ר ש ו ת נ י י ר ו ת ע ר ך ISRAEL SECURITIES AUTHORITY
Submitted to the Minister of Finance and the Knesset's Finance Committee Jerusalem, 2014
רשותניירותערך
ISRAEL SECURITIES AUTHORITY
CHAIRMAN
29th of Adar II 4775 March 31 2014
To: To: Mr. Yair Lapid, MK Mr. Nissan Slomiansky, MK Minister of Finance Chairman of the Knesset Finance Committee Ministry of Finance The Knesset
Dear Minister of Finance, Dear Member of the Knesset and Chairman,
Re: Report on the Activities of the Israel Securities Authority
In accordance with Section 14 of the Securities Law of 1968 (hereinafter – the Law), I respectfully submit to you this report on the activities of the Israel Securities Authority (ISA) for 2013. The ISA currently regulates most of the capital market activity in Israel. As of the end of 2013, the ISA supervised the Tel Aviv Stock Exchange, as well as 658 corporations, 1,257 mutual funds, 531 exchange traded notes, 158 licensed portfolio management companies, and 4,768 individual license holders who serve as investment advisors, investment marketers and porfolio managers. As of the end of 2013, the capital maket value of the stocks traded on the Tel Aviv Stock Exchange stood at approx. NIS 702.4 billion, and the value of the bonds traded on the Exchange stood at approx. NIS 334 billion. In 2013, there was an increase in equity and debt raising on the Stock Exchange, and the ISA also expects an increase in the number of IPOs in 2014, after a significant decrease in the past few years. The volume of activity in mutual funds and exchange traded notes (ETNs) increased significantly in the reporting year. Assets under management in these activities as of the end of 2013, including portfolio management activities supervised by the ISA in these industries, exceeded half a trillion shekels. In 2013, the ISA continued to promote its strategic Road Map Plan, which was published in October 2012.The ISA's Road Map is an extensive and comprehensive plan, which outlines the ISA's strategy and goals for the coming years. The document's underlying assumption is that informed regulation ensures the existence of a fair and efficient capital market, supports its stability over time and contributes to the confidence of the investing public as a whole and to attracting investors – both domestic and foreign – in particular. The goals of the Road Map were developed according to the principles of balance, proportionality, transparency and deterrence, and are based on three elements: regulation, regulatory allowances and the development of the capital market. The ISA has developed goals and work plans for each of these subject matters. The ISA will continue to promote and implement the Road Map in 2014:
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In 2014, the ISA will continue to strengthen the capital market and Stock Exchange as a national resource, so as to enable better use of capital sources – while developing the Stock Exchange, protecting investors and continuing its unrelenting enforcement. The ISA will function to act in the following areas: Regulation – There are currently a number of areas which are undergoing regulation, including: the transitioning of ETNs to a new supervisory framework; supervision over rating agencies; establishment of a new supervisory body which will oversee CPAs; improvement and enhancement of companies' financial statements; regulating broker-dealer activities, etc. Regulatory allowances – Despite the need for extensive regulation of the capital market, we should recognize that regulation needs to be proporational and balanced.In this context, the ISA submitted an initial series of allowances to the Knesset for approval. The allowances include both primary and secondary legislative amendments in a number of areas. These amendments include a series of regulation allowances for the supervised entities, which will not compromise the interests of the investing public, including revocation of the ISOX requirement for small-cap companies and extension of the effective period for shelf prospectus to three years. In 2014, the ISA will promote the approval of said legislative amendments and submit a second series of proposed allowances for the Knesset's approval. This series is set to include significant allowances in the manner in which public offerings are made as well as allowances regarding reporting requirements. Market development – in 2014, the ISA will focus on market development, including the development of the Stock Exchange, the online voting system – which is designed to increase the participation of the public in general meetings, the introduction of foreign funds into Israel in order to increase competition, and the introduction of Loans and Deposits Funds (LDFs). The ISA's work plan includes removing barriers and developing models which will provide a capital market-based financing alternative to fields and industries which currently rely, in terms of funding, mainly on the banking system and on private loans from insitutionals. Such projects require a complex and creative regulatory infrastructure, which includes – inter alia – tax incentives and government support. For this purpose, the ISA cooperates with the relevant government ministries, in an effort to formulate a comprehensive, financially-viable outline. These projects include steps intended to facilitate the introduction of varied financial instruments, municipal bonds, funding of national infrastructure projects, funding of rental housing projects as well as funding of small and medium businesses. During the reporting year, as part of the plan to develop the capital market and Stock Exchange as a national resource, the Chairman of the Israel Securities Authority appointed two committees. The first one, the Committee for Promoting Investments in Public Companies Active in the Research and Development Fields, was established with the purpose of keeping Israeli technology companies within state boarders, by providing them with allowances in terms of access to capital resources on the Stock Exchange. The Committee published its
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ISRAEL SECURITIES AUTHORITY
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recommendations in November, including a long list of proposed legislative amendments, which will allow young Israeli companies to obtain funding through the capital market and continue their activity in Israel, in lieu of merging with, or being acquired by, larger international companies.The ISA deems the relocation of Israeli companies abroad and the "exit culture" a significant loss of income for Israel, both in the short- and long term. According to assessments, Israel loses USD 3 for each USD 1 obtained in an exit. Leaving these companies in Israel is essential, due to their potential contribution to domestic employment and to the Israeli economy's growth. Thus, the ISA attributes great significance to implementing the Committee's recommendations as soon as possible, including expanding the allowances related to task breaks for these companies in order to increase the chances that they remain in Israel. The Committee for Increasing Trading Competition and Liquidity on the Stock Exchange was established due to the lower trading cycles on the Stock Exchange in the past few years, which is hurting both the primary and secondary markets.The vital need for the economy's growth and the need for an efficient distribution of its resources, as well as the existence of financial instruments which enable high level risk management, make the Stock Exchange a highly significant center of the capital market, demanding its efficient activity, especially given the growing competition in global capital markets and the technical developments in this field. The Committee is expected to submit its final recommendations in April 2014. According to the ISA, turning the the Tel Aviv Stock Exchange into an advanced, up- to-date, and competitive exchange in relation to other exchanges, is of prime importance.The Tel Aviv Stock Exchange should be turned into an exchange which would attract investments from all over the world, prevent institutionals from investing as much in foreign markets, and – as far Israeli companies are concerned – constitute a valuable source of fund raising and be instrumental in lowering the cost of fund raising from capital resources in the local market. For this purpose, it is essential to implement the Committee's recommendations as quickly as possible, including turning the Stock Exchange into a for-profit company, as is the case in all developed capital markets. The implementation of these recommendations may significantly increase the trading volume in relation to the current one. In addition to the aforesaid, and besides granting allowances to supervised entities in order to develop the market, the ISA places great emphasis on increasing the public's confidence in the capital market, recognizing that a dynamic, well-supervised capital market cannot exist without it. In this context, and in order to further this target, the ISA acts on two levels: Enhancing enforcement in the capital market –In addition to the ISA's strategy aimed at furthering allowances for supervised entities and rendering the capital market more efficient and developed, relentless, stringent enforcement is required – both criminal and administrative – in order to enforce the laws under the ISA's purview. The administrative enforcement channel, which was established in 2011, expanded the ISA's enforcement capabilities.Stringent enforcement ensures the proper function of the capital market, serves as a deterrent against inflicting harm on the investing public, and increases the public's
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confidence in the capital market. In addition, the ISA increased its support of civil enforcement by funding class actions and derivative actions, when it deems these actions to be in the public's interest. Enhancing enforcement, in various aspects, constitutes a significant step towards reinforcing the public's confidence in the efficiency and proper conduct of the capital market, and is at the top of the ISA's list of priorities.
