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Middle Market Money

Your Guide to Understanding Regulatory Developments to Navigate the Capital Markets

International Taxation in Cross Border Transactions: The Recent Work of the Joint Transfer Pricing Forum

Posted in Rules & Regulations

On June 4, the European Commission (“the Commission”) published a Communication to the European Parliament, the Council and the European Economic and Social Committee on the work of the EU Joint Transfer Pricing Forum (“JTPF”) in the period from July 2012 to January 2014. The JTPF was set up by the Commission in 2002 as an important source to its work on improving the practices of transfer administration and functioning in the EU in the context of international taxation of cross border transactions. The Communication addresses three different aspects of transfer pricing through three annexed reports respectively:

Secondary Adjustments: The report includes an assessment of secondary adjustments as differently applied in some Member States in order to allow for profit allocation between consecutive transactions. Secondary adjustments might lead to double taxation, thus Member States which have not made such a measure mandatory under applicable legislation, are advised not to use it. The report suggests that secondary adjustments can be re characterized as constructive dividends or constructive capital contribution pursuant to the Parent Subsidiary Directive (Council Directive 2011/96/EU of 30 November 2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States) and operate as such.

Transfer Pricing Risk Management: The report includes advice on managing transfer pricing risks by adequate cooperation between the tax payer and the tax authorities as well as by proper identification of high and low risks areas, through the use also of special tools such as the exchange of information, common working procedures for audits, a common documentation standard under the Code of Conduct on transfer pricing documentation for associated enterprises in the EU and the dispute resolution mechanism provided by the EU Arbitration Convention. The latter provides for the procedure to resolve disputes, where double taxation occurs between enterprises of different Member States as a result of an upward adjustment of profits of an enterprise of one Member State.

Compensating adjustments: Different practice between Member States with respect to compensating adjustments may result in double taxation or double non-taxation. To that end, the relevant report suggests that Member States should only accept compensating adjustments initiated by the taxpayer, if the taxpayer satisfies certain conditions such as reporting of the price of the transaction to each Member State concerned, historical consistency in approach by the taxpayer, ability to explain differences between forecasts and actual results etc.

The Commission invites the Council to endorse the three reports annexed to the non binding in nature Communication and the Member States to implement the recommendation provided therein in their national legislation. All in all, the JTPF has produced considerable work over the years in the field of transfer pricing in the EU and its recommendations and their subsequent implementation in the different Member States should be closely and frequently observed by U.S. and multinational corporations (and their tax departments) alike operating in Europe to allow for efficient and compliant tax payments in accordance with adequate pricing of cross border transactions.

Chambers USA and The Legal 500 United States Recognize MLA in Corporate/M&A and Tax

Posted in Uncategorized

MLA has once again been ranked by Chambers USA in the area of Corporate/M&A in Georgia. Wayne Bradley, Ann-Marie McGaughey, David Brown and Jeremy Silverman were recognized individually for their accomplishments. Chambers respondents noted MLA’s “Exceptional performance – they bring a team approach with a number of experts,” and that MLA is “A top firm that provides legal services in a responsive manner.”

Also, The Legal 500 United States ranked MLA in the M&A: Middle Market category. The Legal 500 noted MLA “knows how to get deals closed in the clients’ best interests. The team offers quick timing, industry expertise, and the ability to work with complex transactions and complex personalities.”

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Facebook’s Oculus VR Acquisition and Crowdfunding

Posted in Capital Markets, Federal Securities, Financing & Lending

Image Author: Sebastian Stabinger

The announcement of Facebook’s acquisition of Oculus VR is a great starting point to explore the current state of crowdfunding.  Facebook has agreed to purchase Oculus VR (the development company behind the cutting-edge Oculus Rift virtual reality headset) for approximately $2 billion in total consideration.  Oculus developed and refined its headset in part because of significant crowdfunding capital support from Kickstarter.com users.  Crowdfunding provides a means for generating startup capital from a broad base of investors, and is an inclusive process that contrasts sharply with traditional, targeted private placements. There are some important differences to highlight between Kickstarter (a rewards-based crowdfunding site) and equity-based crowdfunding sites.

