In this newsletter, we provide a snapshot of the principal European, US and selected international governance and securities law developments of interest to European corporates and financial institutions.
The previous quarter's Governance & Securities Law Focus newsletter is available here.
EU DEVELOPMENTS
General Developments
Proposed Directive on Improving Gender Balance of Non-executive Directors of Listed Companies: Report and Adoption by Parliament
The proposed directive was supported by a joint report of the European Parliament Committees on Legal Affairs and Women Rights and Gender Equality (the draft of which was covered in our October 2013 memo), published on 14 October 2013, which confirmed the need for legislation to help increase numbers of female non-executive directors on listed company boards. The proposed directive was adopted, with amendments, by the European Parliament on 20 November 2013 and is still awaiting approval by the Council.
The key amendments to the Commission's proposed text included:
- increased detail on the selection process, including ensuring that the pool of candidates is gender balanced, in order to attain the 40% quota of non executive directors of the under represented sex;
- removing the exemption from the 40% quota, proposed by the Commission, for companies with a workforce comprised of less than 10% of the under-represented sex;
- new sanctions for non-implementation, including exclusion from public calls for tenders and restriction on funding available from the EU's structured funds;
- requiring annual statements about the implementation of the directive and any failure to attain the quota to be published in the annual report as well as on the company's website; and
- requiring the Commission, in its evaluation report (due by 1 July 2017), to examine whether the directive should be extended to include non-SME non-listed companies and executive directors of listed companies.
The Committees' Report is available at:
The text of the proposed directive, as adopted by the Parliament is available at:
Amendment to the Transparency Directive
On 17 October 2013, the Council of the European Union adopted a directive to amend the so-called Transparency Directive. The text of the amendments is the same as that approved by the Parliament (reported in our July 2013 memo), except for minor technical points. The amending directive was published in the Official Journal on 6 November 2013 and came into force on 26 November 2013. Member States are required to implement its provisions within two years of it coming into force.
The amending directive is available at:
http://new.eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2013.294.01.0013.01.ENG.
ESMA Publishes Versions 20 and 21 of Questions and Answers on Prospectuses
On 28 October 2013, the European Securities and Markets Authority ("ESMA") published version 20 of its Questions and Answers on Prospectuses. Three new questions have been added since the last version was published:
- "Agreement" of the independent accountant/auditor where a profit estimate is included in a prospectus without a report on it. This question relates to the possibility under the Prospectus Regulation not to include an independent accountants'/auditors' report on a profit forecast in a prospectus, where the relevant financial information relates to the previous financial year and only contains non-misleading figures substantially consistent with the final figures to be published in the next annual audited financial statements covering the previous financial year. In place of the report, there must, among other things, be included a statement that the accountants/auditors have agreed that the information is "substantially consistent" in this way. ESMA has clarified that any of the auditor, offeror, issuer or person seeking admission to trading may make the statement. ESMA also considers that the meaning of the statement is merely that "the auditors do not expect the figures to change substantially, except in case of unforeseen events" and can therefore be made with a lower level of assurance than the audit report.
- Proportionate disclosure regime for prospectuses for rights
issues. There are two questions answered in relation to this
issue:
- If an offer to the public is made following an undersubscribed rights issue, this offer should be treated as separate and a prospectus drawn up just as if it were a normal offer to the public. Therefore, the proportionate disclosure regime does not apply unless the "public offer" exemptions under the Prospectus Directive are applicable.
- A prospectus drawn up under the proportionate disclosure regime may also be used where any shares not subscribed for under the rights issue by existing shareholders or pre-emptive rights holders are offered to other investors where the "public offer" exemptions apply.
ESMA has also revised its answers on pro forma financial information and the level of disclosure concerning price information for share offerings, which will both be effective from 28 January 2014.
Prospectuses Questions and Answers version 20 is available at:
http://www.esma.europa.eu/system/files/2013-1537_qa_prospectuses_-_20th_updated_version.pdf.
