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FSA: Consultation Paper 12/5: Quarterly Consultation Paper No.32
On 7 March 2012, the Financial Services Authority (FSA) published its latest Quarterly Consultation Paper. Chapter 7 contains proposals concerning the definition of a “related party” under the Listing Rules and provisions relating to the role of the UK Listing Authority (UKLA) Helpdesk in providing guidance in relation to the Listing Rules and the Disclosure and Transparency Rules.
Listing Rule 11
Under LR 11, the definition of a related party includes a person who is (or was within the 12 months before the date of the transaction or arrangement) a “substantial shareholder”. The FSA Handbook defines a “substantial shareholder” as “any person who is entitled to exercise or control the exercise of 10% or more of the votes able to be cast on all or substantially all matters at general meetings of the company”. The FSA notes that in some circumstances investment banks may hold shares for relatively brief periods of time as a result of arranging or facilitating block trades between shareholders and other investors. Where the amount of shares being traded either taken alone or in conjunction with other holdings of the investment bank represent ten per cent or more of the voting rights of the issuer, this creates a related party relationship between the issuer and the investment bank. This triggers a series of obligations, as set out in LR 11, on the issuer, as well as on the bank, to identify further related party transactions and to ensure that the Listing Rule requirements for those are fully complied with. The FSA considers that these obligations are disproportionate in situations where the shares are held for only a very short period and as an incidental consequence of arranging transactions for other parties. As a result, the FSA is proposing to redefine “substantial shareholder” as set out in LR 11.1.4R so that where an authorised firm holds ten per cent or more of the voting rights of an issuer, subject to other conditions, these voting rights may be disregarded for the purpose of the related party definition in LR 11.1.4R.
The UKLA Helpdesk provides market participants with individual guidance and the UKLA has previously allowed requests for individual guidance to be made on a “no names” basis where the adviser does not wish to provide the identity of the issuer to which the query relates. Within the FSA this practice is unique to the UKLA. The FSA is proposing to no longer accept requests for individual guidance which are made on a “no names” basis. However, issuers and their advisers will still be able to make requests for individual guidance in writing, on a named basis which the UKLA, except in the case of simple queries, will respond to in writing within the current turnaround times. In cases of exceptional urgency, the FSA may receive requests orally and would retain a stand-alone telephone line for this purpose. The FSA is proposing to insert new guidance at LR 1.2.6G, DTR 1.2.5G and DTR 1A.2.5G to deal with this.
The deadline for comments on the Consultation Paper is 6 May 2012.
(FSA, Consultation Paper 12/5: Quarterly Consultation paper No.32, 07.03.12)
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European Commission: Proposal for a regulation on improving securities settlement in the European Union and on central securities depositories and amending Directive 98/26/EC
On 7 March 2012, the European Commission published a proposal for a regulation setting up a common regulatory framework for the institutions responsible for securities settlement, central securities depositories (CSDs). The proposal aims to harmonise both the timing and discipline of securities settlement in the EU and it follows the publication of a consultation paper by the European Commission in January 2011.
The European Commission notes that while settlement is generally safe and efficient within national borders, settlement across borders presents higher risks and costs for investors than domestic operations. Given the increasing importance of cross-border transactions in Europe, the European Commission believes it is important to have a harmonised set of measures across Europe for settlement, as well as for institutions responsible for settlement.
The main aspects of the proposed regulation are as follows:
- Dematerialisation of securities: Companies that issue transferable securities admitted to trading on regulated markets must arrange for such securities to be recorded electronically in book-entry form through a CSD, at least from the moment they are traded via an organised trading facility or posted as collateral. Market participants will be given until 1 January 2020 to record all existing paper securities in electronic book entries.
- Settlement periods: The settlement period for transferable securities traded on regulated markets, multi-lateral trading facilities or organised trading facilities, will be no later than the second business day after the trading takes place. Currently the settlement period is not harmonised across Europe although most securities transactions are settled two or three days after the trading date.
- CSDs: CSDs will have to comply with strict organisational, conduct of business and prudential requirements to ensure their viability and the protection of their users. They will also have to be authorised and supervised by their national competent authorities.
- CSD passport: Authorised CSDs will be given a "passport" to provide their services in the EU, either by directly providing a service in another Member State or by establishing a branch in that Member State.
