FREQUENTLY ASKED QUE STIONS A B O U T E U R O P E A N SECURITIES LEGISLATI ON

Who is affected by European securities legislation? What are the core pieces of European securities

European securities legislation applies not only to legislation?

European issuers of securities, but also affects: Under the Action Plan, the most

 issuers from outside Europe that raise important European legislative provisions in respect of

in Europe through institutional and/or retail the securities market are the Prospectus Directive, the

offerings; Market Abuse Directive, the Transparency Directive and the Markets in Financial Instruments Directive.  issuers with Euro MTN Programs (see

“Frequently Asked Questions - European What does the Prospectus Directive do? Medium Term Note Programs”) or Euro The Prospectus Directive creates a single EU-wide commercial paper programs; and regime governing the content, format, approval and

 issuers of securities listed on a European publication requirements for disclosure and offering

exchange, such as the London , documents in respect of securities offerings in the EEA,

the Irish Stock Exchange and the Luxembourg including the ability to “passport” a prospectus

Stock Exchange. approval from one EEA member state to another. (For

details of the provisions of the Prospectus Directive, see What is the framework for European securities “Frequently Asked Questions - European Medium Term legislation? Note Programs.”) The EU’s Financial Services Action Plan was drafted with the intention of creating a single European What does the Market Abuse Directive do? wholesale which issuers could access The Market Abuse Directive (“MAD”) establishes rules effectively and which would harmonize prudential prohibiting insider dealing and market manipulation. rules and supervision in European financial services. MAD applies in respect of all financial instruments (as

Forty-two separate legislative measures were planned, defined below) which are under the auspices of a of which almost all have now been implemented in the “competent authority” of an EU member state (such as

European Economic Area (“EEA”). the UK’s Financial Services Authority, in the case of

securities listed on the regulated market of the London feature to retain additional market abuse provisions that

Stock Exchange). already existed under UK law before MAD.

The following pages pose frequently asked questions What are “financial instruments” in this context? in relation to the MAD as it stands today. However, on “Financial instruments” include securities which are 20th October 2011, the EU Commission published negotiable on the capital markets, units in collective proposals to replace the MAD with a new on investment undertakings, -market instruments, insider dealing and market manipulation (commonly financial futures contracts (including equivalent cash- referred to as MAR) and a directive on criminal settled instruments), forward interest-rate agreements, sanctions for insider dealing and market manipulation interest-rate, currency and equity swaps, options to (commonly referred to as CSMAD)). The aim and acquire or dispose of any of the foregoing (including purpose of these legislative changes are primarily to equivalent cash-settled instruments), commodity update and strengthen the market abuse regulatory derivatives and any other instrument admitted to framework, while at the same time ensuring that the trading on a regulated market in the EEA. This is a framework is consistent with the proposed new MiFID broader category than “securities” which are subject to II regime (see “what does MiFID do”), in terms of the the insider trading prohibition under Rule 10b-5 of the instruments and markets that are within the scope of the US Securities and Exchange Act of 1934. Since MAD is a two regimes. On 25th June 2012, the European minimum harmonization directive, individual states are Commission proposed amendments to MAR and free to adopt an even broader definition of financial CSMAD which are intended to bring the manipulation instruments. of benchmarks within their scope, and to ensure that manipulation of markets becomes a criminal offence. The term “regulated market” is defined by statute and

The European Parliament is expected to consider the each EEA member state is required to publish a list of

MAR and CSMAD proposals at its September and the regulated markets operating in its jurisdiction. The

October 2013 plenary sessions, respectively. Once UK regulated markets currently include the London adopted, MAR will apply from 24 months after its entry Stock Exchange – Regulated Market, LIFFE, EDX, into force (on which date MAD will be repealed). London Metal Exchange, ICE Futures Europe, SWX

Member states will have the same period of time to Europe Limited and the PLUS-listed market operated transpose CSMAD into national law. by PLUS Markets plc.