On 15 January 2014, ESMA published a further version (no. 21) of its Questions and Answers on Prospectuses which contains answers to two new questions:
- The format for the individual summary in a prospectus relating to several securities. ESMA has provided two alternative formats that may be used for such a summary.
- Which registration document schedule – a share or a debt securities one – should be used where a listed issuer proposes to issue convertible or exchangeable debt securities and where the underlying securities to be issued on conversion are the issuer's shares. ESMA has said that where these underlying shares (and not just shares of the same class) are already issued and admitted to trading on a regulated market, a debt registration document can be used.
Prospectuses Questions and Answers version 21 is available at:
http://www.esma.europa.eu/content/QA-Prospectus-21st-version.
Council Announces Audit Reforms
On 18 December 2013, the Council of the European Union issued a press release stating that it had reached agreement with the Parliament and the Permanent Representatives Commission on a legislative proposal to increase the credibility of audited financial statements of public-interest entities ("PIEs"). The key changes proposed include:
- mandatory rotation of auditors every 10 years, or every 24 years where the audit is carried out jointly between firms. Member States may extend the 10-year period to 20 years where the audit contract is publicly tendered;
- prohibition and restriction on the provision of non-audit services to the audited entity. Tax consultancy and advisory services will be prohibited, whilst other non-prohibited non-audit services provided over three years or more will have their fees limited to a maximum of 70% of the average of the fees paid in the last three years by the audited entity; and
- cooperation of audit oversight bodies, including a Committee of European Auditing Oversight Bodies (CEAOB) and ESMA to ensure guidance and supervision.
The press release is available at:
http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/intm/140170.pdf.
Ruling on Access to Prospectuses in Electronic Form
On 26 November 2013, Advocate General Sharpston gave an opinion in the case of Michael Timmel v. Aviso Zeta AG (Case C-359/12). In that case, a prospectus and related documents were only available to potential investors on a website following a complex registration process. Some of the documents were only accessible upon payment of a fee. The Advocate General concluded that such a restriction of access to a prospectus or base prospectus would be incompatible with Article 29 of the Prospectus Regulation, which implements the Prospectus Directive. Such documents should be easily accessible and should not require:
- payment of a fee;
- limitation to the number of documents viewed for free (in this case two per month); and
- registration involving agreeing to a disclaimer and providing an email address.
The Advocate General's opinion is available at:
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:62012CC0359:EN:HTML.
ESMA Publishes its Work Programme for 2014
According to its work programme, published on 3 October 2013, in 2014 ESMA intends to focus on the following areas:
- convergence – consolidation and co-operation of supervisory regimes including ongoing discussion with the International Accounting Standards Board ("IASB") about developments in International Financial Reporting Standards ("IFRS") and maintaining Question & Answer documents under various pieces of legislation;
- financial consumer protection – product intervention, including bans of certain financial products by ESMA under the Markets in Financial Instruments Regulation ("MiFIR"); improving the application and implementation of the Markets in Financial Instruments Directive ("MiFID") conduct of business rules; drafting technical standards in relation to the Packaged Retail Investment Products initiative;
- financial stability – financial market surveillance and economic research;
- single rulebook – review of MiFID and the Market Abuse Directive ("MAD") including drafting implementing measures (see "ESMA Consults on Implementing Measures under the New European Market Abuse Regime" below); and
- supervision – of trade repositories and credit ratings agencies.
The work programme is available at:
http://www.esma.europa.eu/system/files/2013-1355_rev1_-_2014_work_programme.pdf.
ESMA Publishes Final Report on Supplementary Prospectuses
On 20 December 2013, ESMA published its final report on draft regulatory technical standards ("RTS") on specific situations that require the publication of a supplement to the prospectus. ESMA's draft RTS now include an obligation to publish a supplement in the following circumstances:
- new annual audited financial statements are published;
- an existing profit forecast or a profit estimate is amended;
- change of control;
- new public takeover bid by third parties;
- change to the working capital statement;
- the issuer is seeking an additional listing in an additional country or an additional offer in another Member State;
- a new significant financial commitment is undertaken which is likely to give rise to a significant gross change; and
- aggregate nominal amount of the offering programme is increased.
