IBA Securities Law Committee submits comments to the European Commission on the Prospectus Directive 2003/71/EC and Market Abuse Directive 2003/6/EC
The Securities Law Committee has submitted comments to the European Commission on two recently launched consultations concerning European directives regulating the securities markets. The first submission was in response to a proposal to amend the Prospectus Directive (2003/71/EC). The second was in response to a call for evidence on the review of the Market Abuse Directive (2003/6/EC), initiated under the Action Programme for Reducing Administrative Burdens in the European Union.
Prospectus Directive 2003/71/EC
In respect of the Prospectus Directive, the Committee submitted a letter to the Commission on 10 March 2009, addressing a number of disclosure-related issues. Some of the key conclusions offered by the Committee are noted below:
In the context of the ‘retail cascade’ of securities (ie, the activity by which financial intermediaries resell securities to retail investors following the initial issue), the Committee recommended to amend Article 3(2) of the Prospectus Directive (which sets out certain exemptions from the obligation to publish a prospectus). In particular, the Committee proposed to include specific provisions clarifying that subsequent sellers may rely on the prospectus published by an issuer so long as: (a) such reliance is with the issuer’s express consent; (b) the prospectus remains valid; and (c) necessary supplements have been published (where applicable).
The Committee noted that the requirement to publish a prospectus supplement in accordance with Article 16(1) of the Prospectus Directive should cease to apply at the earlier of the ‘final closing of the offer to the public’ or the ‘beginning of trading on a regulated market’. Particularly, an overlap to the issuer’s obligation to disclose inside information about itself that applies immediately upon the issuer’s request for admission to trading of securities according to Article 6 of the Market Abuse Directive was deemed unnecessary. Also, the Committee felt that the requirement to have a prospectus supplement approved by the competent authority (and to allow that authority a review period of up to seven working days) should be abolished.
The Committee proposed that the definition of ‘offer of securities to the public’ be amended to provide that an offer to the public should not be deemed to have been made until such time as a binding declaration to purchase or subscribe for securities to be offered can actually be made by an investor. Currently, the definition in Article 2(1)(d) of the Prospectus Directive emphasises the question of whether information has been provided to an investor enabling such person to make an investment decision, rather than whether such person is in a position to actually purchase securities.
The submission also addresses issues concerning the content and prescribed word-count of prospectus summaries, the disclosure of information in respect of government guarantee schemes and state guarantors, the need for an alignment of the definition of ‘qualified investor’ with ‘professional clients’ for the purposes of private placements, prospectus exemptions in respect of employee share schemes and in respect of small-quoted companies, and the need for certain issuer-related information to be made available on issuers’ websites and, ultimately, on a central European database. The Committee also supported the proposal made by the European Securities Markets Expert Group (ESME) to achieve a higher level of harmonisation in terms of prospectus liability, specifically to require that the issuer of securities should primarily be liable for information contained in a prospectus. This is an issue that had already been discussed at the 25th International Financial Law Conference in Stockholm in 2008.
With regard to the Commission’s question as to whether rights issues should, under certain circumstances, should be exempted from the requirement to publish a prospectus, the Committee had a lively discussion, but could not form a common view. Valid arguments were raised both for a more liberal approach that exempts rights issues from publishing a prospectus (ie, if there is no rights trading and the offer is only made to existing shareholders) and in favour of a strict application of the existing regime with a view to investor protection. Finally, the Committee decided to refrain from commenting on this topic.
A copy of the submission is available on the Securities Law Committee’s website or by clicking onto www.ibanet.org/Document/Default.aspx?DocumentUid=A171C133-D4DF-4E06-BE0F-C1059DFF3E97.
Market Abuse Directive 2003/6/EC
In respect of the Market Abuse Directive, the Committee submitted a letter on 10 June 2009, commenting on a number of insider dealing and market manipulation related issues. Specifically the letter discusses the following major issues and submits a number of related proposals:
- The Committee recommended that, as far as an issuer’s disclosure obligation is concerned, the definition of ‘inside information’ should be amended as follows:
(a) Only information relating to an issuer’s economic situation and its business should trigger the disclosure obligation. More specifically, information should only need to be disclosed if a reasonable investor would use it as a basis for an investment decision.
(b) Future corporate developments of an issuer should only be required to be disclosed if their occurrence is more likely than not (ie, greater than 50 per cent).y
(c) Transactions subject to staged decision-making processes should not have to be disclosed as long as they remain subject to an issuer’s internal decision-making process (ie, the obligation to disclose should not arise before the relevant decision-making body has taken its definitive decision).
- With regard to the deferred disclosure mechanism (ie, the issuer’s ability to delay disclosure of inside information to avoid its legitimate interests being prejudiced), the Committee took the view that the conditions for delaying disclosure should be less restrictive and more specific. Particularly, where an issuer is in negotiations to implement emergency measures to avoid its financial collapse, it should be allowed to delay disclosure of inside information if the preparation of those emergency measures is underway and such measures may be jeopardised by premature disclosure. However, despite the fact that this scenario is of particular relevance in light of the ongoing financial crisis, in the Committee’s opinion, this situation could be dealt with under the existing deferred disclosure mechanism – if the criteria for its application were clarified.
- For the purposes of the insider dealing prohibition, the Committee is of the view that information should only be deemed to be ‘used’ when a person trades (or attempts to trade) on the basis of inside information, rather than when a person in possession of inside information concerning certain securities trades in such securities.
- The Committee recommended that the obligation of issuers and their advisors to draw up insider lists should only commence upon the initiation of an investigation, rather than in respect of each and every transaction entered into by an issuer (in which, most of the time, such lists are neither needed or relevant).
- In respect of buy-back programmes, the Committee recommended that the safe harbour provided pursuant to Article 8 of the Market Abuse Directive should be extended to cover all buy-backs permitted under corporate law as well as to the buy-back of debt securities, which are currently not covered in the definition of ‘buy-back programmes’.
The submission also addresses issues concerning, among other matters, the scope of the Market Abuse Directive (including whether it should be extended to cover multilateral trading facilities, to physical products, or to commodity derivatives issuers); the definition of ‘financial instruments’; the general definition of ‘inside information’ (for purposes other than corporate disclosure); the need for clarification of the circumstances in which issuers may utilise the deferred disclosure mechanism (including the need for guidance on what constitutes an issuer’s ‘legitimate interests’); transaction reporting by managers; stabilisation activities; and short-selling.
A copy of the submission is available on the Securities Law Committee’s website or by clicking at /Document/Default.aspx?DocumentUid=206D1689-F3B5-4A21-A3E3-B20B11A91A0D
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