Debt settlement agreements –The problematic phenomenon of debt settlement agreements has been overclouding the capital market activity and preoccupying the ISA in recent years. In 2013, 10 additional companies entered debt settlement agreement proceedings, relating to debt obligations totaling NIS 5.8 billion, as compared with 31 debt settlement agreements relating to debt obligations totaling NIS 10 billion in 2012. The ISA attributes great importance to the streamlining of debt settlement proceedings, and the issue was discussed by the Debt Settlement Committee.
Financial education –In 2013, recognizing the significance of financial education and in line with the global trend to consider investor education as an integral part of the purview of securities authorities, the ISA initiated, in cooperation with the Israel Educational Television, the production of twenty animated films which explain capital market terms. In addition, the ISA intiated and operates a targeted website for public financial eduction (www.kesef.org.il), which includes information about the capital market, common investment channels, a glossary, etc.The ISA intends to continue its investor eduction activities, using, inter alia, the media in order to reach as many people as possible.
Regulation and Supervision Activities The Corporations Department The Corporate Department's main role is to increase transparency in the capital market in accordance with the disclosure provisions contained in the Securities Law. The Department operates on three levels: supervision, regulation, and enforcement. In terms of supervision, the Department ensures that reporting corporations fulfill their reporting duties as prescribed by law. The ISA currently supervises 658 reporting corporations (including 447 public companies, 73 bond companies, 44 dual listed companies, and 29 financial instruments).The value of stocks listed on the Stock Exchange as of the end of 2013 stood at approx. 702.4 billion, and the market capitalization for bonds traded on the Stock Exchange as of the year's end stood at NIS 334 billion. During 2013, the ISA's Corporate Department handled 170 prospectuses and conducted reviews of financial statements, 30 purchase offers, 136 private offerings, 10 new debt settlement agreements and 432 interested party transactions.
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In terms of regulation, the Department develops disclosure requirements and adjusts them to capital market dynamics, so as to best serve users, reflect material and relevant information and increase the use of reports by investors for the purpose of making investment decisions. In terms of enforcement, the Department mainly focuses on gathering cases in which there is prima facie suspicion that a reporting corporation or interested party therein have violated the provisions of the law and forwards them to the ISA's enforcement departments. In 2013, the Department focused on a number of areas, including:
Handling various aspects of implementing the requirement to disclose officeholder remuneration (Amendment 20 to the Companies Law); Developing and implementing a unique disclosure plan for dual listed public companies when such companies wish to issue bonds solely in Israel; Reporting allowances –in this context, the Department led projects aimed at granting corporations allowances in the areas of prospectuses and immediate reports; Facilitating the Financial Statements Improvement Project, which will introduce a thorough change in the structure of corporations' periodic reports. 2014 will be dedicated to further handling the following areas as well as capital market development initiatives, which were first reviewed in 2013, including: Facilitating a model which will enable the offering of municipal bonds; Facilitating a model which will enable the offering of ETNs for investment in national infrastructure projects; Facilitating a model of Real Estate Investment Trusts (REITs) as a source of funding for rental housing projects; Facilitating a model for funding entrepreneurial property projects through the Stock Exchange; Facilitating a model for credit funds for SMEs; Facilitating a model for securitizing loans and other financial assets; Removing barriers in order to encourage the offering of commercial securities; Adopting an American model which will enable companies to raise capital or debt from the public using the secondary market (ATM); Introducing structured financial instruments into the capital market; Enhancing the quality of reporting and disclosure by reporting corporations and abridging financial statements; Regulating companies defined as public shells; Amending the "profit test" included in the Companies Law in relation to dividend distribution; Establishing a supervisory body to oversee CPAs.
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At the same time, the Department will prepare for the upcoming implementation of two new supervisory areas, which were placed under the ISA's purview only recently – overseeing Israel's rating agencies and licensing of bond trustees. The Investment Department The ISA oversees the activity of entities managing public funds totalling approx. half a trillion shekels, as well as that of investment advisory and investment marketing service firms, including the mutual fund industry, the Exchange Traded Notes (ETN) industry and the portfolio management industry. As of the end of 2013 – the mutual fund industry includes 1,257 funds, with approx. NIS 230.8 billion in assets under management (as compared with approx. NIS 170.1 billion under management in the previous year); The ETN industry currently includes 531 ETNs, with approx. NIS 101.3 billion under management (as compared with approx. NIS 68.9 billion under management in the previous year); The portfolio management industry currently has approx. NIS 234 billion under management (as compared with approx. 237 billion under management as of the end of 2012).
The ISA places significant emphasis on investment advice and portfolio management activities, due to their importance in enhancing the accessibility of the capital market to the public.The number of supervised license holders in 2013 stood at 158 licensed companies and 4,768 individual licensees.
During 2013, the following legislative moves were promoted: Promotion of Amendment 21 to the Joint Investment Law, which relates to subjecting ETNs to a legal regulatory regime; Development of Amendment 15 to the Joint Investment Law and submission of the proposal for the Knesset's approval. The aim of the Amendment is to make foreign funds accessible to the Israeli investing public, increase competitiveness in this area and enhance the development of the capital market; Reducing distribution fees for mutual funds, in addition to a complementary move whereby fund managers committed, for a limited period of time, to reduce the management fees they charge for funds under their management. The result of this move was the reduction of management fees from an average of 1.91% in 2007 to an average of 1.03% in 2014; Establishing an industry-specific reporting infrastructure for the ETN industry. In 2014, the ISA intends to do the following: Complete the legislative infrastructure for LDFs (Loans and Deposits Funds), which will constitute a sub-class of NIS money funds and an effective alternative for bank deposits, which currently offer much lower interest rates.