- Sanctions: Market participants that fail to deliver their securities on the agreed settlement date will be subject to penalties and will have to buy those securities in the market and deliver them to their counterparties. The regulation also harmonises the sanctioning powers available for national competent authorities, the criteria for determining sanctions and the level of fines to be imposed.
The draft regulation will now pass to the European Parliament and to the Council of the European Union for negotiation and adoption.
(European Commission: Proposal for a regulation on improving securities settlement in the European Union and on central securities depositories (CSDs) and amending Directive 98/26/EC (2012/0029 (COD), 07.03.12)
(Proposal on improving securities settlement in the EU and on Central Securities Depositaries - Frequently Asked Questions, 07.03.12)
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European Commission: Gender imbalance in corporate boards in the EU - public consultation questions
In March 2011, the EU Justice Commissioner, Viviane Reding, challenged publicly-listed companies in Europe to voluntarily increase the number of women in their boardrooms by signing the "Women on the Board Pledge for Europe". By signing this pledge, companies commit to raising female representation on their boards to 30 per cent by 2015 and 40 per cent by 2020.
Since then, the European Commission has been assessing gender diversity in the boardroom and the results of self-regulatory efforts across Europe. It has now published a report, "Women in economic decision-making in the EU: Progress report". The report looks at the economic importance of gender diversity in corporate boards and then reviews the current situation in terms of gender representation at the top level of major publicly listed companies across the EU and looks at how this has changed over recent years. The report provides a brief overview of recent important initiatives developed in Member States to promote gender balance in business leadership but its conclusion is that progress continues to be very limited. The report notes that during the past year only 24 companies across Europe have signed the Pledge introduced by Viviane Reding and comments that with progress at the same pace as in recent years, it would take more than 40 years to arrive at gender balanced boards. As a result, in parallel with the publication of the report, the European Commission has launched a public consultation that will contribute to assessing the impact of possible EU measures, including legislative ones, to address the situation.
The public consultation comprises seven questions to which responses are requested by 28 May 2012. The European Commission proposes to take a decision on possible measures later in 2012.
The questions asked are as follows:
- How effective is self-regulation by businesses to address the issue of gender imbalance in corporate boards in the EU?
- What additional action (self-regulatory/regulatory) should be taken to address the issue of gender imbalance in corporate boards in the EU?
- Would an increased presence of women on company boards bring economic benefits, and which ones?
- Which objectives (e.g. 20 per cent, 30 per cent, 40 per cent, 60 per cent) should be defined for the share of the under represented sex on company boards and for which timeframe?
- Should these objectives be binding or a recommendation? Why?
- Which companies (e.g. publicly-listed/from a certain size) should be covered by such an initiative?
- Which board/board members (executive/non-executive) should be covered by such an initiative?
- Should there be any sanctions applied to companies which do not meet the objectives? Should there be any exception for not reaching the objectives?
(European Commission, Gender imbalance in corporate boards in the EU - public consultation questions, 05.03.12)
(European Commission, Progress report: Women in economic decision-making in the EU, 05.03.12)
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Remuneration Committee Guide for Smaller Quoted Companies
On 5 March 2012, the Quoted Companies Alliance (QCA) published its Remuneration Committee Guide for Smaller Quoted Companies (Guide). The QCA issues guidance for UK smaller quoted companies, including standard listed, AIM and PLUS-quoted companies. In September 2010, it published its Corporate Governance Guidelines for Smaller Quoted Companies and these, with the Guide, are intended to aid remuneration committees in developing a bespoke approach to remuneration so that remuneration for key management and executives can be set in a fair and reasonable manner, ensuring that the chosen scheme and metrics do not result in adverse consequences, particularly for risk management.
The Guide provides an overview of the following areas:
- Objectives of the remuneration committee: This section sets out the overarching objectives of the remuneration committee and explores both how remuneration committees function and best practice in communication with shareholders. The QCA considers the key aim of a company’s remuneration committee is to ensure that remuneration policy and practice promote and drive the long-term growth of shareholder value as effectively as possible in accordance with the board’s strategy and policy on succession and risk management.
- Factors to be considered in setting remuneration policy: The QCA sets out factors to consider when developing or reviewing remuneration schemes at a company and an individual level. The Guide also considers aspects of remuneration schemes such as performance linked pay, an annual bonus and long-term incentives.