Rewards-Based Crowdfunding

Rewards-based crowdfunding sites like Kickstarter allow donors to contribute to projects in return for certain rewards.  For example, a singer-songwriter may promise an advance copy of a new album for those donors who meet a certain contribution threshold.  The actor/director Zach Braff funded the production of a movie (“Wish I Was Here”) through Kickstarter, and promised rewards like posters and t-shirts.  Importantly, a donation to Kickstarter is not an investment; the site takes care to specify that “creators keep 100% ownership of their work.” From a practical standpoint, rewards-based crowdfunding has two primary side effects.  First, donors have no stake in the company and no ability to influence company decisions.  Accordingly, the Oculus Kickstarter donors did not receive any proceeds from the Oculus sale, and had no influence over the sale negotiation and approval process, even though they provided the means for the company to develop its flagship product.  Second, since a donor does not receive a stake in the donee company, companies can sidestep regulatory scrutiny and associated costs with a rewards-based strategy.   Kickstarter’s co-founder recently made a statement that, in his opinion, “there are things that are more important than money”, highlighting the passive nature of rewards-based crowdfunding.

Equity-Based Crowdfunding

In contrast to Kickstarter, equity-based crowdfunding may allow for true “investors” in a venture, with a startup issuing shares of stock in exchange for investments.  The borders of equity-based crowdfunding are still blurred as the Securities and Exchange Commission continues to refine the rules and regulations governing crowdfunding, promulgated under the authority of the Jumpstart Our Business Startups (JOBS) Act.  However, when the dust settles and the regulations implementing Title III of the JOBS Act become effective, equity-based crowdfunding will be open to all investors, regardless of net worth or financial sophistication.  The first, and most important feature of equity-based crowdfunding is the regulatory presence of the SEC, and the associated time and expense. There are already some who argue that the costs of an equity-based crowdfunding raise may be prohibitive.  In addition to any legal and accounting costs, the regulated “portal” sites that companies use to solicit investors will charge fees for their services and further dilute any proceeds received from investors. However, as a product of this increased cost, a company with equity-based crowdfunding investors will likely have a more motivated investor base, and may also attract larger contributions from investors who know they might receive a real return on investment (as opposed to, say, a movie poster).

Rewards v. Equity: Choosing the Right Means of Crowdfunding

Having examined the key differences between rewards-based and equity crowdfunding, let’s take another look at the Facebook/Oculus deal.  If the Oculus Kickstarter donors had received shares, the Facebook acquisition would have ultimately resulted in some consideration being paid to them from the $2 billion proceeds of the sale.  The shareholders may have also received a say in approving the sale.  The existence of a large body of existing shareholders may have stalled negotiations with Facebook, or even potentially killed the deal.

So how should a company choose between rewards- and equity-based crowdfunding?  The first step is for management to make sure that crowdfunding is truly the best option.  A company can always turn to a private placement for startup capital, or a more measured “advertised” private offering, with open advertisement (through a crowdfunding portal site) targeted only at accredited investors.  In considering the above, a company should also be sure to survey the current crowdfunding landscape in full. For example, debt-based crowdfunding, which is not covered in this article, may be a viable alternative for some companies.

If rewards- or equity-based crowdfunding is the right choice, a company should consider the following question: are the risks of (i) giving investors a stake in the company (and any corresponding approval rights/decision-making power), (ii) increased SEC oversight and (iii) increased transaction costs outweighed by the monetary benefits of raising capital through equity instead of donations?  For many smaller companies, the risks may not outweigh the benefits, but for businesses with substantial capital needs and significant plans for growth, equity based crowdfunding may be worth the potential risks.  Conversely, both the risks and rewards for investors are much more substantial in equity-based crowdfunding, while rewards-based crowdfunding could be an entertaining, safe way for an investor to show support for an up-and-coming project.