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The ETN reform – this reform, which has been underway in recent years, is expected to change the industry's structure, when Amendment 21 to the Joint Investment Law becomes effective. A new financial product will be regulated – ETNs – mutual funds tracking predetermined underlying assets in each fund. The ETNs will be traded on the Stock Exchange, similarly to ETFs issued in other countries. Promotion of legislative proposals for the establishment of research and development funds and enabling foreign funds to offer their units to the Israeli public. Further promotion of Amendment 21 to the Joint Investment Law.
Stock Exchange and Trading Platforms Supervision Department The Department was established in 2013 as a separate department, in preparation for supervision over trading platforms and the structural change of the Stock Exchange. The Department coordinates the ISA’s supervision and control over the proper and fair management of the Tel Aviv Stock Exchange. In addition, the Department supervises the Stock Exchange's clearing house, as defined under Section 50a of the Law, in order to ensure its stability and efficiency. For this purpose, the Department assesses, inter alia, whether the clearing house has met its requirements under international standards. The Department ensures that supervision over Stock Exchange members focus on material issues, by using adequate methods and audit tools, so as to minimize lapses and risks embodied in members' activities. The Department's representatives participate in meetings of the Stock Exchange's board, clearing houses and various committees, serving as observers. In addition, the Department examines the Stock Exchange's request for amending its Rules & Regulations and provisions, bringing them before the ISA plenum. In 2013, the Department handled the following: Proposed Amendment to the Prohibition on Money Laundering Order applicable to Non-Banking Members of the Stock Exchange (NBMs) regarding closed-end system accounts – 2013, the Department promoted a proposed amendment to the Prohibition on Money Laundering Order, which is applicable to NBMs, whose main purpose is to increase competition between NBMs and banks in the brokerage field by expanding the closed-end system account mechanism. Memorandum regarding finality of clearing – The proposal was developed by the Stock Exchange, in cooperation with the ISA, with the purpose of increasing the stability of the Stock Exchange's clearing houses (hereinafter – the Clearing Houses), in accordance with the covenants recommended by the international umbrella organizations and as a response to the recommendations of the International Monetary Fund's report dated April 2012.
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The Department is promoting a proposed Securities Regulations (Own Account Trading Floors) of 2013, regarding regulation of the activity of own account trading floors. The high tisk embodied in products traded on these platforms, in addition to the lack of controls over the platforms' activities, led the ISA to initiate the regulation of this area, which is currently unsupervised. Broker-dealer regulation – In 2013, the Department mapped and characterized the entities in this field which are subject to regulation around the world, in order to develop the main regulatory requirements to be applied to these entities in Israel. A joint team – with the Bank of Israel – was established, with the aim of ensuring that the regulation proposed by the ISA in the broker-dealer field will be consistent, comprehensive and broad-reaching, minimizing gaps and overlaps in terms of requirements. During the year, the team developed the principles behind the regulatory requirements which will apply to the brokers and dealers, including banks. Main activities planned for 2014: Follow-up and implementation of the recommendations of Committee for Increasing Trading Competition and Liquidity on the Stock Exchange, especially the recommendation to turn the Stock Exchange into a for-profit corporation; Implementation and amendment of corporate governance principles in the Stock Exchange; Continued development of the legislative framework for supervision and regulation of the broker-dealer field; Promotion and completion of the legislative procedure and placing own account trading platforms under a regulatory regime; Preparation for the Stock Exchange's structural change. Enforcement activities The Israel Securities Authority conducts enforcement actions in all sectors under its purview. The ISA is authorized to carry out criminal investigations and administrative inquiries and impose financial sanctions on violators. The Investigations, Intelligence and Trading Control Department As part of its purview, the Investigations, Intelligence and Trading Control Department (hereinafter – the Investigations Department) carries out numerous investigative actions and inquiries and collects a significant amount of information from financial entities and other sources.The Department uses various tools and technological systems in order to collect and analyse information and data, studying and investigating complex financial and business processes, which require stringent standards of evidence collection.
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The Department conducts administrative inquiries which require in-depth analysis, input and knowledge, often giving rise to innovative issues demanding research and legal assessment. In addition, the Investigations Department conducts investigations in cooperation with other enforcement agencies in Israel and assists foreign securities authorities, in accordance with cooperation agreements to which the ISA is a party. At times, the Investigations Department takes part in civil proceedings related to enforcement proceedings, to which it allocates resources. During the reporting year, the Department examined hundreds of reports and cases suspected as illicit.Dozens of them were subjected to further investigations. In 2013, the Investigations Department handled more than 50 criminal and administrative securities cases and judicial inquiries. Main activities in 2013 Investigating events – during 2013, the Investigations Department identified and investigated events related to securities trading, in which officers or employees of institutionals conducted activities suspected as securities fraud, for personal gain. In addition, the Department identified and investigated events in which an activity suspected as securities fraud was performed for own trading floors, and cases which were suspected as involving inside information (20 cases). Administrative probes – in 2013, the Investigations Department conducted administrative probes and forwarded their findings to the ISA's chairman, for the purpose of reaching a decision regarding whether or not to start an administrative proceeding (9 cases). Trading control – trading control is performed on two levels: ongoing control and supervision – in order to maintain proper and fair trading and focus on identifying irregular trading activities which may point to violations of the Securities Law. During the reporting year, the Department further developed and calibrated the BI (Business Intelligence) system. This included developing and building of automatic periodic reports for the purpose of ongoing supervision, as well as development and calibration of complex algorithms which will help identify irregular activities. Judicial inquiries – as part of the ISA's globalization strategy, the Department continued, during the reporting year, to respond to judicial inquiries submitted by foreign authorities, under treaties which the ISA is a party to (9 cases). Cooperation with other enforcement entities in Israel as part of the enforcement agencies' struggle to eradicate economic criminal activity. In 2014, the Department plans to enhance enforcement, while streamlining its work methods and processes, developing additional algorithms in order to identify trading irregularities, enhancing knowledge and examining various aspects of algorithmic trading and high frequency trading (HFT) and their impact on trading.