The Commission has three months, from 20 December 2013, to decide whether to endorse the draft regulatory technical standards.
The report is available at:
Financial Markets Regulation Developments
European Trade Reporting Start Date
On 7 November 2013, ESMA announced that the reporting start date for all derivative asset classes – commodities, credit, FX, equity, interest rates and others – would be 12 February 2014. The date has been set following the approval for registration by ESMA of four trade repositories, the registrations of which took place on 14 November 2013. The European Commission published a communication on the same date announcing that it would not endorse ESMA's request for a delay to the reporting start date of exchange traded derivatives ("ETDs"). In August 2013, ESMA submitted draft implementing technical standards to the Commission for endorsement to delay the reporting start date of ETDs to January 2015. ESMA considered that it needed time to develop guidelines and recommendations to ensure consistent application of the reporting obligation for ETDs under the European Market Infrastructure Regulation (EU) No. 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties ("CCPs") and trade repositories ("EMIR"). The Commission considered that the delay was not justified and would go against the principle of ensuring the stability of the financial system.
Final Draft RTS on Extraterritorial Effect of Risk Mitigation Obligations under EMIR
On 18 November 2013, ESMA published its final draft RTS on contracts with a direct, substantial and foreseeable effect within the EU and non-evasion of the provisions of EMIR. The draft RTS provide (i) that the clearing obligation and risk mitigation provisions under EMIR also apply to contracts between two non-EU counterparties where those contracts have a direct, substantial and foreseeable effect within the EU; and (ii) for the prevention of the evasion of rules or obligations under EMIR.
The European Commission has until 15 February 2014 to decide whether to endorse the draft RTS. If endorsed, the RTS will still be subject to the consent of the European Parliament and Council before they can come into force. To allow market participants time to adapt to the new requirements for contracts considered to have a direct, substantial and foreseeable effect within the EU, ESMA proposes to delay the application of that provision for six months. The non-evasion provision would come into force 20 days after publication of the RTS in the Official Journal.
The draft RTS are available at:
Delegated Regulations under EMIR
On 19 October 2013, the following two delegated regulations were published in the European Union Official Journal:
Commission Delegated Regulation (EU) No. 1002/2013 of 12 July 2013 amending EMIR with regard to the list of exempted entities. This Regulation provides that EMIR is not applicable to the central banks and public bodies charged with or intervening in the management of the public debt in the US and Japan. The Regulation came into effect on 8 November 2013.
The Delegated Regulation is available at:
http://new.eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=oj:JOL_2013_279_R_0002_01&from=EN.
Commission Delegated Regulation (EU) No. 1003/2013 of 12 July 2013 supplementing Regulation (EU) No. 648/2012 of the European Parliament and of the Council with regard to fees charged by ESMA to trade repositories. The Regulation came into effect on 22 October 2013.
The Delegated Regulation is available at:
http://new.eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=oj:JOL_2013_279_R_0004_01&from=EN.
ESMA Publishes Further Third Country Advice on Equivalence
On 2 October 2013, ESMA published technical advice to the European Commission on the equivalence to the rules under EMIR of the derivative rules in South Korea, India and Canada, as well supplemental advice to its advice on Australia, Hong Kong and Switzerland. The scope of the advice covers requirements for CCPs and trade repositories, requirements for the clearing obligation, reporting obligation, non-financial counterparties, and risk mitigation techniques for uncleared trades. The European Commission is responsible for adopting implementing acts on equivalence for each jurisdiction.
ESMA's technical advice is available at:
http://www.esma.europa.eu/news/ESMA-delivers-second-set-advice-EMIR-equivalence?t=326&o=home.
