On 9 August, the European Commission adopted under the written procedure an amended proposal on the "prospectuses" directive, which partly takes into account the opinion issued by the European Parliament on 30 May 2001 on its initial proposal, but which has already given rise to certain criticisms (see EUROPE of 10 August, p. 1 and of 7 August, p. 2). The Commissioner responsible for the single market, Frits Bolkestein, made a point of commenting that the amended proposal takes account of the many observations submitted to the Commission during the past year. The EUROPE/Documents series reproduces (in English, French and German) the Explanatory Memorandum outlining the changes made to the Commission's initial proposal for an important piece of legislation in the single market for financial services.
EXPLANATORY MEMORANDUM
1. GENERAL COMMENTS
In the context of an integrated European capital market, the Commission attaches great importance to improving the framework for investing and raising capital on an EU wide basis. A single financial market will promote the competitiveness of the European economy, lowering the cost of raising capital for all types of companies. It will bring major benefits for consumers and investors.
This objective also satisfies the Lisbon European Council's request to introduce a single passport for issuers in the European Union.
Facilitating the widest possible access to capital markets, including for SMEs, requires a complete overhaul of the Community provisions on prospectuses, the first of which are 20 years old (Directive 80/390/EEC of 17 March 1980 coordinating the requirements for the drawing up, scrutiny and distribution of the listing particulars to be published for the admission of securities to official stock exchange listing (1) and Directive 89/298/EEC of 17 April 1989 coordinating the requirements for the drawing up, scrutiny and distribution of the prospectus to be published when transferable securities are offered to the public).
The need to upgrade these Directives has been listed as a top priority in the Financial Services Action Plan and the Risk Capital Action Plan.
In May 2000, FESCO (the Forum of European Securities Commissions) published for public consultation the paper European Public Offer. Following that consultation, and as a result of the process, on 17 January 2001 it published a new paper A European Passport for Issuers - A report to the EU Commission, calling also for an urgent overhaul of the existing rules and suggesting possible new approaches.
A proposal for a Directive on prospectuses was adopted by the Commission on 30 May 2001. This legislative initiative was given a first reading by Parliament, which on 14 March 2002 amended the text adopted by the Commission. At the same time, the Council Working Party on Financial Services (Prospectus) met on several occasions to try and reach agreement on the proposal.
To speed up the legislative process and meet the expectations expressed at the Barcelona Council on the early adoption of a directive on prospectuses, the Commission wishes to put forward an amended proposal for a Directive that takes account of many of Parliament's and the Council's wishes and concerns. The presentation of the proposal has been changed as regards form to make the text more understandable and readable.
The amended proposal also includes new, flexible arrangements for firms that were not in the proposal adopted by the Commission on 30 May 2001 while remaining consistent with the principles of protection and sound information for investors.
The indications that the current Community instruments on prospectuses are not suited to the operation of capital markets have not changed. There are currently many different practices and differing interpretations based on distinct traditions within the European Union regarding the content and the layout of prospectuses. The methods used and the time required for checking the information given therein are also different. Unless reform is undertaken, inconsistencies will continue and the European financial market will remain fragmented. Cross-border capital raising will therefore remain the exception, rather than the rule - the antithesis of the logic of the single currency.
The current complex and partial mutual recognition mechanism is unable to ensure the objective of providing a single passport for issuers. There is a need for modernisation and more flexibility. To achieve this objective, harmonisation of the information contained in each prospectus, including those relating to markets specially intended for professional investors, is necessary in order to provide equivalent protection for investors at Community level.
The European passport for issuers is also a unique opportunity to simplify regulatory compliance for issuers without their having to produce duplicative sets of documentation or respond to numerous additional national requirements.
The main changes compared with the Commission's original proposal are:
introduction of enhanced disclosure standards in line with international standards for the public offer of securities and admission to trading;
introduction of special Community rules for securities designed to be traded by professionals;
introduction of new prospectus formats for frequent issuers, and the duty on firms whose securities are listed on a regulated market to update the information on issuers at least once a year;
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(1) Directive repealed and since replaced by the consolidated Directive 2001/34/EC.