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ISRAEL SECURITIES AUTHORITY
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The Securities Department at the Tel Aviv District Attorney's Office In 2013, the Securities Department at the District Attorney's Office handled 45 cases related to securities, at different stages of legal proceedings (these include 6 new cases; 5 indictments that have been filed with the courts; 4 cases closed conditionally; 7 cases closed without pressing charges; 13 cases are still undecided – whether or not to press charges; 23 criminal cases are pending in courts of the first instance and 5 appeals are pending in appeals courts; verdicts have been handed down in 16 cases in both courts of the first instance and courts of appeals). It is expected that in 2014, the Economic Department at the Tel Aviv District Court will handle numerous cases and that the Department will handle cases of high public significance. The complexity of enforcement in the area of securities and its importance to the economy have brought about the establishment of the Economic Department at the Tel Aviv District Court. The Economic Department specializes in criminal and civil proceedings in this area. It was established in order to render enforcement more efficient and create norms of propriety and equality in capital market trading. As a result of the establishment of the Department, most indictments are filed with the Economic Department at the Tel Aviv District Court, and criminal appeals on verdicts of the Economic Department are heard in the Supreme Court. The efficacy and finality of the judicial process constitutes a great contribution to the efficiency and fairness of the capital market. The Economic Department at the District Court brought about a significant improvement in the streamlining of criminal proceedings, as compared with the situation prior to its establishment. In addition, the Chairman of the Israel Securities Authority was granted the power to channel some of the violation cases to the new administrative enforcement track. As a result, the criminal track handles the severe and complex cases – according to uniform criteria. The costs of handling criminal cases remain significant, but the rerouting alternative results in improved resource allocation.
The Administrative Enforcement Department In addition to the criminal enforcement mechanism, the ISA has an administrative enforcement one. According to the Securities Law, administrative enforcement proceedings against violators are opened following a decision by the ISA's Chairman. Thus, the ISA established an Administrative Enforcement Department, which develops administrative claims for the ISA, following the findings of administrative probes forwarded by the Investigations, Intelligence and Trading Control Department. The Administrative Enforcement Department then handles the case for the ISA, before of the Administrative Enforcement panels. The Administrative Enforcement Department develops the enforcement
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arrangements, representing the Chairman of the ISA in the negotiations with the violating parties as well as the panel of the Administrative Enforcement Committee in the enforcement arrangement approval process. In addition to the administrative proceedings held before the Administrative Enforcement Committee, the Securities Law and Regulations have included, for a number of years, an administrative proceeding of financial sanctions imposed by the ISA. The financial sanctions are imposed on supervised entities which commit violations of the Securities Law and Regulations. During 2013, the Administrative Enforcement Department handled 8 new administrative cases, 5 of which were followed by administrative proceedings: in 3 cases, administrative claims, dealing with various violations, were submitted to the administrative proceedings panels, and in 2 cases – a committee panel was asked to approve an enforcement arrangement; one case was closed, and two cases are still pending. In addition, claims were submitted in two cases which reached the Department at the end of the previous year. During the reporting year, the Administrative Enforcement Committee submitted and handled a total of 7 administrative cases before the Administrative Enforcement Committee. In addition, during the reporting year, the Department prepared to begin handling the financial sanctions area, which was placed under its purview. In this framework, the Department prepared a new financial sanction model, and started gradually handling the various stages of financial sanction imposition. The Department imposed financial sanctions on supervised entities in 33 cases, pursuant to the Securities Law and the Companies Law. In two cases, financial sanctions were imposed on licensed companies pursuant to the Advice Law. The Administrative Enforcement Department is expected to handle 10 cases, either by way of filing administrative pleadings and conducting full proceedings or by way of enforcement arrangements, as relevant. In addition, tcpceotte gaee r teatnt aoc latw tatptrape eht lpnctions and handling administrative petitions.
Activity in other areas The International Affairs Department The Department is active in the IOSCO (International Organization of Securities Commissions) and is a member of a number of permanent work teams which deal with issues that are on the ISA's agenda, including the committee dealing with accounting and auditing, the committee dealing with enforcement and information exchange cooperation, the committee for regulating and supervising rating agencies, and the IOSCO's screening committee, which screens securities authorities from various countries wishing to join the IOSCO as members. In addition, the ISA uses international cooperation agreements in order to deal with criminal conduct of entities both in Israel and abroad. In 2013, the ISA signed agreements with 24 securities authorities (members of the ESMA) for the exchange of
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ongoing supervisory information regarding foreign fund managers wishing to work locally, and vice versa – local fund managers wishing to open shop in other European countries. In addition, and following the Israel's joining of the OECD, the ISA participates in the OECD's corporate governance committee on an ongoing basis.
Main activities in 2013 During the reporting year, the International Affairs Department hosted two meetings of IOSCO committees in Israel: In June, meetings of the enforcement (C4) committee and the Screening Group were held in Israel, with the participation of 33 representatives from 25 countries. In November, the committee dealing with credit rating agencies met in the ISA's offices in Jerusalem. During the reporting year, memoranda of understanding were signed with European authorities regarding the Alternative Investment Fund Managers Directive – AIFMD.
Main activities planned for 2014 In 2014, the ISA will continue to enhance its relations with the ESMA (European Securities and Markets Authority) – both in terms of the ESMA recognizing Israeli prospectuses and in the context of cooperation in relation to supervision over rating agencies. The ISA will also emphasize cooperation regarding international enforcement. In the coming year (May 2014), the ISA will host the European Regional Conference, including 26 represenatives of European securities authorities. Continued participation in the above-mentioned forums.
The Legal Counsel Department In 2013, the Legal Department continued to implement the various components of the ISA's Road Map Plan. This is a highly complex legal task, which includes introducing dozens of changes into existing regulation in various fields. This is done in addition to the Department's ongoing legal work, which has not diminished in scope, on spervisory and enforcement aspects pursuant to the securities laws. The regulation allowances and capital market development project is at the heart of the ISA's Road Map. Due to the increase in regulation in the past two years and the ongoing criris in the capital market, the ISA decided to dedicate resources to a thorough assessment of the regulation under its purview, for the purpose of identifying possible allowances for supervised entities while upholding the interests of the investing public.
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After a thorough assessment for the purpose of identifying possible allowances as aforesaid, the ISA conducted numerous meetings with various entities in the capital market, and published a regulation allowance outline in 2012. After examining the exposure draft, the ISA formulated its regulation allowances proposals. Most allowances require legislative amendments – either primary or secondary. Due to the considerable number of allowances, and since they are not necessarily related to each other, the allowances will be enacted in a number of stages. The first series of allowances (the Allowances Law) includes amendments to the three laws the ISA is charged with (the Securities Law, the Joint Investment Law and the Investment Advice Law) and the regulations pursuant to these laws. The Capital Market Allowances and Encouragement of Activity Bill (Legislative Amendments) of 2013 was passed in the first reading by the Knesset plenum on November 25, 2013, was approved by the Finance Committee on December 30, 2013, and was approved in the second and third readings on January 20, 2014. The bill The bill includes allowances on the following matters: Reduction of financial sanction amounts imposed for persistent violations; Extension of the money-raising period under shelf prospectuses; Allowances at the conclusion of the reporting duties of reporting corporations; Allowances in the field of dual registration corporations; Allowances in the work of the board of directors and its committees in large portfolio management companies and fund managers; Allowances in the reporting duties of licensees under the Advice Law; Establishing a legal infrastructure which would enable the loans and deposits funds instrument to be distributed and made accessible to customers who receive no investment advice in banks; Establishing a legal infrastructure to enable publication of paid analysis work. Regulations and directives In addition to the primary legislative amendments approved as foregoing in the Allowances Law, the project also includes regulation of amendments in dozens of regulations and directives by the power of which the allowances were implemented and, inter alia, on the following issues: allowances for small-cap corporations; allowances related to prospectuses; allowances with respect to financial sanctions imposed by the ISA; allowances at the conclusion of reporting corporations' reporting duties; allowances in the Securities Regulations on the matter of financial reporting; creating a legal framework to encourage the loans and deposits fund instrument; and allowances in the field of mutual funds.