TTIP and Data Flows: Do Traditionally Different Legal Approaches Create a Dead End for the Free Flow of Data?

Posted in Rules & Regulations

As we approach the next round of negotiations between the EU and the US on the Transatlantic Trade and Investment Partnership (“TTIP”), which will take place in Arlington, Virginia from May 19 to May 23, 2014, the inclusion of provisions allowing free data flows between the parties in the final Agreement becomes, once again, the subject of a heated debate with respect to the suitability of such inclusion given the fundamental differences between the legal systems of the US and the EU. Below we identify some of these fundamental differences and suggest potential solutions that would allow data flows provisions to make it to the final Agreement.

I. Legal Culture and Government Structure

Differences between common and civil law systems determine the different approach with respect to personal data relevant legislation. Significantly, judicially-created U.S. law results in fewer statutory restrictions in the flow of data. In addition, the US federal organization of the state as compared to the semi federal non economically unified structure of the EU gives leeway to a sovereign-based approach and different legal and judicial interpretation of data flows, thus creating legal uncertainties and inconsistencies in the application of the law.

Similar differences in approach can also be observed with respect to international trade law, affecting further the substantive elements of the respective trade policies adopted. In particular, the United States have traditionally refused to accept certain mainstream provisions of international customary law and have insisted on maintaining an insistent objector’s position in the international legal order. This approach, together with the size of the US economy and the volume of international trade transactions in which the country is involved, makes a potential alignment with trade policies of the EU even more difficult. The courts of the latter have developed jurisprudence (see the Kadi I and II cases and the relevant Opinions of Advocate General Maduro) which supports the further integration of the EU in the international legal order – with those remaining separate though – and proves the Union’s commitment to the respect of all customary and treaty international law obligations.

II. Conceptual differences

U.S. law treats data as a sui generis commodity that can be freely traded. US legislation lowers the threshold of protection of all types of personal data to enhance their commercial nature and allow for its efficient processing by US corporations.

EU law traditionally treats data as part of a fundamental rights enlistment. Data protection is an inextricable part of the EU Digital’s agenda. Similar rationales which are shaped by the need to protect data privacy as a fundamental right of the individual appear in a number of recent legislative texts and proposals. The efforts of the EU to create a uniform data protection regime throughout the European Economic Area that would prompt multinational corporations to reconsider their entire business strategy in this part of the world have received international attention and have been heavily criticized by reputable scholars, attorneys and other legal professionals.

III. Potential violations of existing legislation

The inclusion of a data flows chapter in TTIP would necessarily entail potential breaches in EU data protection legislation, especially as this will be shaped after the adoption of the new Data Protection Regulation. Free and highly unregulated data flows between the two parties to the Agreement under a reciprocal arrangement that would not comply with EU standards but which would operate on an ad hoc commercially oriented exception to the uniform application of EU legislation would not be desirable.

In addition, compliance with EU legislation would be problematic especially with respect to jurisdictional issues. As TTIP is not envisaged to introduce a jurisdictional clause, parties would need to consider the procedural aspect of potential claims stemming from violations of their respective national legislations.

Another big question mark is the dispute resolution system to which violations of the provisions of a hypothetical TTIP chapter would be brought. It would be absurd to expect an investment arbitration proceeding to deal with data flows issues as the exposure of international commercial and investment tribunals to similar issues is extremely limited if not completely inexistent. In addition, it would need to be determined whether such disputes are overall arbitral; this debate only has its individual value.

IV. Bridging the gap: Existing Paradigms

A system that would allow data flows without violations of the existing legislation in the EU and the US could have as a starting point the existing data transfer arrangements between the EU and the US.

For example, exchange of personal data between the EU and the US for the purposes of law enforcement, including the prevention and combating of terrorism and other forms of serious crime, is governed by a number of agreements at EU level. These are the Mutual Legal Assistance Agreement, the Agreement on the use and transfer of Passenger Name Records (PNR), the Agreement on the processing and transfer of Financial Messaging Data for the purpose of the Terrorist Finance Tracking Program (TFTP) and the Agreement between Europol and the US. These Agreements respond to important security challenges and meet the common security interests of the EU and US, whilst providing a high level of protection of personal data.

