Financial Markets Newsletter – February 2011

The Netherlands - Law and regulations

Recently introduced statutes/decrees/regulations

With effect from 1 January 2011, a number of statutes, decrees, and supervisory rules were amended.

Statutes

In addition to pension funds and insurance companies, a new type of pension administrator has been introduced into Dutch law: the premium pension institution (premiepensioeninstelling, "PPI"). Although it is a pension vehicle that may be active on the Dutch pension market, the PPI has been introduced mainly with a view to activities in other EU member states. A feature of the PPI is that it may not insure risks or give guarantees with respect to return on investment. This makes PPIs suitable for Defined Contribution schemes, in which the premium contribution is fixed, but the amount of the ultimate pension is not. The new PPI regulations have been incorporated into the Financial Markets Supervision Act (FMSA).

Some significant amendments to the Securities Giro Transfer Act took effect on 1 January 2011, aimed at further protecting clients of intermediaries and achieving greater dematerialisation of securities. De Brauw has issued a legal alert on the amendments. If you have not been sent a copy and would like to receive one, please get in touch with your regular contact at De Brauw. The legal alert can also be downloaded from www.debrauw.com.

Decrees

Three decrees entered into effect on 1 January 2011:

• Financial Markets Amendment Decree 2011
• Controlled Remuneration Policy Decree
• Decree Introducing Premium Pension Institutions

The Financial Markets Amendment Decree 2011 contains several amendments to existing regulations. It adjusts a number of decrees to the EU Regulation on rating agencies, and it introduces provisions in anticipation of the implementation of the Solvency II Directive.

The Controlled Remuneration Policy Decree gives The Netherlands Authority for the Financial Markets (AFM) and the Dutch Central Bank (DNB) powers to introduce rules on, among other things, the way in which remuneration policy in financial institutions is to be drawn up, adopted, and implemented.

The AFM ensures that remuneration policy provides no incentive for dealing with customers without due care. In the first half of 2011, it will look at the risk analysis to be carried out by institutions. This should give an insight into the elements of the remuneration policy that could lead to treatment of customers without due care. In the second half of 2011, the AFM will monitor more closely that the remuneration policy is implemented. A Q & A section (in Dutch) in respect of risk analysis can be found on the AFM website.

DNB will focus on risks of the remuneration policy that may have a detrimental effect on the solidity of the financial institution.

Supervisory rules

In the 2011 Policy Guidelines concerning Expertise, the AFM and DNB clarify the expertise requirements for policy makers and the aspects they take into consideration when carrying out their assessment. The guidelines concern policy makers of all undertakings that fall under the FMSA, the Pensions Act, the Compulsory Occupational Pension Schemes Act, and the Trust Offices Supervision Act.

DNB has published two regulations implementing the amendments to the Capital Requirements Directive (CRD III):

• 2011 Regulation on Controlled Remuneration Policy
• the first tranche of amending rules in implementation of CRD III, which amends the 2010 Regulation on solvency requirements, credit risks and large positions.

The other changes arising from CRD III will be incorporated into supervisory regulations per 31 December 2011.

The Netherlands - Other

Update on Financial Markets Amendment Bill 2010

The Second Chamber of the Dutch Parliament adopted the Financial Markets Amendment Bill 2010 on 2 December 2010.

At a late stage in the debate, the Minister of Finance submitted an amendment to the Bill which raised the threshold for exemption from the licence requirements for investment objects and participation rights in investment institutions from EUR 50,000 to EUR 100,000. The existing threshold of EUR 50,000 was considered too low to prevent non-professional investors from investing in funds that are exempt from supervision.

Implementation of revised UCITS Directive

The Minister of Finance has submitted to the Second Chamber a Bill implementing the revised UCITS Directive (2009/65/EC). The Bill introduces amendments to the FMSA and the Dutch Civil Code. The amendments relate to:

• simplification of the notification procedure
• introduction of a European passport for managers of UCITS
• facilitating (cross-border) mergers between UCITS
• introduction of a statutory framework for master-feeder structures (enabling a UCIT to invest in another UCIT)
• inclusion of key investor information in UCIT documentation

In addition, the Minister has held a consultation about a draft decree implementing the Directive.

Implementation of amendments to Capital Requirements Directive (CRD II)

In a letter to the Second Chamber of the Dutch Parliament, the Minister of Finance explains the reasons for the late implementation of CRD II (Directives 2009/27/EC, 2009/83/EC and 2009/111/EC). CRD II should have been implemented into national laws by 31 October 2010. Only the implementation of Directive 2009/111/EC requires a change in the law. The implementation delay has been caused mainly by a lack of capacity at the Ministry of Finance.

The Minister now aims to submit implementing legislation to the Second Chamber in the spring.