Possibility to offer or admit securities to trading on the basis of a simple notification of the prospectus approved by the home competent authority Concentration of the responsibilities in the home administrative competent authority;
extensive use of the committee system, following the Stockholm European Council's broad endorsement of the Lamfalussy Report in the resolution adopted by Heads of State or Government on more effective securities markets regulation in the European Union.
The need for enhanced European disclosure standards for publicly offered securities
Adequate and equivalent disclosure standards should be in place in all European Member States when securities are offered to the public or traded on regulated markets.
This implies that the existing disclosure standards need to be aligned in order to introduce the same standards for the public offer of securities and admission to trading throughout the Union, in accordance with the principle of maximum harmonisation.
Clear and common definitions have to be agreed to clarify the scope of the Directive and ensure necessary harmonisation at Community level. As recognised by the Preliminary Report of the Wise Men (15 November 2000), the introduction of a definition of public offer is a prerequisite for attaining the objective and encouraging firms to raise capital on a European basis under similar rules. It aims at avoiding loopholes at Community level and disparity in the treatment accorded to retail investors due to the fact that the same operation is considered as a private placement in some Members States (for which no prospectus has to be published) but not in others. A common definition of a public offer of securities automatically entails harmonising the concept of private placement in the European Union.
It is accompanied by new rules on exemptions, which will also assist the introduction of uniform standards in all Member States.
The amended proposal extends the scope of the existing measures to ensure that harmonised disclosure requirements are available for equity and debt securities traded on regulated markets. Directive 2001/34/EC applies only to securities that have been admitted to an official stock exchange, i.e. one which was known at the time the Directive was adopted. It is worth noting that start-ups and high tech companies are mainly traded on regulated markets outside the official listing segment. At present, it is up to each Member State to decide what information relating to these markets is required, and this has implications for the cross-border offering of these securities.
Need to introduce special Community rules for securities, especially those intended to be traded between professionals
The operation of the wholesale capital markets at European level needs to be made more efficient in order to improve the integration of the European financial market. It is therefore planned to establish Community rules for these markets and no longer automatically leave them outside the Community's scope as in the current Directives. It is planned to introduce special rules for those securities specially intended to be traded between professionals, while still applying the common arrangements in the European passport.
The basis of these arrangements is that there is no need for a prospectus in the case of an offer to qualified investors in the form of a private placing, the rules on advertising do not apply to this type of offer, and the content of the prospectus in the event of admission to trading is adapted to trading for this type of investor: in particular there is no obligation to provide a summary. Such issues are also not caught by the traditional rule of determining the competent authority by reference to the issuer's registered office.
European regulated markets are distinguished by their lack of barriers to entry, which is consistent with the functioning of the single market. Since wholesale and retail investors have free access to these stockmarkets, an objective criterion based on a high nominal value for the securities to be traded has been introduced, in order to create an effective distinction between markets for professionals and the general public. Thus the more flexible arrangements envisaged cannot be put into effect to the detriment of retail investors.
A simple, effective notification system that will make it possible to use a single prospectus for a public offer or admission to trading in two or more Member States
The introduction of a true single passport for issuers requires the replacement of the existing mutual recognition system by a simple notification system, similar to the one present in the financial intermediaries Directives for the cross border provision of services.
Under the new system, host Member States will be deprived of the possibility of asking for additional information to be included in the prospectus.
The operation of such a system requires a great degree of trust among competent authorities in charge of approving the prospectus and supervising the information disseminated by issuers. The proposal therefore specifies that the competent administrative authority in the home Member State is responsible for providing supervision that will ensure equivalent treatment of all investors as regards access to information and the on-going disclosure of material information by the issuer.
Independent administrative authorities, i.e. authorities in charge of ensuring general good objectives, are necessary for ensuring market and investor protection. The delegation of resources, but not of responsibilities, to private bodies may be entertained, subject to an organisation being set up that has no conflict of interest and does not impede competition between stockmarkets.
Other measures are foreseen in order to improve the functioning of the existing Community legislation. The requirement to fully translate the content of the prospectus does not encourage multinational offerings or admission to trading in more than one country. The proposal provides for a new language regime: host Member States' competent authorities may now require, if they so wish, only a translation of the summary of the prospectus, provided that the full prospectus is drafted in a language which is customary in the sphere of finance (normally English). These arrangements should facilitate cross-border arrangements, while guaranteeing adequate protection for retail investors: the latter will always receive the key information in summary form in their own domestic language. The purpose of the summary is to provide, in particular to retail investors, immediate, succinct information on the most relevant aspects relating to the issuer and the proposed operation.