V. Conclusions

Bridging regulatory regimes of different legal and institutional traditions is a difficult task. It becomes even more difficult when this needs to take place in the context of a trade agreement that should also per se focus on economic realities. However, the increasing importance of the digital economy, which has developed a potential to cover more industries and reshape modern economies while creating more inequalities in development between different parts of the world calls for extensive uniform data flows regimes.

Optimizing the potential of the EU economy cannot take place without abandoning certain aspects of stringent regulatory commitment to principles of moral value. At the same time, strengthening the US economy through increased exports and enhancing the presence of US high tech companies in Europe requires an actual understanding of the EU data protection framework and a deeper commitment to international law.

Opinion of the European Data Protection Supervisor — Bridging EU Data Protection with Competition Law?

Posted in Compliance

On March 26, the European Data Protection Supervisor (“the Supervisor”) issued a preliminary opinion (“the opinion”) on the interplay between data protection, competition law and consumer protection in the Digital Economy. The opinion reflects the convergence of underlying rationales and policy objectives of these different fields of EU law and analyzes the need for EU regulators to enhance their cooperation not only to aid enforcement of competition and consumer protection rules but also to stimulate the market for privacy enhancing purposes.

The opinion addresses first the issue of big data, outlining the value of big personal data for the digital economy. The Supervisor explains why digital services such as e-mail or search engines, although advertised to be provided for free, in fact are not because individuals are required to provide valuable personal data to access them. This turns data into what is, in essence, a currency for the provision of online services. The industry has developed sophisticated business models for capturing big personal data, making it available for sale, creating efficient economies of scale and putting into play the potential application of a number of legal provisions of EU law.

An overview of each individual piece of EU legislation concerned is followed by a substantive analysis of their interfaces. In particular, the Supervisor points out that competition law analysis with respect to market definition supports potential violations in the digital market, when few digital services providers collect and process personal data in one market for use in another (as “input” to “supply” in competition law terms). At the same time, infringements of EU data protection law are also possible because the data subjects have not provided their consent for the use of their data to types of services which not only are perceived of but are also in fact different. In many cases, complex algorithms are used to codify data that is afterwards used for business purposes, having thus been transformed into a commodity.

In addition, the entire approach to market concentration under the Merger Regulation could change if the European Commission took into consideration the enhanced capabilities of combined undertaking that in turn manage to achieve more substantial control of personal data of commercial value. The opinion underlines also potential “tying” of services when for instance digital companies offering services “for free” engage in the collection of personal data coupled with online provisional behavioral advertising. Even more importantly, dominant undertakings can effectively restrict market entry to competitors that lack the access to the required data collection and processing for digital service development. Even if access to personal data was granted on a remedial basis, this would not be acceptable from a data protection perspective because the required consent of the data subject would be lacking.

Whereas competition and data protection law depart from the same point, namely the protection of the consumer, the argument of the Supervisor on fostering privacy as a competitive advantage, resembling a similar argument of the Commission with respect to the Proposal for a Data Protection Regulation and the recent case law of the Court of Justice of the EU, is not convincing. Indeed effective competition can be restricted as big personal data grows bigger to drive more forces in the digital economy, however it is difficult to see how an in parallel non liberal approach to the existing and future data protection framework, on which the institutions and the data protection authorities seem to agree, could help the market economy.

The opinion of the Supervisor signifies the beginning of an era of enhanced regulatory cooperation affecting different fields of EU law that could compromise even further the operational freedom of U.S. corporations that operate in the EU digital market. These corporations need to closely monitor the new developments, while in parallel continue receiving effective advice by experienced counsel on both EU competition and data protection law, whose infringements entail considerable financial and reputational risks.

Chinese Units of Big 4 Accounting Firms Barred for Six Months from Auditing Chinese Companies Listed in U.S.