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Some of the allowances are pending the Finance Committee's decision, and others will soon be brought before the Committee. In 2014, the ISA is expects to continue implementing its Road Map Plan, including completing the legislation phase of a number of key projects, such as: Continuation of the Allowances Plan – the ISA will publish legislative proposals for the second series of allowances. Online voting system – the bill was approved by the Knesset, and the Department is currently working on regulations which will enable the law to become effective and the system to start working. Trading platforms – discussions regarding trading platforms were recapped in the subcommittee of the Knesset's Finance Committee, and as soon as the Regulations are approved, the ISA will start supervising this area, which is currently unsupervised. Rating agencies – the Rating Agencies Bill was approved in 2013 in the first reading and after discussions in the Knesset's Economic Committee – was approved in the second and third readings in March 2014. In 2014, the Department will develop regulations in this area, which are necessary for supervision over rating agencies to begin. Numerous other projects are being handled by the Legal Counsel Department. These projects include regulating the ETN area; the financial statements improvement project, which aims to create a fair disclosure standard for reporting entities; the bill regarding prohibition on front- running; changes in the underwriting field and the manner of offering securities to the public; regulation of the institutional proxy advisor field. In addition, it should be noted that since the Economic Department at the Tel AvViv District Court was established, which deals specifically with securities-related cases, the ISA is required to offer its opinions and participate in a large number of hearings at court, as well as to handle a growing number of requests to finance class actions and derivative actions. This trend is expected to continue in 2014. In sum, the Israel Securities Authority faces significant challenges in terms of protecting the interests of the investing public. The implementation of the ISA's Road Map Plan, including its various components, is critical in order to continue positioning the Israeli capital market as one the of the world's foremost capital markets in terms of regulation and investor protection. It can be expected that following the implementation of the Plan, the Israeli capital market will be more stable, better developed and reliable, thus becoming more attractive – both to local and foreign investors and to companies and entrepreneurs. Respectfully,
Prof. Shmuel Hauser
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Table of Contents
Definitions
1. Structure of the ISA
2. Senior officers, department heads and employees
3. The ISA's Purview
4. The ISA's contact information
4.1 Contacting the ISA, including its Ombudsman
4.2 Contacting the ISA's Freedom of Information Officer
4.2 Contacting other units providing service to the public 5. Review of the ISA's Activity in the Past Year and Main Activities Planned for 2014, in Relation to Work Plans
5.1 The Corporate Finance Department
A. General
1. Corporate Finance Department's Purview
2. Main activities in 2013
3. Main activities planned for 2014
B. Supervision
1. Prospectuses & capital and debt raising
2. Current reports
a. Review of financial statements
b. Transactions with controlling shareholders
c. Private offerings
d. Purchase offers
e. Bond settlement agreements and bond trustees
f. Ending reporting requirements
3. Audits and outsourcing in the Corporate Finance Department
4. Underwriter registry
5. Dual listing
C. Regulation
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1. Projects handled in 2013
a. Market development
b. The regulatory easing project
c. Improvement of financial statements
d. Accounting projects
2. Requests for pre-rulings 3. FAQs, staff and plenum position papers & accounting and auditing enforcement decisions
a. Summary of the Staff and Plenum SLBs & FAQs published in 2013
b. Accounting and auditing enforcement decisions
4. Staff and plenum legal position papers
a. General position papers b. SLBs published following public reports and position papers
filed with the court D. Enforcement -- financial sanctions and administrative enforcement
5.2 The Investment Department
A. General
1. The Investment Department's areas of activity
2. Main activities in 2013
3. Main activities planned for 2014
B. Mutual Funds
1. General 2. Permits to hold means of control in fund managers and licensing of fund managers and trustees
3. Prospectuses
4. Reports
5. Participation of mutual fund managers in general meetings
6. Onsite audits of mutual fund managers
7. Supervision of mutual fund trustees
8. Regulatory activities
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9. Enforcement measures concerning fund managers
C. Exchange Traded Notes (ETNs)
1. General
2. Prospectuses
3. Reports
4. Regulatory activities
5. The ETN trading reform
6. The ETN reporting reform
7. Opening the market for leveraged ETNs 8. Revoking the requirement for a minimum percentage of public holding for issuing index products D. Investment advisors, investment marketing agents and investment portfolio managers
1. General
2. Licensing
3. Supervision
4. Regulatory activities
5. Enforcement -- financial sanctions and administrative enforcement
E. Legislative activity involving the Investment Department
1. Regulations published during the reporting year
2. Complementary regulation published during the reporting year
3. Legislative proposals (primary and secondary)
F. Legal proceedings related to the Investment Department 5.3 Department of Economic Research & Development, and Strategic Counseling
A . General
1. The Department's purview (hereinafter – the Economic Department)
2. Main activities in 2013
3. Main activities in 2014
B. The Department's activities
1. Development
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2. Managing systemic risks
3. Assessing market trends and developments
4. Regulatory impact analysis
5. Economic research
6. Examples of ongoing analyses performed in 2013
5.4 The Investigations, Intelligence and Trading Control Department
A. General 1. Purview of the Investigations, Intelligence and Trading Control Department
2. Main activities in 2013
3. Main activities planned for 2014 5.5 The Department for Supervision over the Stock Exchange and Trading Platforms
A. General 1. Purview of the Department for Supervision over the Stock Exchange and Trading Platforms
2. Main activities in 2013
3. Main activities planned for 2014
B. The Department's activities
1. Supervision over the Stock Exchange and clearing houses
2. Trading platforms
3. Broker-dealer regulation
5.6 The Legal Counsel Department
A. General
1. Fields of activity and functions of the Legal Counsel Department
2. Main activities in 2013
3. Main activities planned for 2014
B. The Department's activities
1. Key Activities in the ended year
2. Legislation
3. Coordination and Consultation for Civil Legal Proceedings
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4. Financing class actions and derivative actions
5. Tenders and contractual engagements
6. Public inquiries
5.7 The International Affairs Department
A. General
1. The Department's purview
2. Main activities in 2013
3. Main activities planned for 2014
B. The Department's activities
1. Participation in international forums
2. Bi-lateral recognition
3. Signing cooperation agreements
4. Study delegations
5. Strengthening ties with foreign authorities and other entities
6. The International Monetary Fund (IMF) 7. Cooperation with various departments regarding high frequency trading and algorithmic trading
