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FINRA´s Regulatory and Examination Priorities 2017

Each year, FINRA publishes its Annual Regulatory and Examination Priorities Letter to highlight issues of importance to FINRA’s regulatory programs. In this year´s letter, Robert W. Cook, President and CEO, provides information about areas FINRA plans to review in its 2017 exams based on observations from its regulatory programs as well as input from various stakeholders, including member firms, other regulators and investor advocates.

Robert W. Cook, says: “As you will see, a common thread running throughout the Priorities Letter is a focus on core “blocking and tackling” issues of compliance, supervision and risk management. Most of the topics addressed in this year’s letter have been highlighted in prior years, but specific areas of emphasis have been updated or modified based on recent observations and experience. Attention to the core regulatory requirements identified in the letter—and how to address them in light of new business challenges and market developments—will serve investors and markets well.

“Your ongoing input on existing and emerging issues that put investors and market integrity at risk is very important. We share a common goal of promoting investor confidence, and I ask that you let us know of any areas on which you think FINRA should focus its regulatory resources to protect investors and bolster market integrity.

“Since joining FINRA in August, I have been engaged in an ongoing “listening tour,” meeting with member firms, regulators and investor groups, among others. I am grateful for the feedback and time many people have given me. In the coming months, I plan to provide more information about some concrete steps we are planning—based on the listening tour, as well as other input—to take a fresh look at certain aspects of FINRA’s programs and operations and to identify opportunities to do our work more effectively. In the meantime, I want to share with you two more modest steps we are already planning to take.

“First, I have heard frequently from firms and other FINRA stakeholders that it would be useful to learn more about what FINRA is seeing through its examination programs. They have suggested that publishing common examination findings would help inform firms of deficiencies FINRA has observed, including in its areas of priority, and allow firms that have not yet been examined to fix any similar deficiencies. I agree, and starting this year, we will publish a summary report that outlines key findings from examinations in selected areas. This document will alert firms to what we are seeing from a national perspective and, therefore, serve as an additional tool firms can use to strengthen the control environment for their business.

“Another suggestion that emerged from my meetings is that many small firms would like us to explore how FINRA can provide more, and perhaps different, compliance tools and resources to assist them in complying with applicable regulatory requirements. I have already asked our staff to develop several new resources along these lines, and in 2017 we will introduce a “compliance calendar” and a directory of compliance service providers. In addition, to gather more information in this area, we recently sent a brief survey to small firms to help us learn about the compliance tools and resources they would find valuable. We have received very helpful input from firms to date, but it is not too late to participate. If you are a small firm and have not already completed the survey, please do so to help us better assist you.

“A related area of focus in the coming year will be recognizing the vital role that small firms—as well as larger firms—play in facilitating capital formation by small and emerging growth companies, which are vital engines of our economy and of job creation. We will be looking for opportunities to support these activities, including by providing guidance where appropriate to encourage innovative business models and new technologies in the Fintech space, consistent with maintaining important investor protections.

“Some have asked me when my listening tour will be finished. The short answer is: never. As noted above, in the coming months I will share with you some additional steps we will be undertaking that have been informed by the listening tour, and I am very excited about moving forward with these initiatives. But the listening will not end during my tenure. I hope you will always feel free to reach out directly to me or to anyone on our staff with your ideas and suggestions on how FINRA can better execute its mission of investor protection and market integrity.”

You may see the document that follow the letter here.

Sotheby’s Launches Global Luxury Division and Announces Leadership

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Sotheby’s announced the appointment of Maarten ten Holder as global Managing Director of the Company’s new Luxury & Lifestyle Division, uniting the categories of jewelry, watches, wine, cars and experiences, as well as the relationship with Sotheby’s International Realty, under one senior executive. A highly experienced member of the firm’s senior management team, Maarten will relocate to New York from London, where he was most recently Managing Director of the operations in Europe, the Middle East, India and Africa. Prior to his post in London, Maarten held leadership positions in New York, Milan and Amsterdam. His appointment is effective immediately.