European Commission Reports on Impact of Short Selling Regulation
On 13 December 2013, the European Commission published its report to the European Parliament and to the Council of the European Union on the impact of the Short Selling Regulation (the "SSR"). The Commission concludes that the SSR has had a positive impact in terms of greater transparency of short sales and reduced settlement failures. The Commission does not consider that there is sufficient evidence yet to warrant a revision of the SSR.
The report is available at:
http://ec.europa.eu/transparency/regdoc/rep/1/2013/EN/1-2013-885-EN-F1-1.Pdf.
European Political Agreement on Reached Proposed Directive for Market Abuse
On 20 December 2013, the Council of the European Union announced that political agreement had been reached on the proposed Directive on criminal sanctions for insider dealing and market manipulation ("CSMAD"). Under CSMAD, Member States must provide in their national legislation for criminal penalties for insider dealing, market manipulation and unlawful disclosure of inside information. The agreement means that CSMAD and the proposed Regulation on insider dealing and market manipulation (Market Abuse Regulation, or "MAR") can be adopted at first reading by the European Parliament. MAR is still subject to technical amendments pending the finalisation of the new Markets in Financial Instruments Regulation and Directive ("MiFID II").
The press release is available at:
http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/140276.pdf.
ESMA Consults on Implementing Measures under the New European Market Abuse Regime
On 14 November 2013, ESMA published a discussion paper proposing positions and regulatory options on implementing measures it will be required to develop for the new MAR. The proposals are based on the text agreed by the European Parliament, European Commission and the Council on 24 June 2013. The final version of MAR is still to be published in the Official Journal, which is being delayed pending the finalisation of MiFID II. ESMA's discussion paper covers issues such as indicators and signals of market manipulation, format for insider lists, criteria to establish accepted market practices and reporting of violations and related procedures. Responses to the proposals are requested by 27 January 2014. Responses will be taken into account when ESMA prepares the draft technical standards and advice required under MAR. The timing of ESMA's publication of those later consultations will depend on the publication of the final version of MAR.
The discussion paper is available at:
ESMA Provides Clarification on the Meaning of "Acting in Concert"
On 12 November 2013, ESMA published a public statement which aims to provide clarification to investors on the meaning of "acting in concert" as defined in the Takeover Bid Directive. The statement is made in response to the European Commission's report in 2012 in which it recommended that clarification was needed to increase certainty for international investors who wish to cooperate with each other on corporate governance issues but may feel inhibited from doing so in case that action would result in them having to make a mandatory bid. The statement represents the collective views of ESMA and the national authorities that implement the Takeover Bid Directive. The statement includes a "White List" of activities that an investor may cooperate in and which would not be considered as "acting in concert" and therefore the investor would not be required to make a mandatory bid. The statement emphasises that the circumstances of each case will still need to be assessed by national regulators and that early consultation with regulators is very important. ESMA will keep the statement under review to ensure that it continues to reflect the practices and views of the applicable regulators.
ESMA's public statement is available at:
European Commission Responds to IOSCO on CCP Recognition
On 22 December, the International Organisation of Securities Commissions (IOSCO) published the response from the European Commissioner, Michel Barnier, to its letter seeking clarification from the European Commission about the approach to equivalence assessments under EMIR for CCPs. The Commission states that it is analysing the advice provided by ESMA on the equivalence of various third country regimes which involves assessing whether, despite differences in the legal and supervisory regimes, similar outcomes are achieved, namely the reduction of systemic risk in financial markets. With regard to the link between the recognition process for central counterparties and the treatment of CCP exposures under the Capital Requirements Regulation (CRR), the Commission confirms that it will consider extending the deadline if necessary.
A copy of the letter from the European Commission is available at:
http://www.iosco.org/committees/aprc/pdf/20131220_Response_from_EU_to_APRC_letter.pdf.