8. Cooperation with other departments on market development projects
9. International trade agreements
10. Regulation of the proxy advisor field 11. Activity as part of the Committee for Implementing the Prohibition on Investing in Corporations Dealing with Iran Law
12. Participation in teams and inter-ministerial committees
5.8 The Information Technology Department
A. General
1. Purview of the Information Technology Department
2. Main activities in 2013
3. Main activities planned for 2014
B. The Department's activities
1. Electronic Reporting – MAGNA
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2. Document archiving and automated office
3. Operational system
4. The ISA website
5. Central Information System (CIS) – AMIGO
6. Computing for the Investigations Department
7. Forms and payments system
8. BI irregular trading system
9. Knowledge management – search tools
10. Knowledge management – organizational portal
11. Human resources system
12. Integrated voting system
13. Infrastructure -- servers, communications, and information security
14. Building a new computer room in Jerusalem
5.9 The Administrative Enforcement Department
A. General
1. Purview of the Administrative Enforcement Department
2. Main activities in 2013
3. Main activities planned for 2014
B. The Department's activities
1. Administrative enforcement
2. Enforcement arrangements
3. Financial sanctions
5.10 Criminal Enforcement
A. General
1. Purview of the Securities Department at the District Attorney's Office
2. Main activities in 2013
3. Main activities planned for 2014
B. The Department's activities
1. Criminal indictments
2. Criminal cases closed during the reporting year
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3. Criminal cases pending in the courts
4. Criminal verdicts in trial court
5. Verdicts in criminal appeals 6. The ISA's budget for 2013 and breakdown of the ISA's expenditures in 2013, according to budget line items
7. The ISA's Budget for 2014
8. Publications issued by the ISA during the reporting year 9. The locations in dates in which it is possible to view the written administrative provisions under which the ISA operates 10. The ISA's databases, in accordance with the Protection of Privacy Law of 1981
11. Funds and grants funded by the ISA 12. Backing provided by the ISA to public entities, their names and amounts 13. Report by the Officer of Freedom of Information at the ISA, pursuant to Section 5(a) of the Freedom of Information Law of 1998
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Tables
Table 1: No. of applications for permits to publish prospectuses vs. permits granted in 2011-2013 Table 2: Issues and offerings by way of shares, convertible securities and bonds in 2012- 2013
Table 3: Initiated review of financial statements in 2011-2013
Table 4: Transactions with controlling shareholders in 2011-2013
Table 5: Private offerings (substantial and exceptional) in 2011-2013
Table 6: Purchase offers in 2011-2013
Table 7: Debt settlement agreements in 2011-2013
Table 8: Corporations which ended their reporting requirements in 2011-2013
Table 9: Underwriter registry data in 2011-2013
Table 10: Requests for pre-rulings in 2011-2013
Table 11: No. of mutual funds and value of assets under their management in 2009-2013
Table 12: Statistics on mutual funds, by class, as of December 31 2013
Table 13: Participation rate of fund managers in general meetings in which they are required by law to participate and vote, in 2009-2013
Table 14: Total no. of licenses granted to individuals: Portfolio managers, investment advisors and investment marketing agents in 2009-2013
Table 15: No. of license applicants added each year in 2009-2013
Table 16: Value of non-institutional clients' assets under management as of December 31 2013
Table 17: Licenses granted, converted and revoked during 2013
Table 18: Exam success rates in 2013
Table 19: Distribution of investigation cases forwarded to the Investigations, Intelligence and Trading Control Department, by type of violation, in 2009-2013
Table 20: Cases where it was decided whether or not there was sufficient prima facie evidence that an offense had been committed in 2009-2013
Table 21: Distribution of investigation cases forwarded to the District Attorney's Office, by main type of violation, in 2009-2013
Table 22: Distribution of administrative probe cases forwarded to the Investigations, Intelligence and Trading Control Department, by type of violation, in 2009-2013
Table 23: Distribution of administrative probes forwarded to the ISA Chairman, by main type of violation, in 2012-2013
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Table 24: Data summary for 2013
Table 25: Distribution of administrative cases opened in 2013
Table 26: Financial sanctions imposed under the Securities Law or Companies Law
Table 27: Financial sanctions imposed under the Advice Law
Table 28: Distribution of investigation cases forwarded to the District Attorney's Office in 2013, by type of violation
Table 29: Distribution of indictments filed in 2013, by type of offense
Table 30: Cases at the District Attorney's office, as of the end of 2013, pending decision whether to prosecute, by year forwarded
Table 31: Cases at the District Attorney's office, as of the end of 2013, pending decision whether to prosecute, by type of offense
Charts
Chart 1: Asset value as a percentage of total funds, by funds' class, in 2012-2013
Chart 2: No. of trust funds in 2009-2013
Chart 3: Asset value of trust funds in 2009-2013 (in NIS billions)
Chart 4: Downward trend in funds' management fees, in 2007-2013 (by simple and weighted average)
Chart 5: No. of ETNs in 2009-2013
Chart 6: Value of public holdings of ETNs in 2009-2013
Chart 7: No. of reports filed by ETN managers in 2009-2013
Chart 8: Total value of assets under management by portfolio management companies in 2009-2013 (in NIS billions)
Chart 9: Total value of assets under management for institutional and private investors by portfolio management companies as of December 31 2013
Chart 10: No. of licensing examinees (by no. of exam units) in 2009-2013
Chart 11: Processing of exemption applications in 2009-2013
Chart 12: Processing of internship applications in 2009-2013
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Defi nitions
In this report, the following terms shall have the following meanings:
The "Securities Law" – the Securities Law of 1968;
The "Joint Investments Law" – the Joint Investments in Trust Law of 1994;
The "Advice Law" – the Regulation of Investment Advice and Investment Portfolio Management Law of 1995; The "Prohibition on Money Laundering Law" – the Prohibition on Money Laundering Law of 2000;
The "Companies Law" – the Companies Law of 1999 ;
The "ISA" – the Israel Securities Authority;
The "TASE" or "Stock Exchange" – the Tel Aviv Stock Exchange Ltd.;
The "Controlling Shareholder Regulations – the Controlling Shareholder Regulations (Transaction between a Company and its Controlling Shareholder) of 2001;
The "Periodic and Immediate Reports Regulations" – the Securities Regulations (Periodic and Immediate Reports) of 1970; The "Private Offering Regulations" – the Securities Regulations (Private Offering of Securities in a Listed Company) of 2000;
The "Purchase Offer Regulations" – the Securities Regulations (Purchase Offer) of 2000;
The "Prohibition on Money Laundering Order" – Prohibition on Money Laundering Order (Identification, Reporting and Keeping Records Requirements by Stock Exchange Members for the Purpose of Preventing Money Laundering and Financing of Terrorism) of 2010; The "Road Map" – the strategic plan published by the ISA in October 2012, in which the ISA presented a comprehensive document detailing its strategy and targets for the coming years, based on three elements: regulation, deregulation and development of the capital market.