“Our creation of a new division that unites these key areas globally under Maarten’s talented leadership is yet more progress on Sotheby’s strategy to serve clients and provide value for shareholders,” said Tad Smith Sotheby’s CEO.”

Maarten ten Holder added, “I am thrilled to step into this crucial role leading the new Luxury & Lifestyle division. Each of these businesses operates in a market even larger than the art market, and I am excited to lead our strategic effort to fashion our talented teams into a stronger foundation for Sotheby’s growth.”

Maarten ten Holder began his career at Sotheby’s in Amsterdam. Early on, Maarten played an integral role in many large-scale country house sales across Europe and helped to organize Sotheby’s first auction in France in 1999. He took on the role of Deputy Managing Director in Italy in 2002, before moving to New York in 2006 as Managing Director of North & South America. During his tenure in New York, and more recently in London, Maarten oversaw some of the most high profile auctions in recent memory, including the sale of Edvard Munch’s The Scream, the collection of Mrs. Paul Mellon, property from the personal collection of Deborah, Duchess of Devonshire, and the personal collection of David Bowie. Additionally, he was involved in numerous major sales of jewelry including the collections of Mrs. Charles Wrightsman and Mrs. Estée Lauder & Mrs. Evelyn H. Lauder, as well as the recent $175 million record-breaking sale of jewelry in Geneva.

Maarten’s involvement with car auctions began in 2005 with Sotheby’s landmark sale of cars and related memorabilia at Ferrari‘s legendary premises in Maranello, Italy. This past November, he was an auctioneer for the RM Sotheby’s sale of The Duemila Ruote sale in Milan – the largest automobile collection sale ever staged in Europe. An accomplished auctioneer, Maarten regularly conducts sales in all of Sotheby’s major international selling locations in five different languages.

Navigating Negative Rates In 2017

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We are facing a world where ‘safe assets’ pay nothing or even charge you to own them, yield can only be found at higher risk levels and markets which have benefited from falling yields are vulnerable to a change in direction. The question for investors is: what to do? We believe there are opportunities worth pursuing, along with risks that require careful mitigation.

Despite these difficulties, we believe a thoughtful approach can help investors to meet these income challenges, by applying six simple rules:

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Identify your objectives

You need to clearly define your investment objectives and use these to guide all portfolio decisions. What yield or return do you need? What level of risk tolerance is acceptable? Are

you sensitive to short or longer term capital risk? How much liquidity do you require? If all of these things are broadly realistic, they can guide you in building an appropriate portfolio.

However, if you try to push any of these objectives too far, the balance of outcomes may be unattainable. For example, if you try to chase yield too far, it may increase the risk to capital loss. If you try to push volatility down too low, you may not be able to generate yield or a suitable return.

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Diversify your portfolio

Diversification is one of the most powerful tenets of portfolio construction. Assets with different characteristics will often offset each other in terms of risk, but can all still contribute towards performance, thereby improving the return achievable for a given level of risk. This is incredibly useful when trying to balance the need for yield against a limited appetite for volatility.

The key issue here is implementation. We think asset class labels can be highly misleading. For example, we think there is a much closer relationship between equities and high yield bonds than high yield and government bonds. Their respective labels say they are different asset classes, while their underlying performance driver, essentially corporate profitability, is the same for both.

We believe investors need to consider asset behaviour, when building portfolios. This is why we think of assets as exhibiting either ‘growth’, ‘defensive’ or ‘uncorrelated’ characteristics, regardless of the traditional labels. A truly diversified portfolio will have a blend of all three, which is critical to achieving proper portfolio diversification.

Adapt to changing market conditions

What is attractive today will change over time as markets move and economies evolve. Adapting exposure to re ect these changes, and rotating out of asset classes as they become less attractive can help towards achieving the stated objective.

In particular, certain types of assets will typically do well in times of economic expansion, such as equities and high yield bonds, and do poorly in recession, whereas other assets normally exhibit more defensive qualities, such as high quality government bonds. So a fundamentally different mix of exposures makes sense at different stages of the business cycle. It is, however, important to take account of value, as assets tend to go from cheap to expensive and back again, and the cyclical behaviour of assets may change in response to these valuations changes. Assets, for example, like government bonds, may have lost some of their defensive characteristics as they have become more expensive, making them less useful in negative economic periods.