Posted in Accounting, Federal Securities


In a decision sure to be challenged by the defendants, the Chinese units of the Big Four accounting firms (Ernst & Young, KPMG, Deloitte Touche Tohmatsu and PricewaterhouseCoopers) have been barred for six months from auditing companies that are reporting with the SEC.  If the decision stands, it will have far-reaching implications not only on Chinese companies listed in the U.S., but on U.S. multinational corporations with major operations in China.

ALJ Initial Decision

It could have been worse, as the SEC staff initially requested that the Chinese units of the Big Four accounting firms be permanently barred from these audits.  While the Administrative Law Judge rejected this request, she did find that because of the Big Four’s unwillingness to turn over records in connection with ongoing SEC enforcement investigations, a six month bar was warranted.  This despite the arguments of the Big Four accounting firms that, under Chinese state secrecy laws, they are prohibited from turning over the information to the SEC.

The ALJ Initial Decision will become a final decision of the SEC unless one or more of the parties files a petition for review of the Initial Decision (deadline of 21 days from the date of the Initial Decision) or files a motion to correct a manifest error of fact (deadline of 11 days from the date of the Initial Decision, with an additional 21 days from the date any correcting order is issued to file a petition for review).

Implications of ALJ Initial Decision

If the ALJ’s Initial Decision remains intact, Chinese companies that are listed in the U.S. and whose financial statements have historically been audited by the Chinese units of one of the Big Four accounting firms will be unable to comply with U.S. securities laws requiring that they file audited financial statements with the SEC.  Those companies will be forced to scramble to retain other auditors to conduct an audit of their financial statements.  With a looming deadline for filing audited fiscal year end financial statements (assuming a calendar year end fiscal year), this is not an insignificant hurdle.

The Initial Decision also could implicate the audits of financial statements of U.S. multinational companies with a significant presence in China, as the Big Four accounting firms will often collaborate with their Chinese units to have a portion of the overall audit completed.

European Commission Launches Consultation on Crowdfunding: A Gateway to Alternative Project Financing in Europe

Posted in Capital Markets

On October 3, 2013, the European Commission launched a consultation inviting stakeholders to share their views on crowdfunding. Considered as a rapidly emerging alternative source of financing involving open calls to the public, generally via the internet, to finance a project through either a donation, a monetary contribution in exchange for a reward, product pre-ordering, lending, or investment, crowdfunding is thought to demonstrate potential considerable benefits for EU economies, leading the European Commission to explore future regulation possibilities. This is also indicated by the estimated 65% growth that crowdfunding experienced in 2012 compared to 2011 reaching EUR 735 million. The consultation is due to terminate on December 31, 2013.

One of the most important benefits of crowdfunding appears to be the financial support provided to many small start-ups and medium sized enterprises that do not manage to access mainstream financial markets. In this way, crowdfunding can help facilitate technological research and development and secure the efficient execution of innovative projects, thus contributing to growth and job creation at the macroeconomic level, according to the European Commission.

In addition, benefits can be found on the contributors side, as crowdfunding constitutes a complementary investment tool that could lead to the generation of profits through the conclusion of further cooperation agreements between the project creators and the contributors.   To contributors, crowdfunding generally offers the possibility of greater understanding of the projects they finance since, in principle, there is more efficient communication with the project’s founders. In addition, one could add to the benefits the broadening of the concept of project ownership due to the extensive pool from which the required funding is derived and the promotion of popular legitimization of research and social solidarity.

The consultation paper addresses a number of issues concerning crowdfunding, ranging from the benefits and risks associated with this form of finance to the adequate safeguards for the avoidance of illegal practices and the required actions to exploit the potential of crowdfunding. The consultation participants are asked to complete a questionnaire referring to all of these issues, the compilation of answers to which is thought to provide the Commission with a preliminary understanding on whether crowdfunding markets require proper regulation or some type of soft law instead. Certain concerns could be raised about the failure of the European Commission to mention the implications of the call on the public that crowdfunding involves on the regulatory level and the prohibition of canvassing and hawking in financial products that exists in the national legislations of some EU Member States. It  remains to be seen whether the historically uniform license requirements for calls on the public in the finance sphere will be decided to apply to crowfunding as well or whether a de minimis exception will be provided.