The need for best practice concerning the content of financial disclosure
The disclosure requirements provided for by Directive 2001/34/EC are no longer sufficient to meet the needs of investors in modern global financial markets. Increasingly, investors want to make decisions on the basis of a continuum of standardised company financial and non-financial information. The current requirements need to be replaced by new European disclosure standards. Fostering best practice will enhance market confidence and attract capital. The upgrade of EU disclosure standards shall be in accordance with the International Disclosure Standards approved in 1998 by IOSCO (International Organisation of Securities Commissions). This new approach is designed to provide key information on certain topics such as risk factors, related-party transactions, corporate governance or management's discussion and analysis that are not currently dealt with at EU level.
To hasten the completion of the single market in securities and improve the comparability of information, the Commission has updated the Community accounting rules by adopting a new regulation: all companies in the European Union whose securities are traded on a regulated market will have to prepare their consolidated accounts in accordance with a single set of accounting rules, namely the International Accounting Standards (IAS). This requirement should enter into effect in 2005 at the latest. Thus it will be possible to trade the securities of the companies concerned on EU and international financial markets on the basis of a single set of accounting standards.
Need to improve the ways of presenting the prospectus and ensure that information is easily available and regularly updated The proposal introduces several new formats for the Community prospectus, leaving each issuer to choose which is most suitable. The issuer implements the policy described above, aiming at increasing the quality and the quantity of the information to be put at the disposal of investors and markets. It is the Commission's firm belief that increasing investor confidence will deliver significant benefits, lowering the cost of raising capital and ultimately improving job creation and the overall dynamism of the European economy.
The prospectus may consist of one or more documents. In all cases, a summary of the documentation is required. For frequent issuers such as credit institutions that issue in a continuous or repeated manner, the system proposed is a basic document plus supplements. A similar system is planned for issuers that programme their offers.
Another new format is also proposed, in which the prospectus consists of two parts: the registration document, containing information about the issuer, and the securities note, containing information about the securities (as explained in detail below). A summary of the two parts is provided in an ad hoc summary note. This system introduces a fast-track procedure for new issues, under which only the information related to the securities offered or admitted to trading has to be given, plus any updating of the information in the registration document. The competent supervisory authority will be required to approve only the securities note, and therefore the time for approval will be reduced. The introduction of the new system therefore meets an increasing demand from multinational issuers (i.e. issuers frequently raising capital on European and world markets).
In addition, incorporation by reference will be allowed. This means that information to be disclosed in a prospectus may be incorporated into that document by reference to another document, previously filed and approved by the home competent authority. This will save time and money for companies frequently raising capital on the market. The issuer will be allowed to use a document or prospectus that have already been approved, and red tape will therefore be reduced.
To ensure the long-term protection of, and reliable information for, holders of securities, it is planned that information about issuers whose securities are traded on regulated markets should be updated at least annually. The updating may be based on all the current disclosure requirements in other Community legislation, such as the Company Law Directives, the Directive on information to be published on a regular basis by listed companies (cf. Directive 2001/34), and the Regulation on International Accounting Standards. In order not to overload certain companies, the updating system is not compulsory for those that have offered securities which are not being traded on a regulated market. For small and medium-sized enterprises, the minimum requirement of an annual updating is limited to the filing of their financial statements.
The rapid development of information and communication technology is changing the way financial information is disseminated. To facilitate the circulation of prospectuses (and the various documents composing a prospectus) the use of electronic means such as the Internet is encouraged. This will be less costly for companies than current requirements but may also have a number of advantages. Investors would have effective and free access to information on a real-time basis, as the issuer is now able to publish the prospectus in electronic format.
Need for an extensive use of committee procedures (comitology) to keep up with developments in the financial sphere.
Member States' securities markets are facing dramatic changes and increasing consolidation, driven by new technologies, globalisation and the effect of the euro. Standard setting is also evolving rapidly. Competition between securities markets calls for best practice taking new financial techniques and new products into account. On the other hand, consumer protection and confidence has to be maintained at Community level. It is important to ensure that any new measures adopted do not leave consumers wishing to invest in innovative products without proper protection and remedies or vulnerable to differentiated treatment depending on each Member State's interpretation.
