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FSA: Final Notice - Exillon Energy plc fined for breach of Listing Rules
On 26 April 2012, the Financial Services Authority (FSA) published a Final Notice imposing a fine on Exillion Energy plc (Exillon) for breach of the Listing Rules as a result of failing to identify around £930,000 of payments to its former Chairman and beneficiary of its major shareholder as related party transactions. This is the first fine imposed by the FSA on a company for breach of the Listing Rules relating to related party transactions and the first time a company has been fined for failing to establish and maintain the systems and controls necessary to comply with the Listing Rules.
Exillon was admitted to trading on the Main Market of the London Stock Exchange on 17 December 2009. In 2010, Exillon made a series of payments totalling £930,000 to and on behalf of Maksat Arip, Exillon’s then Chairman and a beneficiary of Exillion’s major shareholder. These payments were for private expenses and were the continuation of Exillon’s practice of paying Mr Arip’s private expenses and netting such payments off against his unpaid salary that had operated in Exillon before its listing. These payments constituted related party transactions but were not identified as such by Exillon or its senior officers.
By June 2010, the aggregate amount of these payments totalled £587,627, which exceeded 0.25 per cent of the aggregate market value of all Exillon’s ordinary shares. However, Exillon failed (and subsequently when further expenses payments were made) to comply with the requirements in LR 11.1.10R(2), namely to:
- inform the FSA in writing of the details of the transaction;
- provide the FSA with written confirmation from an independent adviser that the terms of the transaction were fair and reasonable; and
- undertake in writing to the FSA to include details of the transaction in the next published annual accounts.
After that time, Exillion also failed to comply with LR 11.1.11(3) each time it considered making a further payment to Mr Agip. Exillon had policies and procedures in place intended to ensure compliance with the Listing Rules regarding related party transactions. However, from the time of listing and throughout 2010, these policies and procedures did not work in practice since they relied heavily on senior officers to identify and take appropriate action. The senior officers charged with this responsibility lacked the experience and training to perform this function and Exillon did not check that the policies and procedures were effective and had been implemented. Exillon therefore also breached Listing Principle 2 by failing to take reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with its obligations.
In deciding whether a financial penalty was appropriate and proportionate, the FSA considered the five steps to determine the penalty to be imposed on firms set out in chapter 6.5A of its Decision Procedure and Penalties Manual. In relation to Step 2 (where the FSA determines a figure to reflect the seriousness of the breach), the FSA used the value of the related party transactions as the relevant indicator and determined that the breach was a level 3 breach (50 per cent of the value of the related party transactions being £465,000). The FSA viewed Exillon’s conduct as an aggravating feature, owing to the fact that the listing should have been a trigger for it to ensure all its procedures were effective and fully operational and it failed to do so. Exillon’s conduct was, however, mitigated by the following:
- it took a number of remedial steps after the breach was identified to bring its related party transaction compliance procedures up to a high standard;
- its cooperation during the investigation, including waiving privilege over all relevant documents at an early stage without being asked and making Mr Arip available for meetings and interviews at the earliest opportunity (despite him residing overseas), went well beyond the typical level of cooperation experienced by the FSA; and
- Mr Arip repaid the payments with interest before it was brought to Exillon’s attention that they constituted related party transactions.
Accordingly, the FSA reduced the penalty by 10 per cent to £418,500. Exillon agreed to settle at an early stage in the investigation and therefore qualified for a 30 per cent reduction in penalty, thereby reducing the financial penalty to £292,950.
The FSA did not conclude that Mr Arip had acted improperly in relation to the payments made to him, neither was there any evidence to suggest that Mr Arip or Exillon benefited financially from the payments or that Exillon’s shareholders suffered any losses.
(FSA, Final Notice - Exillon Energy plc fine for breach of Listing Rules, 26.04.12)
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ESMA: Final report - Technical advice on possible delegated acts concerning the Regulation on short selling and certain aspects of credit default swaps
On 20 April 2012, the European Securities and Markets Authority (ESMA) published its final report containing technical advice to be provided to the European Commission on a number of possible delegated acts concerning the Regulation on short selling and certain aspects of credit default swaps (the Regulation). The final report also contains a draft regulatory technical standard on the method of calculation of the fall in value of a financial instrument. The Regulation comes into force in November 2012 and the final report contains some amendments to the draft technical advice published for consultation in February 2012. Those amendments include the following:
- The definition of when a natural or legal person is considered to own a financial instrument for the purposes of the definition of short sale: ESMA has amended the technical advice to add an exemption from the definition of a short sale for the selling of financial instruments by a person who has exercised an option or similar claim if the securities will be delivered so that settlement is effected when it is due. ESMA has also added an exemption for the return of securities due to the agreement within the timeframe for settling the lender’s sale.
- Specification of the method of calculation of a net short position in shares or sovereign debt: Article 13(1) of the Regulation provides that an investor may only enter into a short sale of sovereign debt under specified circumstances. These restrictions do not apply if the transaction serves to hedge a long position in debt instruments of an issuer, the pricing of which has a high correlation with the pricing of the given sovereign debt. In the draft technical advice, ESMA proposed that such a high correlation could be determined for these purposes using historic data over a 24 month period with a 90 per cent correlation coefficient. ESMA has decided to reduce the timeframe to 12 months and the percentage to 70 per cent for a threshold to be considered as “highly correlating”.
- Method of calculating positions when different entities in a group have long or short positions or for fund management activities related to separate funds: ESMA has abandoned the concept of “decision maker” whereby the net short positions of the funds the management of which has been delegated to another entity should be aggregated at the level of that entity (i.e. considered as the decision maker) and has instead defined the method which should apply for fund management and portfolio management activities, even when performed within a group.
- Advice on cases in which a sovereign credit default swap transaction is considered to be hedging against a default risk or a risk in the decline of the value of assets or liabilities correlated with the value of the referenced sovereign debt: ESMA believes that there are some cases where there are legitimate reasons for allowing the use of sovereign credit default swaps for cross-border hedging purposes within the European Union. ESMA now recommends in its final technical advice that, providing other tests are met, a sovereign credit default swap position can be used to hedge an exposure within the European Economic Area (EEA) in certain cases. However, ESMA remains of the opinion that to use such a position to hedge an exposure outside the EEA should be considered as an uncovered sovereign credit default swap position.
- Specification of what constitutes a significant fall in value for financial instruments other than liquid shares: So far as the requirement for triggering a consideration as to whether to temporarily suspend short selling in non-liquid stocks when there has been a significant fall in the share price, ESMA has decided to increase the percentage fall in value for a share where the price is less than €0.50 (or the equivalent in the local currency) from 30 per cent to 40 per cent.
(ESMA, Final report - Technical advice on possible delegated acts concerning the Regulation on short selling and certain aspects of credit default swaps (2012/263), 20.04.12)
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