Build exposure from the bottom up

Building portfolios from the bottom-up seeks to ensure that positions are consistent with the desired outcome, rather than just exhibiting broad market characteristics. The market will

contain many securities which may not help towards meeting your objectives. It will contain expensive assets, as well as ones that don’t provide much income. It will also contain assets with signi cant quality or capital risks. As a result, it is important to tailor the underlying portfolio to re ect the desired outcome and, again, to allow this mix to evolve over time.

Think holistically

Building from the bottom-up also allows a holistic approach across asset classes and capital structures. For example, given the many challenges faced by the banking sector, we have felt

that it is generally better to lend to banks as a senior bond holder than to own their equity. Regulatory change is designed to make harder for banks to make money for their equity holders, but conversely regulation is designed to make banks safer for their bond holders.

Similarly, earlier this year when oil prices collapsed, a lot of energy-related assets ended up at relatively cheap levels across their capital structures. We looked to see whether there were interesting opportunities that could do well, even if oil prices remained low, and which would benefit from any recovery in the oil price. Reviewing the opportunity set, we found that some of the best opportunities were within US high yield energy sector bonds, but selectivity would be key, because of the risk of default.

Hope for the best, but prepare for the worst

Financial markets are always hostage to events. One way to guard against this is to think about which events are worth worrying about, and then analyse their potential consequences

for markets, and the implications for your portfolio. This can be looked at alongside how probable the event appears to be, to decide whether to hedge exposed areas within the portfolio. This kind of approach worked particularly well in advance of the UK’s EU referendum, a discrete risk event with an uncertain binary outcome.

Rather than taking a view on how the vote would go, we believed that a more prudent course was to seek to reduce risk to limit the possible downside, in return for perhaps foregoing some of the upside. It can be very useful to manage exposure around future referenda or elections in a similar way.

Open-ended event-based risks offer a different challenge, such as the risk of a ‘hard landing’ in China, the risk of an oil price spike, or the risk of a bond yield spike. With these, it is worth examining exposure levels to see whether it makes sense to hedge certain risks while still maintaining core strategic positions.

John Stopford is Co-Head of Multi-Asset at Investec.

And Now for Something Completely Different?

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HSBC Global Research asks if the ECB QE set to become an ‘ex policy’. In its last European Economics Quarterly the firm explains that there’s more than a whiff of Monty Python’s famous parrot sketch in the ECB’s current position. “Like Michael Palin trying to persuade John Cleese that his dead parrot might be just “resting” or “pining for the fjords”, so the ECB for the past few years has been keen to convince markets that it has the will and the means to return inflation to target, despite mounting evidence to the contrary”.

It is two years since the ECB announced QE, albeit belatedly and cautiously. Yet inflation still seems stuck in a rut. “So is ECB QE, like Monty Python’s parrot, dead? Is it an ex-policy? Is it time for something completely different?”, asks HSBC Global Research.

Markets have become more optimistic on inflation and the reflation trade is on

Since Donald Trump was elected as the next US president, equities and bond yields have risen and the US dollar has appreciated. This positive sentiment has affected Europe. During Q4, ten-year bund yields rose from around -10bps to +25bps, and at 1.4% gilt yields are up around 90bps from their post-Brexit lows. European equities have shrugged off various political shocks to end 2016 at highs for the year.

To HSBC, the market reaction jars with the economic realities. The two key tailwinds to eurozone growth over the past two years – energy price deflation and fiscal headroom from falling government borrowing costs – have ended. They expect the eurozone to grow by just 1.2% in 2017. This is 0.2% higher than their previous forecast thanks to strong momentum going into the year, but it still marks a slowdown from 2016. Unemployment and economic slack are still elevated in three of the eurozone’s big four economies and are likely to remain so.