U.S. investors who already operate in the EU or who are considering becoming involved in the EU financial markets need to watch closely for new developments and should take advantage of the current opportunity to complete the questionnaire and influence the process, contributing thus to the added value that flexible and efficient regulation would entail for crowdfunding. Financial models of crowdfunding can create a complementary investment opportunity, where investors can develop direct communication channels with project creators and  benefit from the future success of the project.

Client Alert on Pay Ratio Rules

Posted in Disclosure, Dodd-Frank Act, Federal Securities

My colleague, Ellen “Nell” Czura Schiller, and I recently penned a more detailed memorandum explaining the new proposed pay ratio rules and next steps for those companies who will be subject to the final rules (when adopted).  The memorandum can be accessed here: Corporate Advisory SEC Proposes Pay Ratio Rules.

SEC Proposes Pay Ratio Rules

Posted in Disclosure, Dodd-Frank Act, Federal Securities

After years of delay, the SEC finally proposed pay ratio rules (as required by the Dodd-Frank Act) requiring, among other things, disclosure of the ratio of the median of the compensation of all employees (other than the CEO) to the total compensation of the CEO.  Comments are due 60 days from publication of the proposed rule in the Federal Register (as of the date of this post, this has not occurred) and can be submitted here.

How to Calculate the Median of Employee Pay

As proposed, the rules would permit companies to use various alternatives to calculate the median of employee pay, including

  • by calculating the compensation of each employee in accordance with the executive compensation disclosure requirement (i.e., the same method that is used to calculate compensation of each named executive officer);
  • by using reasonable estimates of employee pay; and/or
  • by using statistical sampling.

Because of the complexity of calculating every employee’s pay based on the executive compensation disclosure requirements, the SEC confirmed in the proposing release that the median employee could be determined using a direct pay method of analysis, i.e., by determining the median employee based on compensation as reflected in the company’s payroll systems, and then determine the compensation of that median employee based on the executive compensation disclosure requirements.

How to Disclose the Pay Ratio

The proposing release provides that the ratio of the median of the annual total compensation of all employees to the annual total compensation of the CEO can be disclosed in one of two ways:

  • as a ratio in which the median of the annual total compensation of all employees is equal to one; or
  • in narrative form in terms of the multiple that the CEO’s total compensation amount bears to the median.

For example, if the median annual total compensation is $60,000 and the annual total compensation of the company’s CEO is $14,000,000, then the pay ratio would be 1 to 233. This could also be expressed narratively along the lines of: “the CEO’s annual total compensation for the fiscal year ended [YEAR] is 233 times the median of the annual total compensation of all employees.”

How to Determine Which Employees to Include in the Calculation

When determining the median annual total compensation of all employees of the company, the company must include all employees of the reporting company and all of its subsidiaries, including all full-time, part-time, seasonal, non-U.S., and temporary employees.  Notably, the company should also include executive officers (including named executive officers other than the CEO) in this calculation.  However, independent contractors or other temporary workers employed by a third party are not covered.

Next Steps

As noted above, comments on the proposing release are due 60 days from publication of the release in the Federal Register.  Because two Commissioners dissented (which can be found here and here), and because I expect to see a fair bit of resistance to implementation of the rules, I would not be surprised if one of the usual suspects (such as the U.S. Chamber of Commerce) challenges the adopted rules in the D.C. Federal Circuit courts.