MAD is a minimum harmonization directive, meaning What is the European definition of “insider dealing”? that it provides minimum standards of conduct in The insider dealing regime under MAD prohibits: respect to financial instruments. Each EEA member  dealing or attempting to deal in financial state is free to implement provisions into its national instruments on the basis of inside information; law which are additional to, or more stringent than, the provisions of MAD. For example, the UK has used this

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 disclosing inside information other than in the As noted above, individual EEA member states are

proper course of such person’s duties free to adopt more far-reaching definitions of “inside

(regardless of whether it leads to a trade); and information” and “financial instruments,” so the exact

scope of obligations of an insider or a related person  recommending or inducing another person to would be decided by the laws of the relevant EEA do any of the above. member states. In this context, for the behaviour to be prohibited, it is not necessary for the relevant person to know that the What is “market manipulation”? information is inside information, and the relevant The MAD prohibitions on market manipulation include behaviour need not itself be on a regulated market or a the following behaviour: non-regulated market.  effecting transactions or orders to trade which

give or are likely to give a false or misleading What is the definition of “inside information”? impression of the supply of, demand for, or “Inside information” is defined as follows: price of financial instruments; “information of a precise nature which has not been  effecting transactions which secure the price of made public, relating, directly or indirectly, to one financial instruments at an abnormal or or more issuers of financial instruments or to one or artificial level (in each case, unless the relevant more financial instruments and, which, if made person demonstrates that there were legitimate public, would be likely to have a significant effect reasons for such behaviour and the behaviour on the price of those financial instruments or on the conformed to accepted practice on the relevant price of related derivative financial instruments.” market); It should be noted that the MAD determination of what constitutes “inside information” differs from the  effecting transactions or orders to trade using determination of “inside information” under US fictitious devices or other forms of deception; securities laws. The MAD analysis focuses only on the  dissemination of information giving a false or price sensitivity; whereas under the US analysis, the misleading impression (including rumours) as potential effect on price is only one of a variety of to financial instruments where the factors that may be considered when determining disseminator knew or should have known that whether non-public information constitutes “material” the information was false or misleading; non-public information. In practice, US and European  requiring or encouraging another to do any of lawyers often analyze these issues in a relatively fact- the above. specific manner, as the impact of the public dissemination of information upon the market price of a Are there any specific exemptions from MAD? security cannot be known for certain prior to disclosure. MAD expressly provides that the prohibitions contained

on insider dealing and market manipulation do not

3 apply (a) to dealing in one’s own shares under a buy- states may require issuers to inform the relevant back programme or (b) to the stabilisation of a financial competent authority without delay of any decision to instrument where such stabilisation complies with the delay public disclosure of inside information.

Buy-back and Stabilisation Regulation. Wherever an issuer, or a person acting on the issuer’s

This Regulation specifies particular periods in which behalf, discloses any inside information to any third stabilisation action can take place, limitations on the party in the normal exercise of such person’s price at which securities can be offered as part of the , profession or duties, he must also make a stabilisation action, a maximum proportion (15%) that a complete and effective public disclosure of that greenshoe option may constitute of the original offer, information. This public disclosure must be made and a maximum proportion (5%) that any other over- simultaneously, in the case of an intentional disclosure, allotment (not including a greenshoe option) may or promptly, in the case of a non-intentional disclosure constitute of the original offer. (as is the case with respect to the timing of disclosures

Failure of stabilisation action to comply with the under US Regulation FD). conditions set forth in this Regulation will not However, public disclosure is not required if it would automatically mean that the action will constitute breach a duty of confidentiality (whether based in law market abuse. However, full compliance with the or in contract).

Regulation does provide a “safe harbour” defence to In addition, MAD requires that the issuer maintain a any market abuse allegations. list of “insiders”, i.e., those in possession of inside

information. The insiders list must include: What other obligations are imposed by MAD?  the identity of any person having access to MAD emphasizes the need for prompt public disclosure inside information; and, prior to disclosure, control of inside information.

In particular, it requires the public disclosure by issuers  the reason why any such person is on the list; of inside information as soon as possible. (By and comparison, a public in the US is generally  the date at which the list of insiders was first only subject to an affirmative obligation to disclose created and last updated. material developments when required under stock Issuers must promptly update the list of insiders and exchange rules, when a Form 10-K, 10-Q or 8-K must be provide it to the competent authority upon request. The filed, or when conducting an offering.) An issuer may insider list must be updated on a regular basis and kept delay public disclosure so as not to prejudice its for five years after being prepared. legitimate interests, but only if the delay does not mislead the public and the issuer is able to ensure the Are there any specific categories of information that are confidentiality of that information. In this context, required by MAD to be disclosed? where market rumours have begun to circulate, a failure MAD specifically requires that any senior executives or to disclose information may mislead . Member persons discharging managerial responsibility must