There may be structural global factors, such as price-sensitive, digitally-savvy consumers restraining inflation. And the impact of monetary policy is still limited by a low ‘natural’ real interest rate. It will require more than a dose of US fiscal expansion to reverse the trend in the factors that have driven ‘natural rates’ down, such as slowing productivity growth, high debt burdens and unfavourable demographics. In short, they think we are a long way from seeing ‘the whites of the eyes’ of sustained eurozone inflation.

Core inflation in the eurozone is unlikely to rise much above 1% over the coming years, even if headline inflation is set to rise reasonably sharply. The 18% rise in the EUR oil price through Q4 2016 alongside EUR depreciation means they now see eurozone inflation peaking briefly at 1.8% and averaging 1.6% in 2017 (up from 1.0% previously). But they see core inflation reaching just 1.2% in 2018. Indeed, even after the latest extension of QE to December 2017, the ECB itself is only forecasting inflation rising to 1.7% by 2019.

The eurozone is unlikely to follow the US down the path of fiscal expansion. Markets shouldn’t rely on the fiscal expansion to drive up growth and inflation, even if there is a strong case for Europe to follow the US. In aggregate, the eurozone’s deficit, current account and public debt burden provide a more favourable base to launch a fiscal loosening. Also, there is an urgent need for investment, with the level of investment around EUR200bn below where it should be given the level of GDP. Even the European Commission has acknowledged this and requested (for the first time) an aggregate fiscal expansion of 0.5% of GDP. Unsurprisingly, it wants this to come from the surplus countries although it has no powers to enforce this.

So is it time for something completely different?

Perhaps the ECB’s best option to meet its inflation mandate is to accept lower inflation for a few years, ramp down its bond buying programme gradually and put the pressure back on governments to make structural reforms. To avoid a repeat of 2012, where reforms arguably contributed to a recession and the rise of populist parties, there would also need to be an investment-led fiscal stimulus that raises both near-term and, via higher future productivity, longer-term growth. This would require further steps toward centralised fiscal policy, after the raft of 2017 elections.

The ECB should reduce its purchases further at the end of 2017. In reality, the ECB is unlikely to administer a sharp shock. Mario Draghi has been clear that there will be no sudden stop to QE. However, they do think the ECB will reduce the QE purchase rate further when the current programme finishes in December 2017. Of course, the ECB may give different reasons for piling pressure on governments (eg higher headline inflation projections) but they think it is likely to announce another six-month extension, buying at EUR40bn per month, probably at its October 2017 meeting. And there is always the possibility of it adjusting its policy mix away from government bond buying to other forms of easing.

Bellevue Asset Management Launches The BB Adamant Healthcare Index Fund

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April 2017 marks the ten-year anniversary of the Adamant Global Healthcare Index. With that date on the horizon, it is more than fitting that Bellevue Asset Management has launched a corresponding investment fund governed by Luxembourg law. The BB Adamant Healthcare Index (Lux) Fund was registered for public distribution in Germany, Austria, Switzerland and Luxembourg end of 2016.

The Adamant Global Healthcare Index was created in April 2007 to capture the attractive prospects that the global healthcare market offers to investors. The index is composed of the forty most attractive healthcare stocks in the global universe. It is reviewed every six months in April and October and adjusted if necessary. The success of the Adamant Healthcare Index led to the 2011 launch of a Swiss investment fund for institutional investors that replicates the index. This Swiss fund is now being followed by a Luxembourg-based fund that has been approved for sale to retail investors in Germany, Switzerland, Austria and Luxembourg.

All growth segments in one fund

With new drug approvals holding steady at high levels and a flurry of innovation coming from the medtech and services sub-sectors, the healthcare sector’s long-term growth potential is secure and investors can participate in that potential through this fund. For Dr. Cyrill Zimmermann, Head of Healthcare Funds & Mandates, this new fund represents another major step in the development of the firm´s range of healthcare investment products: “A growing number of investors had asked us to offer an index product outside Switzerland too. Those requests have now been met with the launch of the BB Adamant Healthcare Index (Lux) Fund. This is an important addition to our diverse range of sound investment solutions. The fund effectively covers all of the high growth segments within the promising healthcare industry on a global scale.”