In addition, even if (and when) the rules become effective, I would not be surprised to see further controversy arise based on ISS interpretations of how companies should calculate, and disclose, the pay ratio in annual meeting proxy statements.  The SEC acknowledged, in the proposing release, that because of its concerns about competitive harm if all companies were forced to use the same methodology for calculating median employee pay, the SEC would allow companies to take a flexible approach to determining the median.  As a result, the SEC further acknowledged that this would have the effect of diminishing, if not eliminating, the comparability of the median measure across companies.  It will be interesting to see whether ISS views this as an opportunity to step in and create a policy that encourages companies to use a specific calculation method that aids in determining the comparability of the pay ratio to other pay ratios of the company’s competitors.

The European Commission’s Communication on Shadow Banking: A Coordinated Effort to Avoid Contagion of Regulated Markets

Posted in Commercial Lending, Financing & Lending

On September 4,2013 the European Commission (“ the Commission”) issued a Communication to the Council and the European Parliament on shadow banking with a view to address new sources of risk in the Financial Sector. The Communications sets out the roadmap which aims at limiting the emergence of risks in the unregulated systems with a focus on risks of a systematic nature and is an additional step, following the 2012 Commission’s Green Paper, towards the adoption of unified EU wide legislation in order strengthen market integrity and transparency  and increase the confidence of savers and consumers.

US investors and market participants  that have frequently resorted to the different segments of the shadow banking sector need to monitor closely the developments in the European Union and become aware of the new regime which will include enhanced supervision in order to avoid regulatory arbitrage.


The Communication follows the definition adopted by regulators in both sides of the Atlantic, who define shadow banking as a system of credit intermediation that involves entities and activities outside the regular banking system, including but not limited to entities that:

(i)  raise funding with deposit-like characteristics;

(ii) perform maturity and/or liquidity transformation;

(iii) allow credit risk transfer;

(iv) use direct or indirect leverage, including securitization vehicles or conduits, money market funds, investment funds that provide credit or are leveraged and financial entities that provide credit or credit guarantees.


The most important measures that aim at tackling the risks to which financial entities such as banks, insurance companies and investment funds, are subject include: (i) the strengthening of requirements imposed on banks in expectation of the Basel Committee’s review of prudential consolidation practices in the end of 2014; (ii) the reinforcement of requirements imposed on insurance companies, including the risk based approach adopted by the Solvency II Directive; and (iii) new rules for all hedge funds, private equity and real-estate funds with a focus on the new Alternative Investment Fund Managers Directive.


Suggested measures to secure market stability and reliability are also provided in the Communication. They include: (i) regularization of risk transfer instruments  to prevent contagion of regulated markets by shadow banking activities especially with regard to  OTC derivatives, central counterparties and trade repositories  where applicable legislation provides for central clearing of all standardized derivative contracts, as well as margin calls for non standardized contracts; (ii) more robust securitization arrangements especially with a view toward  increasing transparency and reinforcing the standardization of disclosure; and (iii) rationalization of credit rating agencies’ role in the financial system in order to avoid overreliance on such rating, improve their reliability and increase their liabilities under applicable legislation.


The Communication sets out a number of additional measures that are deemed necessary to minimize the risks posed by shadow banking for the stability of the financial system. Enhanced transparency via central repositories or the implementation of the Legal Entity Identifier (LEI) (the new standard ensuring a unique identifier for each legal entity that is party to a financial transaction) is particularly worth mentioning while the Commission stresses its attention in the need to reconsider the risks posed by money market funds formerly considered as a relatively stable form of investment and UCITS. Securities financing transactions are also targeted as a potential source of arbitrage and thus the Commission also calls for special attention to such transactions via the establishment of a central repository to collect detailed data on repurchase transactions in the EU, as recently proposed by the European Central Bank (“ECB”).


The Commission’s Communication on shadow banking is a multi-level plan that operates in different regulatory stages and aims at tackling the risks posed by the shadow banking sector which, although remaining heavily unregulated, accounted for EUR 51,000 billion of asset worth worldwide. The strong connections between the shadow banking system and the rest of the financial sector create severe risks of contagion and market failures that need to be avoided. Prudent foreign investors operating in the EU need to become familiar with the Commission’s initiatives and be ready to adapt to a new regulatory era.