The "Allowances Law" – the Allowances and Encouragement in the Capital Markets Law (Legislative Amendments) of 2013.
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1. Structure of the ISA
Chairman Plenum Prof. Shmuel
Hauser
Legal Chairman Secretary Counsel 's Office General
International Investigations, Corporate Investment Administration,
Affairs Intelligence Department Department Finance and Department and Trading Human Control Resources Department
The Information Securities Department Administrative Department Technology Department of Economic Enforcement for Department at the Research & Department Supervision Tel Aviv Development, over the District and Strategic Stock Attorney's Counseling Exchange Office and Trading Platforms
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2. Senior Officers, Department Heads and Employees
As of the end of December 2013, the members of the ISA plenum were as follows –
Prof. Shmuel Hauser, Chairman;
Mr. Yaheli Cahanov, Adv.;
Mr. Haj Ihie Hani, CPA, Adv.;
Dr. Keren Bar Hava, CPA;
Prof. Orly Sade;
Mr. Miki Kahn;
Dr. Shai Pilpel;
Ms. Pnina Guy, Adv.;
Mr. Mickey Schneider, Adv.;
Mr. Shelly Audwin Aharoni, Adv.;
Prof. Eti Einhorn. The ISA Plenum usually meets once a month. In addition, the Plenum operates through committees, which are charged with the following: granting permits to publish prospectuses; granting exemptions and extensions; stock exchange issues; issues relating to the ISA’s finances and budget; independence of auditors in companies subject to the Securities Law; licensing of investment advisors, investment marketers, and investment portfolio managers; imposition of civil fines on mutual fund managers, as well as other issues, as needed.
In 2013, the ISA Plenum and its committees held meetings as follows:
ISA Plenum – 15 meetings;
The Disclosure and Reporting Committee – 50 meetings;
The Secondary Market Committee – 6 meetings;
The Fines and Sanctions Committee – 8 meetings, as follows:
Class actions – 5 meetings;
Civil fines under the Advice Law - 2 meetings;
Financial sanctions under the Securities Law – 4 meetings; Supervision and Regulation Committee – 9 meetings regarding providing licenses and permits under the Joint Investment Law and Advice Law;
Finance Committee – 5 meetings; Audit Committee – 4 meetings.
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As of the end of December 2013, the Israel Securities Authority's senior officers were as follows –
Mr. Amir Wasserman, Adv. – Chief Legal Counsel;
Ms. Oranit Kravitz, Adv. 1 – Senior Advisor to the Chairman and Head of the International Affairs Department;
Mr. Eli Levy, Adv. – Head of the Investigations, Intelligence and Trading control Market Department;
Dr. Ilana Modai, Adv. – Head of Administrative Enforcement;
Mr. Oded Shpirer, Adv. – Secretary General;
Ms. Orli Doron, Adv. – Head of the Securities Department at the Tel Aviv District Attorney's Office (Taxation and Economics);
Dr. Gitit Gur-Gershgoren – Head of Department of Economic Research & Development, and Strategic Counseling;
Mr. Natan Hershkovitz – Head of the Information Technology Department;
Mr. Moti Yamin, Adv. 2 – Head of the Corporate Finance Department;
Mr. Dudu Lavi – Head of the Investment Department;
Ms. Sharona Mazalian-Levi – ISA Spokesperson;
Mr. Itzik Shurki, CPA – Head of the Supervision over the Stock Exchange and Trading Platforms Department.
In accordance with the Securities Law, the Chairman of the ISA and its members are appointed by the Minister of Finance. Some of the members are appointed from among the public while others are civil servants; and one of them is an employee of the Bank of Israel. The ISA employs accountants, lawyers, economists and administrative employees. As of the end of December 2013, a total of 256 positions were staffed at the ISA, as follows, including interns and students.
1 On August 4, 2013, Adv. Oranit Kravitz was appointed Senior Advisor to the Chairman of the ISA, in lieu of Adv. Moti Yamin, in addition to her role as Head of the International Affairs Department. 2 On August 4 2013, Adv. Moti Yamin was appointed Head of the Corporate Department, in lieu of Adv. Shirel Gutman Amira.
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As of the end of December 2013, a total of 242 positions were staffed at the ISA, as follows:
Chairman’s Office – 3.5 positions;
Legal Counsel Department – 9.5 positions;
International Affairs Department – 3.5 positions;
Corporate Finance Department – 49.75 positions;
Investment Department – 45.5 positions;
Securities Department at the Tel Aviv District Attorney's – 14 positions; Office
Administrative Enforcement Department – 6 positions;
Investigations, Intelligence and Trading Control – 40.67 positions; Department
Research, Development & Economic and Strategic – 6 positions; Counseling Department
Information Technology Department – 8 positions;
Supervision over the Stock Exchange and Trading – 6 positions; Platforms Department
Administration, Finance and Human Resources – 18.67 positions;
Interns – 18 positions;
Students – 13 positions;
The percentage of men and women at the ISA, as of December 2013, was as follows: 52% men and 48% women. The percentage of university graduates at the ISA is approximately 90% of the employees, most of whom are lawyers, CPAs and economists.
Secretary General The Secretary General of the ISA is responsible for its ongoing operations, for follow up on implementation of policies set forth by the Chairman in the ISA’s various areas of activity, as well as for integration and coordination between the various departments. The Secretary General of the ISA also heads the accounting and human resource functions. He is responsible for the following key issues, as follows: managing the ISA’s accounting and comptroller units, including financial reporting for the ISA, accounting, fee collection, preparing the annual budget proposal, handling the budget approval procedures with the Ministry of Finance and the Knesset Finance Committee and overseeing the
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implementation of the budget; managing the ISA’s human resource function, including manpower quota and recruitment; salaries; employment agreements and terms; career development for employees; professional training; and employees’ welfare issues; managing of the procurement unit as well as professional and operational engagements and managing the ISA’s tenders; managing material resources (construction, maintenance, vehicles), as well as the area of security and safety.