4 notify the relevant competent authority of dealings in below) to cover direct and indirect holdings of financial the company’s shares, or other securities or derivatives instruments with ‘similar economic effect’ to holding related to the shares, through a Regulatory Information shares, a removal of the requirement for listed issuers to

Service (“RIS”) approved by the Financial Conduct publish interim financial statements and an increase in

Authority (“FCA”), which has replaced the FSA in this the powers of competent authorities to implement function as the markets regulator as of 1 April 2013. sanctions for breaches of the TD. The adopted text of the

Those responsible for reporting include directors and proposed Directive is currently with the Council for others who have regular access to inside information approval. and the power to make decisions affecting the The TD is a minimum harmonization directive, like or prospects of the company. They may or may not be MAD, allowing individual member states (as “home the same persons as those included on the insider list. member states”) to adopt additional, and more onerous,

provisions in these respects than the TD itself. What does the Transparency Directive do? Each issuer of securities listed on an EEA regulated The Transparency Directive (“TD”) applies to market will have a “home member state” for TD whose securities are listed on an EEA purposes. Member states other than the home member regulated market and their shareholders. It establishes state (“host member states”) may not impose disclosure obligations: requirements on an issuer which are more stringent

 on issuers to publish periodic financial reports than those of the issuer’s home member state. prepared in accordance with International In respect of low denomination (below €1000 or Financial Reporting Standards; equivalent) debt securities (which do not include

 on issuers regarding the manner of convertible or exchangeable securities) and shares, the

dissemination of regulated information; relevant issuer’s home member state will be the member

state where securities of the issuer were first offered to  on shareholders to notify to issuers the public or where they were first admitted to trading information regarding major holdings of listed on a regulated exchange, at the choice of the issuer, or shares. where the issuer is incorporated in an EEA member The following pages pose frequently asked questions state, that member state. For debt securities which have in relation to the TD as it stands today, However, on 25th a minimum denomination of at least €1000 (or its October 2011, following a lengthy consultation process, equivalent), the home member state is selected by the the EU Commission published a proposal for a directive issuer from among those EU member states in which the to amend the TD, and on 12 June 2013, the European issuer has securities listed on a regulated market. Such Parliament passed a legislative resolution adopting, choices, once made, remain valid for a three-year with amendments, the Commission's proposal. The period. proposed amendments include, inter alia, an extension of the major holdings disclosure requirements (see

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What are the obligations regarding financial reporting? What are the content requirements for the required

The TD requires that, unless an issuer falls within one of periodic financial reports? the relevant exemptions, it must publish:  Annual financial reports must contain:

 an annual financial report no later than four  audited financial statements for the

months after each financial year end; financial year;

 a semi-annual financial report no later than  a management report, containing a

two months after the first six months of its fair review of the development and

financial year; and performance of the issuer's business and describing the principal risks and  for issuers of listed shares, an interim uncertainties faced by it; management statement between ten weeks  a responsibility statement, which is a after the beginning, and six weeks before the statement of assurance by the relevant end, of each half-year period (covering the personnel of the issuer that the period from the beginning of the half-year financial statements give a true and until the date of the interim management fair view of the issuer’s assets, statements). liabilities, financial position and The annual and semi-annual financial reports must be profits. prepared in accordance with International Financing  Semi-annual financial reports must contain: Reporting Standards and filed with the competent  a condensed set of financial authority of the home member state. statements;

What are the available exemptions from these  an interim management report; requirements?  a responsibility statement. The reporting requirements above do not apply to:  Management reports must contain:  a non-EEA issuer whose home jurisdiction  an indication of important events laws are considered “equivalent” to the TD in occurring in the annual or semi- this regard. Certain countries have been annual period they cover; declared to have equivalent laws in this  their impact on the financial respect, including the United States, Canada statements; and Japan; and  a description of the principal risks  an issuer of (exclusively) high denomination and uncertainties for the next (at least €100,000) debt securities. financial period;

 (for issuers of shares) details of major

“related party” transactions.