DNB has already amended its supervisory rules to comply with CRD II.

See also Newsletter Financial Markets November 2010

Monitoring Commission issues preliminary report on Banking Code

This year, banks will have to start including information in their annual reports on compliance with the Banking Code. The Monitoring Commission Banking Code will issue a report on compliance later this year.

In December 2010, the Commission issued a preliminary report on the manner in which banks had prepared for the introduction of new reporting requirements. The Commission focused, in particular, on the "customer-centred", "risk management" and "governance" themes.

Next year, the Commission will report comprehensively on the Banking Code, based in part on its review of remuneration practices.

AFM endorses preliminary conclusions in IMF report

The International Monetary Fund has assessed financial supervision in the Netherlands against international standards of supervision. The IMF has found that the Twin Peaks model, dividing Dutch supervision of the financial markets between DNB and the AFM, has remained an effective supervisory model during the crisis. However, the IMF does suggest a number of essential changes to improve supervision.

An important suggestion is to enable supervisors to intervene at an earlier stage in the product development process. In addition, the IMF recommends providing supervisory authorities with wider powers in areas such as financial reporting.

With regard to the housing market and mortgage practice, the IMF notes that the loan-to-value ratio should be limited.

Finally, the IMF suggests further limiting the liability of financial supervisors to wilful misconduct and gross negligence.

These preliminary conclusions of the IMF have been endorsed by the AFM.

AFM report on supervision of financial reporting

The AFM has published a report of its findings with regard to its supervision of financial reporting in 2010.

The report shows that, compared to 2009:

• the AFM completed 10% more reviews of financial reporting in listed companies
• made fewer requests for additional information
• issued fewer "notifications" of shortcomings in financial reporting
• made more recommendations

The AFM also reports that in 2010 it operated less formally on a number of points and sought contact with undertakings more quickly and directly.

Europe - Regulation

Capital Requirements Directive amended (CRD III)

On 15 December 2010, CRD III (2010/76/EU) came into force, amending the Capital Adequacy Directives (2006/48/EC and 2006/49/EC).

The amendments relate to:

• capital requirements for the trading book and re-securitisations
• the supervisory review of remuneration policy

A number of changes had to be implemented before 1 January 2011. In the Netherlands, this was done in the DNB Regulation on Controlled Remuneration Policy. The other changes will have to be implemented by 31 December 2011.

Prospectus Directive and Transparency Directive amended

On 31 December 2010, the Prospectus Directive and Transparency Directive were amended as a result of Directive 2010/73/EU. This Directive includes changes to a number of exemptions. The exemption threshold for the prospectus requirement has been raised to offers with a minimum value of EUR 100,000 per investor or a minimum nominal value per unit of EUR 100,000. For more details on the amendments, see our Financial Markets Newsletter of November 2010.

The amendments must be implemented in the national laws by 1 July 2012 at the latest.

Europe - Other

European Parliament adopts Directive for managers of alternative investment funds (AIFM Directive)

The European Parliament has adopted the Alternative Investment Fund Managers Directive. This Directive introduces rules for the authorisation, ongoing operation and transparency of the managers of alternative investment funds ("AIFM"). The Directive aims to provide an European internal market for AIFM, and a harmonised and stringent regulatory and supervisory framework for the activities within the EU of AIFM. Pursuant to the Directive, the European Commission and the European Securities and Markets Authority (ESMA) must take a number of implementing measures.

The EU Council is yet to vote on the Directive, but the expectation is that the Directive will take effect later this year and will have to be implemented in the member states by the end of 2013.

De Brauw's Investment Management Group sent out a newsletter on the AIFM Directive in December 2010. If you have not received this newsletter, please get in touch with your regular contact at De Brauw. You can also download the newsletter at www.debrauw.com.

European Commission consultations

• Consultation on legislative changes to the UCITS depositary function and to the UCITS managers remuneration

The Commission wants to tighten the rules for and the supervision of depositaries. The consultation will end on 31 January 2011.

• Consultation on legislative steps for the Packaged Retail Investment Products initiative.

PRIPs are packaged products for retail investors, such as investment funds, insurance-related investment and structured products. The Commission announced in 2009 that it wanted to improve protection for investors in these products. The rules on product information and sale needed to be more effective and coherent. The committees of European supervisors published a joint report on PRIPs last year (see Financial Markets Newsletter of November 2010).

The Commission's consultation relates to:

• the scope of PRIPs regulation
• the rules on pre-contractual disclosure
• the rules on sale of PRIPs

The consultation period ends on 31 January 2011.

• Consultation on the review of the markets in the Financial Instruments Directive (MiFID).