The team continuously screens about 600 of the 3,000 listed companies in the healthcare sector based on 8 criteria. Four quantitative and four qualitative parameters are applied. The qualitative parameters measure the quality and track record of a company’s management team, product pipeline and operating risks as well as country-related risks while the quantitative parameters provide information on stock valuations. There are four regions, Western Europe, North America, Japan/Australia and Emerging Markets, and the index is composed of the ten best stocks from each region.

The region with the highest overall score, usually North America, can have a maximum index weighting of 35% when the index is rebalanced, so this index puts more emphasis on emerging markets. Companies with high valuations and low growth rates are rarely in the index. Historical index data shows that mid-cap stocks have typically represented 60% to 80% of the index and the Asia region has accounted for about one-third of the index. Furthermore, conventional pharma stocks are clearly underweighted compared to their weighting on the MSCI World Health Care Index, the standard sector benchmark.

More Outsourcing by Institutions in Asia Will Be a Bright Spot for Fund Managers, Despite of More Turbulence Expected in 2017

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The asset management industry in Asia is set for a turbulent year in 2017, with the impending Donald Trump presidency in the U.S. and its impact on the global economy. For asset managers, the institutional space is becoming more interesting, with a growing trend of outsourcing by institutions.

After a very challenging 2016 in Asia’s asset management industry, what does 2017 hold? That is the question that underpins this quarter’s The Cerulli Edge – Asia-Pacific Edition which highlights key developments in 2016 in eight of the Asian markets they cover, namely, China, Hong Kong, India, Indonesia, Korea, Singapore, Taiwan, and Thailand. They also make some predictions on potential trends in each of those markets for 2017.

The impending Trump presidency and the geopolitical turbulence tipped to come with it will drive global macroeconomic factors in 2017. Although the repercussions remain to be seen after his inauguration in January, one thing that the Asian asset management industry will be closely watching is how his pledge to bring manufacturing jobs back to the United States pans out. This issue will be particularly important to Asian countries as many of them count the United States as one of their top-five trading partners. If the trade faucet to the United States begins to shut, this will inevitably lead to some restructuring as these economies seek and find new exports markets or new export products.

From an asset management perspective, a widespread restructuring will have an impact on asset allocations in Asian markets. However, this will be a long-term process. Any short to medium-term pain felt by Asian retail and institutional investors in the face of such changes would be the price they have to pay for longer-term gains.

Cerulli has observed that retail investors in the region have notoriously shorter-term investment horizons than their Western counterparts. Asset retention is a constant struggle, but likely more apparent in North Asian markets including China. Another commonality is that investor sentiment for financial products, including mutual funds, tends to be driven by stock market sentiment. Consequently, we tend to see outflows from equity funds when stock markets are falling.

In the recent past in Asia ex-Japan, this has led to some funds being diverted to bond funds or balanced funds. However, with growing expectations that interest rates may head higher in 2017, led by rate hikes by the Federal Reserve, bond funds and balanced funds may not be viewed as safe havens for a while. In such market conditions, “we may see retail investors go back to their default positions, namely bank deposits. This would put the asset management industry back to square one in the region, after a lot of effort has been expended in recent years to mobilise people’s savings toward riskier financial products”.

Having said that, across Asia, regulators all stand firm on investor protection -that is ostensibly one of their highest priorities. Their basic stance is that riskier products should only be sold to accredited or wholesale or high-net-worth investors. Plain-vanilla mutual funds and exchange-traded funds are seen as more desirable for ordinary investors. Further, most Asian regulators share a keenness to develop their local mutual fund industries, and offer incentives to asset managers who show commitment to the domestic market. A prominent example is Taiwan’s scorecard that incentivizes foreign asset managers to set up shop on the island.

Cerulli has also noticed asset managers’ burgeoning interest in targeting institutional assets in the region. Institutional investors are increasingly searching for yield outside their comfort zones, and will typically outsource to asset managers with strategies that they do not have internal capabilities in, including foreign investment and alternative asset investment strategies. Cerulli predicts that outsourced assets will maintain an uptrend through to at least 2020, which will be good news for asset managers in the region.