To meet the challenge of regulating modern financial markets, new legislative techniques have to be introduced. On 17 July 2000, the Council set up the Committee of Wise Men on the Regulation of European Securities Markets. In its final report, the Committee called for each Directive to be a split between framework principles and "non-essential" technical implementing measures to be adopted by the Commission under the Union's committee procedures. In its resolution on more effective securities markets regulation in the European Union, the Stockholm European Council welcomed the Commission's intention to establish a Securities Committee. The Securities Committee, acting in its advisory capacity, should be consulted on policy issues, in particular for the kind of measures the Commission might propose at the level of framework principles. In its resolution, the European Council added that, subject to specific legislative acts proposed by the Commission and adopted by the European Parliament and the Council, the Securities Committee should function as a regulatory committee in accordance with the 1999 Decision on comitology to assist the Commission when it takes decisions on implementing measures under Article 202 of the EC Treaty. This Directive follows the guidelines laid down by the Stockholm European Council and the European Parliament.
The amended proposal identifies the second-tier implementing arrangements that will have to be decided by the Commission by the committee procedure - for example, adaptation and clarification of the definitions and exemptions set out in the Directive in order to ensure uniform application and compatibility with developments on financial markets. Adaptation of disclosure standards and deadlines, and clarification of the rules on publication of the prospectus and the technical arrangements for advertisements of a promotional and marketing nature will also be dealt with by the Commission under committee procedure. The areas have been selected in order to ensure a prompt response to fast-changing reality and to ensure the proper functioning of the internal market (in accordance with the home country principle) and adequate protection for retail investors.
2. DESCRIPTION OF ARTICLES
The main formal changes made to the proposal for a Directive adopted by the Commission on 30 May 2001 are as follows:
Paragraphs 1 and 2 of Article 1 of the original proposal have been merged for the sake of clarity and simplicity.
Article 3 has been replaced by a description of the situations where there is an obligation to publish a prospectus, the original paragraph 2 having been incorporated in the definition of a public offer of securities in Article 2, while the original paragraph 3 has been moved to Article 4 - Exemptions from the obligation to publish a prospectus.
Article 4 now deals with the conditions for exemption from the obligation to publish a prospectus.
The amended proposal includes a new Article 6, which deals with responsibility for the content of a prospectus.
Article 7 corresponds to the former Article 6 on the information to be included in a prospectus.
The amended proposal includes a new Article 8, which deals with the omission of information from a prospectus and in particular incorporates paragraph 3 of the former Article 6.
The amended proposal includes a new Article 9, which deals with the period of validity of the various types of prospectus.
The amended proposal includes a new Article 10, which deals with the obligation to update all the information on issuers whose securities are admitted to trading on a regulated market and replaces Article 9 on the annual update of the registration document.
The arrangement of the articles in Chapter III has not been changed. The former Chapter IV, however, has been split into two, so as to deal separately with the practical arrangements for the "European passport" for issuers, while a new Chapter V concerns the language regime and the arrangements for prospectuses drawn up under the rules in force in third countries.
Lastly, the articles containing the transitional and final provisions have been rearranged.
The main substantive changes are as follows:
In Article 1, issues of securities by non-profit-making organisations and certificates of deposit issued by credit institutions have been withdrawn from the scope of the Directive. Sovereign issuers may fall within the scope of the Directive and thus qualify for the European passport.
In Article 2, the definition of securities has been aligned on that in the Investment Services Directive and clarified with regard to the rules for money market instruments with a fixed maturity. The definition of qualified investors has been expanded to include more legal persons and, subject to certain conditions, natural persons. A definition of small and medium-sized enterprises (SMEs) has been included, as has a definition of credit institutions. Definitions of "offering programme", "securities issued in a continuous or repeated manner" and the "approval" of a prospectus have been added. The definition of "offer of securities to the public" has been supplemented and clarified. It is at once a positive and a negative definition, so that private placings may be accurately identified. Small-scale issues (less than EUR 2 500 000) are not treated as public offers. A new system, based on the principle of a high nominal value, has been introduced in order to allow an objective distinction to be made between wholesale and retail regulated markets. The definition of home Member State has been adapted in order to allow certain issuers of securities with a high nominal value a free choice as to their competent authority.