EBA Warning on Virtual Currencies
On 12 December 2013, the European Banking Authority (the "EBA") published a warning to consumers buying, holding or trading virtual currencies such as Bitcoin. The EBA warns consumers that there are no specific regulatory protections that would cover a consumer for losses if a platform that exchanges or holds virtual currencies fails or goes out of business. Consumers are expected to familiarise themselves with the risks associated with virtual currencies. The EBA is, in the meantime, assessing whether virtual currencies can and should be regulated.
ESAs Publish Joint Position on Product Oversight
The European Supervisory Authorities, EBA, ESMA and the European Insurance and Occupational Pensions Authority (the "EIOPA") (together, the "ESAs") published, on 28 November 2013, a joint position paper setting out high-level principles on product oversight and governance processes within financial institutions. The principles represent an agreement among the ESAs upon which each ESA may develop more detailed provisions for their sector at a later stage. Those detailed provisions will be directed at financial institutions and/or national regulators.
The position paper is available at:
http://www.eba.europa.eu/documents/10180/15736/JC-2013-77+%28POG+-+Joint+Position%29.pdf.
ESMA Publishes Information on Waivers from Pre-trade Transparency
On 18 December 2013, ESMA published a document discussing the waivers from pre-trade transparency under Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on MiFID. Under MiFID, operators of regulated markets ("RMs") and multilateral trading facilities ("MTFs") must make public the current bid and offer prices and the depth of trading interests in respect of shares admitted to trading on a regulated market unless exemptions apply. RMs and MTFs must apply to their national regulator for an exemption. With the publication of this document, ESMA aims to assist regulators to meet the opinions that ESMA expresses on this issue in the exemption process. The information also provides clarity to market participants on the MiFID requirements.
ESMA Reports on Deficiencies in Credit Rating Agencies Sovereign Ratings
Processes On 2 December 2013, ESMA published a report identifying numerous deficiencies in the processes for producing and issuing sovereign ratings at Fitch Ratings, Moody's Investors Service and Standard & Poor's. ESMA investigated the sovereign rating processes at the three credit rating agencies (the "CRAs") between February 2013 and October 2013. Problems were identified on the independence and avoidance of conflicts of interests, confidentiality, timing of publications of rating actions and resources. ESMA, as supervisor of the CRAs, is requiring them to address the issues and will monitor progress on the remedial actions. ESMA has not yet determined whether there has been a breach of the CRA Regulation and may take appropriate action in due course.
The report is available at:
ESMA Publishes Market Share of CRAs
On 16 December 2013, ESMA published the market share of CRAs registered within the EU as of 12 December 2013. Total market share is calculated according to the annual turnover generated from credit rating activities and ancillary services, at group level. The annual turnover is for 2012. The CRA Regulation requires ESMA to publish the EU's CRA's market share once a year. Issuers who intend to appoint at least two CRAs for the credit rating of the same issuance or entity are required to consider appointing at least one CRA with no more than 10% of the total market share.
ESAs Consult on Removing Mechanistic References to Credit Ratings
The ESAs are consulting on the approach to mechanistic references to credit ratings in their guidelines and recommendations. Under the European CRA Regulation, the ESAs may not refer to credit ratings in their guidelines, recommendations and draft technical standards where such reference has the potential to trigger sole or mechanistic reliance on credit ratings by national regulators and financial market participants and must review and remove such references by 31 December 2013. The consultation includes proposals to amend various guidelines including under the new capital requirements legislation and on money market funds. Responses to the consultation were due by 5 December 2013.
The consultation paper is available at:
ESMA's Technical Advice on the Feasibility of a Network of Small and Medium-sized CRAs
On 21 November 2013, ESMA published its technical advice to the European Commission on the feasibility of a network of small and medium-sized CRAs. The European Commission was obligated to report under the European CRA Regulation by the end of 2013 on this issue in order to promote competition in the market. ESMA's advice includes information on all registered and certified CRAs, particularly on small and medium-sized CRAs in the EU, as well as potential barriers to entry for companies that want to conduct rating activities in the EU.
ESMA's technical advice is available at:
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