- Communicating with shareholders: The Guide highlights ways to gain investor support on issues concerning remuneration policy and practice. It also suggests the type of information to be included in the annual remuneration report. The QCA comments that a voluntary vote on a remuneration report can show a company’s commitment to engaging with investors and that even if a vote on the remuneration report is not required, there should be consultation with shareholders about the annual remuneration report.
- Remuneration committee membership, organisation and functions: This section contains recommendations on the authority and independence of the remuneration committee, with the QCA advising that the remuneration committee should have formally delegated authority to set executive directors’ pay. Where this authority is limited to making recommendations, such recommendations should be approved without amendment. So far as the independence of the remuneration committee is concerned, the QCA believes that the chairman of the board can be a member of the committee, but that it is best practice that he does not chair it. The section also provides information on the attributes of a remuneration committee member, as well as guidance on the terms of reference for a remuneration committee, succession planning, induction and training.
(QCA, Remuneration Committee Guide, March 2012). Please note that the Guide is available for purchase from the QCA.
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ESMA: Final Report - Second part of technical advice on possible delegated acts concerning the Prospectus Directive
On 2 March 2012, the European Securities and Markets Authority (ESMA) published the final version of Part II of its technical advice on possible delegated acts concerning the Prospectus Directive (Directive 2003/71/EC as amended by Directive 2010/73/EU). In January 2011, ESMA received a formal mandate from the European Commission to provide technical advice on possible delegated acts and that mandate was divided into three parts. In October 2011 ESMA published its final technical advice in relation to Part 1 of the mandate. In December 2011, ESMA published for consultation its draft technical advice on Part II of the mandate which dealt with sections 3.5 and 4 of the mandate relating to the consent to the use of a prospectus in a retail cascade and the review of the provisions of the Prospectus Regulation.
ESMA’s final advice differs in certain respects from its December 2011 draft advice and some of these differences are as follows:
- Consent to the use of a prospectus in a retail cascade: In its draft technical advice, ESMA proposed that the consent to use a prospectus needed to be published and included in the base prospectus/final terms in the case of retail cascades. This approach has been retained but ESMA acknowledges that the issuer’s ability to identify all financial intermediaries in the prospectus or the final terms might be limited given current market practices. As a result, ESMA proposes a two type consent approach, the general consent approach and the individual consent approach. The general consent approach will allow a “general consent” to use the prospectus to be included in the prospectus addressed to any financial intermediary it may concern. The individual consent approach will apply where financial intermediaries are acting with the issuer on the basis of an individual written agreement. In such a case, an issuer may want to restrict its consent to use of the prospectus to those specific financial intermediaries. ESMA sets out the principles which need to be respected by issuers or persons responsible for the drawing up of the prospectus and financial intermediaries, as well as specifying the minimum content of each consent approach and any conditions attached.
Review of the provisions of the Prospectus Regulation
- Information on taxes withheld at source: ESMA clarifies that it does not intend to require the prospectus to provide investors with sufficient information to know the "net" amount that they will receive in accordance with the terms of the securities. ESMA comments that it does not seem reasonable or practical to require issuers to provide extensive disclosure of individual tax treatment in relation to each investor and will therefore revise Number 45 of its Frequently Asked Questions in relation to prospectuses with regard to the net amount.
- Profit forecasts and estimates: ESMA clarifies the manner in which preliminary statements must be agreed by the statutory auditor. The statutory auditor must be confident that the figures are substantially consistent with the final figures. ESMA also proposes to remove the condition that preliminary statements cannot be based on underlying assumptions and amend the proposal that preliminary statements must only be approved by the person responsible for such statements if such a person differs from the one who assumes liability for the prospectus in general.
The European Commission must adopt delegated acts in relation to Parts I and II of the mandate by by 1 July 2012. ESMA will start work on section 5 (a comparative table recording the liability regimes applied by Member States in relation to the Prospectus Directive). ESMA confirms that work on the section dealing with the criteria to be applied in assessing the equivalence of a third-country financial market (Article 4 (1)) has been postponed due to the ongoing review of the Transparency Directive (2004/109/EC), Market Abuse Directive (2003/6/EC) and the Markets in Financial Instruments Directive (2004/39/EC). Part III of the mandate relating to disclosure requirements for convertible bonds will be dealt with under the same technical advice.
(ESMA, Final Report - Second part of technical advice on possible delegated acts concerning the Prospectus Directive (2012/137))
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