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What are the TD’s requirements as to notification of the case in the U.S., cash-settled derivatives on such major shareholdings? shares are not covered – at least not unless they provide

Where a person’s interest in shares, measured by control over voting rights or any entitlement to acquire control of voting rights (by virtue of acquisition or the underlying shares. However, the FSA (now the disposal of shares listed on an EEA regulated exchange FCA) in the UK has already extended these provisions and other financial instruments (including derivatives) of the TD in the UK so that they also cover “pure” cash- in respect of those shares), exceeds or falls below one of settled derivative instruments referencing shares listed the specified thresholds, that person has an obligation to on an EEA regulated exchange, such as contracts for notify the issuer of the changes. difference as they are known in the UK (in addition to those which are settled physically in shares), and the Under the TD, these thresholds are 5%, 10%, 15%, proposed amendments to the TD, referred to above, are 20%, 25%, 30%, 50% and 75%. EEA member states can expected to enact similar extensions of the TD impose more stringent thresholds, and, in respect of UK provisions in the rest of Europe, in due course. issuers, the UK has imposed thresholds of 3%, 4%, 5% and each 1% thereafter. Are there any exemptions from these notification

The obligation to notify the issuer of changes to major provisions? shareholdings extends to any additional securities Member states may exempt non-EEA issuers and their which entitle the holder to acquire the company’s shares shareholders from these requirements if they are with voting rights, such as options, warrants and already subject to similar obligations under their own convertible securities. laws. The issuer thereafter has an obligation to publish such The United States is one of the countries which the information promptly through an RIS. UK’s FCA considers to fall within this category.

Accordingly, a shareholder of a US company which is Who is affected by these provisions? publicly traded in the US and has selected the UK as its Subject to the exemptions noted below, the share home member state would not have to make these notification provisions are binding on any person, notifications, as such shareholder would already be irrespective of whether they are located inside or subject to the US requirement to file Schedule 13Ds outside the EEA, if they have an interest in a major and/or Schedule 13Gs. However, the situation is not holding of shares listed on an EEA regulated market. clear in many other member states, which is one

What kinds of financial instruments on shares are additional reason that makes it important for a non– covered? EEA incorporated issuer to choose its home member state very carefully for purposes of the TD. Instruments such as physically-settled convertible or exchangeable bonds are covered by these provisions, as are physically settled option, forwards and other derivative instruments on such shares. Currently, as is

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What are the TD provisions regarding dissemination of the host member state. However, host member states information? may still impose additional local rules where a firm

Where the financial reporting requirements or major establishes a branch in such host jurisdiction. shareholding disclosure obligations apply, the TD MiFID is a maximum harmonization directive, prescribes rules relating to the methods, conditions and meaning that (with a few limited exceptions) a member- timing of the issuer’s disseminating such information to state may not impose additional or more onerous rules the public and the competent authority of the home than MiFID prescribes. member state. The following pages contain FAQs and answers in

The most important principles outlined in the TD in relation to MiFID in its current form. However, the EU this regard are timeliness of disclosure and equality of Commission has, on 20th October 2011, published information – in respect of changes in major legislative proposals which would make far-reaching shareholdings, the issuer must disseminate the changes to MiFID. These proposals consist of a new information within a few trading days of becoming (or Directive (often referred to as the MiFID II Directive) being deemed to be) aware of the change. that will repeal and replace the current MiFID Directive,

Once again, member states may exempt issuers from as well as a new Regulation (often referred to as MiFIR). countries whose laws are deemed equivalent – again These proposals are intended inter alia to make financial rendering the choice of TD home member state an markets more efficient and resilient, to update the important one for non–EEA issuers. MiFID framework to take account of technological developments since it was enacted, to increase the

What does MiFID do? transparency of equity and non-equity markets and to

MiFID sets out high-level provisions governing the strengthen protection. On 8 October 2013 the organizational and conduct of business requirements European Parliament is expected to consider the MiFID that should apply to financial institutions and II legislative proposals in plenary session and the harmonizing certain conditions governing the operation earliest anticipated implementation date of the MiFID II of regulated financial markets. It replaced the previous Directive and MiFIR is mid-2014 to January 2015.