In Article 4, which concerns exemptions from the obligation to publish a prospectus, certain clarifications have been added, e.g. the payment of dividends in the form of shares, while the rules on offers of securities, including in the form of stock options, to employees or directors have been relaxed in order to exempt such offers from the said obligation.
In Article 5, the obligation to draw up a prospectus in the form of a registration document plus a securities note and a summary note has been dropped in favour of leaving the issuer with a choice. The article also contains provisions aimed at regulating the content of the summary. A new prospectus format for certain types of issue, namely offering programmes and issues of mortgage bonds, has also been introduced.
The new Article 6 establishes the principle of the responsibility of the issuer for the content of the prospectus, and the obligation on Member States to ensure that, where appropriate, the issuer is liable towards third parties. In the case of the summary, such liability is limited.
Article 7 describes explicitly the type of adjustments needed when implementing measures for the different models of prospectus are adopted and establishes the reference standards for the information to be supplied.
Article 8 gives competent authorities a new right, which is not to require certain information normally requested, subject to certain conditions. It is also possible to adapt certain required items, where they are not suited to the issuer's situation.
Article 9, which is new, grants the right to use the same prospectus for a maximum period of twelve months, subject to updating where appropriate.
Article 10, which is also new, concerns the obligation to update all the information on issuers admitted to trading on a regulated market; it has been reworked and made more flexible. There is no obligation to monitor updated information. The format is left open, and the reference to other documents required by other Community instruments is a wide-ranging one.
Article 11, which concerns the incorporation of information by reference, has been supplemented in order to clarify the types of document that may be used when drawing up a prospectus. the summary may not refer to other documents.
Article 12 makes clear that the registration document does not have to be approved, if it is not used for drawing up a prospectus.
The time limits set for the approval of a prospectus have been shortened in Article 13, and failure by a competent authority to comment is now regarded as approval. Failure by a competent authority to act will allow the issuer to change competent authority. A competent authority may also transfer approval of a prospectus to an authority in another Member State, if that authority agrees. Concerning the liability of competent authorities, the law applicable has been clarified, as has the power of a Member State to exonerate from any liability a competent authority which it has appointed.
In Article 14, the deadline by which a prospectus must be published has been made more flexible to take account of the constraints on the issuer and the placing of the prospectus by the competent authority on its website.
There is no longer any obligation to presubmit advertisements of issues and admission to trading. However, a competent authority must have the power to monitor such advertising. Lastly, the principle of equal treatment for investors regarding oral information at investors' meetings is confined to important and sensitive information.
The scope of Article 16 has been extended to include substantive errors and other inaccurate information.
As regards the automatic mutual recognition procedure in Article 17, the three-month time limit has been abolished, as has any opportunity for the host competent authority to intervene in the procedure.
A time limit of three days between applying for and obtaining a certificate of approval has been attached to the notification procedure in Article 18.
In Article 19, the language regime has been spelt out to cover all scenarios.
The procedure for allowing the conditional use of prospectuses drawn up under third-country rules has been relaxed and at the same time expanded to include action by the Commission on the harmonisation of practices.
Article 21, which concerns the powers of the competent authorities, has been supplemented to make it possible for several authorities in one Member State to be involved and to allow tasks to be delegated to other bodies. The power to conduct on-the-spot inspections has been withdrawn.
Article 22 on professional secrecy has been supplemented with detailed rules on inter-authority cooperation.
Article 23 on precautionary measures has been amended by withdrawing from the Commission the power to ask a Member State to amend or abolish such measures.
Article 24, which deals with the operation of the European Securities Committee, has been supplemented by a provision terminating the Committee's regulatory power after a period of four years from the entry into force of the Directive.
Article 25 on sanctions has been aligned with the relevant provisions in the Market Abuse Directive.
The time limit on transposition has been extended in Article 29, and the references to the repealed Community provisions have been updated following the entry into force of Directive 2001/34/EC on the admission of securities to official stock exchange listing and on information to be published on those securities.
Article 30, which deals with transitional provisions, has been revised, so that it no longer refers to the first time the annual update obligation is performed; on the contrary, it now contains a provision governing the initial declaration by third-country issuers of their home country and competent authority.