went about that engagement and the outcome.
On February 09, 2017, the London Stock Exchange plc issued guidance setting out recommendations for good practice in environmental, social and governance (ESG) reporting. The guidance is to help companies understand what ESG information they should provide and how they should go about providing it.
The main aims of the new guidance are to do the following:
stimulate interest in the innovation opportunities opened by this new economic paradigm;
help issuers and investors to navigate the complex landscape of ESG reporting;
enable richer data flows and dialogue on ESG between issuers and investors;
support the consolidation of sound global reporting standards;
The report identifies eight priorities for ESG reporting:
strategic relevance – relevance of ESG issues to business strategy and business models;
investor materiality – what investors mean by ‘materiality’;
investment grade data – the essential characteristics of ESG data;
global frameworks – the most important ESG reporting standards;
reporting formats – looking at how ESG data should be reported;
regulation and investor communication – considering how companies can navigate regulations and communicate efficiently;
green Revenue reporting – how companies can get recognition for green products and services;
Kathleen A. Scott discusses the final Volcker Rule, focusing on some of the issues raised by non-US banks in their comments.
OFAC published a final rule that modifies the Cuban Assets Control Regulations to revoke the so-called "U-turn" authorization.