The Commission has started a consultation on the review of the MiFID. Such review is needed to bring the Directive more in line with the (new) rules on, among other things, derivatives. The MiFID should also offer more protection to investors, and member states should be given less room for their own interpretation of the MiFID provisions.

The consultation period ends on 2 February 2011.

• Reinforcing sanctioning regimes in the financial sector.

Surveys carried out by the committees of supervisors in the past few years have shown that the national sanctioning regimes strongly diverge. In the Commission's view, further convergence and reinforcement of sanctioning regimes are needed to promote adequate operation of the financial markets. It has therefore proposed to set minimum standards at European level. All member states should have administrative sanctions for violation of essential provisions, require sanctions that have been imposed to be made public, and have administrative sanctions against the responsible person and the financial institution on whose behalf that person acted. The Commission also wants to assess whether and in which instances criminal sanctions would be appropriate.

The consultation period ends on 19 February 2011.

• Consultation on technical details of a possible European crisis management framework

The Commission wants to present a proposal by this summer for a European approach to crisis management and recovery and resolution funds for banks. It is currently holding a consultation on the technical aspects of this proposal. The consultation will continue until 3 March 2011.

• Harmonisation of securities law. Over the past few months, the Commission has held a consultation on the proposed Securities Law Directive. It is now proposing a common regulatory structure for central securities depositaries. The closing date for consultation is 1 March.

CESR, CEBS and CEIOPS renamed ESMA, EBA and EIOPA

On 1 January 2011, CESR was replaced by the European Securities and Markets Authority (ESMA) as part of the financial supervision reforms in Europe. CEBS became the European Banking Authority (EBA), and CEIOPS was replaced by the European Insurance and Occupational Pensions Authority (EIOPA). In addition, a committee was created to address systemic risk: the European Systemic Risk Board (ESRB). The AFM will be represented in ESMA, and DNB in EBA and EIOPA. By these supervisory reforms, the European Commission wants to remedy shortcomings that came to light during the financial crisis.

ESMA has published Frequently Asked Questions on its website with regard to its tasks, powers and methods. These are in short:

• direct supervision of credit rating agencies
• drawing up (draft) binding technical standards in implementation of European rules
• supervision of a consistent application of EU rules at national level and potential intervention in case of incorrect application
• during a crisis, coordinating and facilitating activities of national supervisors and, if possible, imposing binding crisis measures
• issuing temporary bans or restrictions on specific financial activities
• mediating in disputes between national supervisors and taking final, binding decisions where necessary

The European Parliament and Council have meanwhile adopted the Omnibus I Directive. This Directive amends existing European legislation in connection with the powers of the new European supervisors. The amendments concern a large number of directives, including the Capital Requirements Directive (CRD), the Prospectus Directive, the Market Abuse Directive, and the Transparency Directive. The Omnibus I Directive will have to be implemented in the member states by 31 December 2011. In addition to the Omnibus I Directive, the Commission has published a proposal for the Omnibus II Directive, which amends the Prospectus Directive and the Solvency II Directive.

CESR/ESMA publications

• ESMA has published a new version of the Frequently asked questions regarding Prospectuses.
• ESMA has published a call for evidence to establish what subjects should be included in rules implementing the amended Prospectus Directive. ESMA will hold a formal consultation on the implementing rules in the summer.
• Guidelines for key information document

EU member states must implement the amended UCITS Directive (2009/65/EC) and implementing regulation (583/2010). Pursuant to article 36 of the implementing regulation, structured UCITS must include at least three scenarios of the UCIT's potential performance in the key information document. ESMA has published guidance in order to harmonise the selection and presentation of those scenarios.

• Call for evidence on the procedure for endorsement of credit ratings

In December 2010, the European Parliament adopted an amendment of the Regulation on credit rating agencies (1060/2009). The amending regulation provides that ESMA must publish guidance by 7 July 2011 on the criteria on the basis of which rating agencies established and licensed in the EU can endorse ratings issued in third countries. ESMA has published a call for evidence in order to take stock of the issues to be included in the consultation to be held later this year.

CEBS/EBA publications

• Guidelines on remuneration policies and practices

The guidelines implement article 22 of the revised Capital Requirements Directive (CRD III) and took effect on 1 January 2011.

• Guidelines for the joint assessment and joint decision regarding the capital adequacy of cross-border groups

EBA members must implement the guidelines by 31 March 2011 at the latest.

• Guidelines on the application of article 122a of the Capital Requirements Directive

Article 122a sets out a number of obligations of credit institutions in the case of securitisation. The guidelines relate to exposure to transferred credit risks and took effect on 1 January 2011.

• Revised guidelines on the recognition of External Credit Assessment Institutions

The guidelines took effect on 31 December 2010.

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