Investment Services Directive in the EEA. Which firms are affected by MiFID? The Investment Services Directive enabled firms to MiFID affects all investment or financial “passport” (i.e., carry on) financial services business institutions with a presence in Europe. throughout the EEA, based on a single permission from the firm’s home state. The two main purposes of MiFID What are the main provisions introduced by MiFID? are to extend the range of services which can be MiFID has introduced new provisions concerning: included in this single “passporting” arrangement, and  client classification; also to prohibit host member states from imposing additional local rules on that firm where it provides  suitability of advice/services/products; cross border services from the home member state into  appropriateness of advice/services/products;

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 best execution;  investment objectives.

 transaction reporting; This suitability obligation is now owed to professional

clients and eligible counterparties, except that firms can  conflicts of interest; and assume that:  pre-trade transparency.  professional clients have the necessary

What are the provisions regarding client classification? knowledge and experience relevant to the type of investment or service; and MiFID requires that financial institutions must categorise their clients as follows:  professional clients (other than “opted up”

 eligible counterparties; retail clients) can financially bear the risk of loss of the investments.  professional counterparties; and

 retail investors. What are the provisions regarding appropriateness?

Whenever a firm provides services (other than There is some overlap between eligible counterparties investment advice or portfolio management services) to and professional counterparties. This is because the a professional or retail client (but not an eligible eligible counterparty regime is only relevant to certain counterparty), it owes an obligation to determine the services including receiving and transmitting orders appropriateness of the services for the client. In this and executing orders on behalf of clients. Firms can regard, the firm must ask the client to provide therefore be treated as an eligible counterparty for some information about his or her knowledge and experience purposes and professional counterparties for others. It is in the relevant investment field, in order to determine possible for clients to opt up or down categories, subject whether the client has the necessary experience and to certain safeguards. In particular, a client that would knowledge to understand the risks involved in relation otherwise be treated as a retail client may only be to the product or service. reclassified as a professional client if the firm undertakes a qualitative and quantitative assessment of The appropriateness test is not applied to certain the client's expertise, knowledge and experience. “non-complex” instruments (e.g., shares admitted to trading on a regulated market or units in UCITS),

What are the provisions regarding suitability? provided certain conditions are met. In addition, the

A suitability obligation is owed wherever a firm firm is entitled to assume that a professional client has provides investment advice or portfolio management the necessary knowledge and experience for those services to a client. products or services for which the client has been

The firm must obtain sufficient information in relation classified as a professional client. to the client’s: What are the provisions regarding best execution?  knowledge and experience; MiFID requires firms to take all reasonable steps to

 financial situation; and obtain, when executing orders, the best possible result

9 for their clients, taking into account price, costs, speed What are the provisions regarding conflicts of interest? and likelihood of execution and settlement, size, nature MiFID provides that firms must “maintain and operate or other relevant considerations. effective organizational and administrative

This duty is modified in relation to discretionary arrangements with a view to taking all the reasonable portfolio managers and to receivers and transmitters of steps designed to prevent conflicts of interest from orders, as they do not execute orders. It is not possible adversely affecting the interests of clients.” More to contract out of the duty of best execution, but the specifically, firms must adopt a conflicts of interest duty does not apply when dealing with eligible policy which describes the arrangements that they have counterparties. established to manage conflicts and, where necessary,

disclose the policy to their clients. Firms are What are the provisions regarding transaction particularly encouraged to pay attention to proprietary reporting? trading as a potential conflict. Transactions in any financial instrument admitted to trading on an EEA regulated market must be reported What are the provisions regarding pre-trade to the relevant competent authority, i.e., the home transparency? member state competent authority for the firm (or the MiFID states that a firm which qualifies as a “systematic branch of the firm) carrying out the transaction. internaliser” is not permitted to buy and sell shares

The requirements apply even if the transactions are using the existing “invitation to treat” business model, not carried out on a regulated market. but will, instead, be required to act as a market maker. It must, therefore, hold out firm offers to buy and sell at In addition to equity and debt transactions, the specified prices, rather than invite clients to negotiate a reporting obligation includes transactions in deal. commodity, interest rate and currency derivative transactions admitted to trading on EEA regulated A “systematic internaliser” is a firm that, on a frequent markets. and systematic basis, deals on its own account by executing client orders in liquid shares outside of a The reporting can be made: regulated marked or MTF.  directly by the firm; The pre-trade transparency obligations only apply to  by a third party on the firm’s behalf; firms which deal below a standard market size (which

 by a trade-matching or reporting system will vary depending on the liquidity of the shares in

approved by the competent authority; or question).

 via a regulated market or multilateral trading ______

facility (“MTF”) through whose systems the By Jeremy C. Jennings-Mares, Partner,

transaction was completed. and Peter J. Green, Partner, Morrison & Foerster LLP © Morrison & Foerster LLP, 2013

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