Deutsche Asset Management names David Bianco as Chief Investment Strategist for the Americas and Head of Equities in the US

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Following the appointment of Petra Pflaum as Chief Investment Officer for Responsible Investments, Deutsche Asset Management (Deutsche AM) has announced that David Bianco has been named Chief Investment Strategist for the Americas and Head of Equities in the US. Based in New York, he will report globally to Stefan Kreuzkamp, Chief Investment Officer and Head of Active Asset Management, and regionally to Bob Kendall, Head of Deutsche Asset Management, Americas.

In his dual roles, Bianco will play an integral part in assisting clients with portfolio construction across Deutsche AM’s full range of investment vehicles and asset classes, and will also lead a team of experienced investors responsible for the management of the active equity assets in the Americas.

“We are extremely pleased to welcome David to our organization,” said Bob Kendall, Head of Deutsche Asset Management in the Americas. “David is a well-respected and familiar face within our industry and will be a key public figure for us in presenting to our clients Deutsche Asset Management’s global views on markets, economies and policies.”

Bianco has more than 20 years of investment research experience and a decade of experience as an equity strategist. He has been the bank’s US Equity Strategist since 2012. Prior to joining Deutsche Bank, Bianco held the position of Head US Equity Strategist for Bank of America Merrill Lynch Investment Research and Global Wealth Management. Before BofA, he spent seven years at UBS and five years at Financial Account Standards Board’s Financial Accounting Standards Advisory Council.

Tikehau IM Names Gen Oba as Marketing and International Development Director

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Tikehau IM has appointed Gen Oba as director of marketing and international development.

Oba will support the executive management team of Tikehau IM to further expand the firm in France and abroad. He will be responsible for the development of Tikehau IM’s marketing strategy and the development of the firm’s relationship with large international clients.

The executive joins Tikehau Capital after 18 years at Bank of America Merrill Lynch where he managed and developed relationships with key international clients, executed major strategic and capital market transactions, and last served as managing director of Investment Banking.

Oba started his career in 1996 at Rothschild in Paris and then at BNP Paribas in New York. He is a graduate from H.E.C.

Banco Santander Receives 18 Bids to Buy Allfunds

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Banco Santander has received 18 bids to buy mutual fund platform Allfunds. The sale value is estimated at €2bn and the operation could be closed this month, according to Spanish media.

Local newspaper Cinco Dias reported the deadline to receive offers is next Friday 13 January. There will be then an additional deadline to shortlist bids. The final list of possible buyers will be available by the last week of this month.

Among the candidates to buy Europe’s largest fund platform are private equity Bain Capital, Advent and Hellman & Friedman, along withCinven, Permira and BC Partners.

Allfunds valuation range oscillates between €1.5bn and €2bn sources said, adding that the sale process is “very advanced” and an IPO is the least likely scenario.

In November last year, Santander reached an agreement with Warburg Pincus and General Atlantic to buy back the 50% stake in its asset-management unit.

Santander, which sold the unit to the two private equity firms in 2013 for €2bn, did not disclose the value of the transaction involving full ownership of the asset manager.

As part of the transaction Santander, Warburg Pincus and General Atlantic agreed to work towards the disposal of their participation in Allfunds Bank through a trade sale or an initial public offering (IPO).

Italy’s Intesa Sanpaolo, which owns the rest, also explores a sale, the company confirmed at the time.

Colbert Narcisse Appointed Morgan Stanley WM´s New Head of International Wealth Management

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Morgan Stanley Wealth Management has appointed Colbert Narcisse as the new Head of International Wealth Management, succeeding James Jesse, effective immediately.

Funds Society could confirm Colbert’s previous responsibilities as Leader of Product Strategy and Development in Morgan Stanley’s investment solutions division will be spread across existing team members. Beyond that, the company did have no further comment at this time.

Narcisse joined Morgan Stanley’s investment management division in 2011 as the head of alternative investments, according to LinkedIn. He previously worked in senior roles at Merrill Lynch.

James Jesse left the company recently, as confirmed last Friday by Morgan Stanley. Jesse joined the firm in 2000 in the fixed income division, and became part of the wealth management unit in 2006.