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3. The ISA's Purview
The Israel Securities Authority (ISA) was established under the Securities Law and its function, as stated in the Law, is to protect the interests of the investing public. As part of its function, the ISA handles, inter alia, the following issues:
1. Granting permits to publish prospectuses in which companies offer securities to the public, and prospectuses in which mutual funds offer units to the public; 2. Reviewing the following reports filed by reporting entities:
a. Immediate current reports, quarterly and annual financial statements;
b. Reports regarding transactions between companies and their controlling shareholders;
c. Reports on private offerings by companies;
d. Purchase offer specifications;
e. Mutual funds' current reports;
3. Regulating and supervising the activities of the mutual fund sector; 4. Licensing portfolio managers, investment advisors and investment marketers, regulating their activity and supervising them; 5. Ensuring the compliance of portfolio managers and non-banking members of the Stock Exchange with the Prohibition on Money Laundering Law.
6. Supervising the proper and fair activity of the Stock Exchange;
7. Conducting investigations regarding violations under the Securities Law, the Joint Investment Law, the Advice Law and other laws where related to violations of the aforesaid laws; 8. Conducting administrative enforcement procedures, including administrative inquiries regarding alleged administrative violations under the Securities Law, the Joint Investment Law, and the Advice Law, as well as initiating administrative procedures with the Enforcement Committee, as per a decision by the Chairman of the ISA.
9. The ISA collaborates with the Institute of Certified Public Accountants in Israel in financing and operating the Israel Accounting Standards Board.
The budget of the ISA is funded by annual fees payable by companies that are subject to the Securities Law and the Joint Investment Law; by fees payable for applications to receive permits to publish prospectuses and private offerings; by licensing fees payable by investment advisors and investment portfolio managers, and by fees payable by the Stock Exchange. The ISA's budget is approved by the Minister of Finance and the Knesset Finance Committee.
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4. The ISA's Contact Information
4.1. Contacting the ISA, including its Ombudsman:
By mail: 22 Kanfei Nesharim Street, Jerusalem, 95464
By email: [email protected]
By fax: +972 -2-6513646; +972-3-5601041.
By phone: +972-2-6556555 4.2. Contacting the ISA's Freedom of Information Officer:
In order to submit a request under the Freedom of Information Law and for questions on the issue, please address the Freedom of Information Officer, as follows: Adv. Offir Eyal, Tel: +972 -3-9538865
Fax: +972 -3-5136841
Email: [email protected] 4.3. Contacting other units providing service to the public:
Contacting other units providing service to the public (hotline for providing information, information regarding advisors, licensing information) is possible through the Israel Securities Authority's website, at www.isa.gov.il.
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5. Review of the ISA's Activity in the Past Year and Main Activities Planned for 2014, in Relation to Work Plans
5.1. Corporate Finance Department
A. General
1. Corporate Finance Department's Purview The Corporate Finance Department is in charge of all corporations which have issued their securities to the public, whether by way of bond issues or share issues. These include 590 reporting traded corporations, of which 447 are traded in Israel alone, 73 bond companies, 44 dual listed companies, and 29 financial instruments. In addition, the Department is in charge of a few dozen delisted companies which are still required to report to the ISA under law. The Department employs accountants, lawyers, and economists, most of whom serve as points of contact for reporting companies. Most Department staff members are charged with professional responsibilities – in either a legal or accounting capacity. Each reporting corporation is handled by a point of contact as regards the reporting requirements prescribed under the Securities Law. As one of the executive arms of the Israel Securities Authority, and as part of its role in protecting the interests of the investing public, the Corporate Finance Department's main role is to increase transparency in the capital market by civil regulation in accordance with the Securities Law
For the purpose of fulfilling its duties, the Department operates on three levels: supervision, regulation, and enforcement. In terms of supervision, the Department ensures that reporting corporations fulfill their reporting duties as prescribed by law. In terms of regulation, the Department develops disclosure requirements and adjusts them to financial market dynamics, so as to best serve users, reflect material and relevant information and increase the use of reports for the purpose of making investment decisions. In terms of enforcement, the Department is mainly focused on identifying violations of the law by reporting corporations or controlling shareholders therein and referring them to the relevant enforcement entities.
2. Main Activities in 2013
(1) Handling various aspects of implementing Amendment 20 to the Companies Law – both on the corporate level and disclosure level. In this context, dozens of reports regarding convening of general meetings were handled in order to
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approve remuneration policies in public companies listed on the Stock Exchange's TA 100 Index. (2) Developing and implementing a unique disclosure plan for dual listed public companies when such companies wish to issue bonds solely in Israel. (3) Market development – the Department initiated a review of financing alternatives within the capital market for cash intensive fields, which are currently financed exclusively by the banking system and private institutional loans. This pertains to fields such as: research and development companies; municipalities and municipal corporations; infrastructure projects, etc. (4) Reporting allowances – In this context, the Department initiated reporting allowances for corporations regarding prospectuses and immediate reports; the proposals for allowances regarding prospectuses are in advanced stages, whereas allowances regarding immediate reports are expected to enter the legsilative process stage in the coming year. (5) Improvement of financial reporting – during the reporting year, progress was made in discussing the financial reporting improvement project. This project is expected to bring about a thorough change in the structure of annual reports, so that they include the following: management's report (to replace the board of directors' report); chapter describing the company's business, which will include a unique financing and liquidity chapter; financial statements; a corporate governance chapter, which will include all corporate finance aspects which currently appear in various parts of the report. The project is expected to be passed into law during 2014.
3. Main activities planned for 2014
(1) To continue promoting current market development projects; (2) To complete improvement of financial reporting and reporting allowances projects; (3) To further handle the issue of public company skeletons. (4) To implement the recommendations of the debt settlement committee, as relevant, and develop a model for supervising rating agencies and bond trustees; (5) To develop unique disclosure requirements for holding companies.
B. Supervision
1. Prospectuses and capital & debt raising
As part of its ongoing activity, the ISA devotes administrative and time resources to reviewing prospectuses filed by reporting corporations. These prospectuses are subject to various review tracks (full / partial / summary), inter alia, based on a risk management policy and by defining a list of priorities for reviewing prospectuses in relation to work plans and reviews of periodic and quarterly reports. The handling of requests for obtaining permits to publish prospectuses, which are required to undergo full reviews, is carried out by a team which includes CPAs and lawyers.
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During 2013, 78 applications for permits to publish prospectuses were reviewed under full or partial procedures and 59 applications – under the summary review procedure3.
Table 1: No. of applications for permits to publish prospectuses vs. permits granted in 4 2011-2013 Prospectuses Shelf prospectuses
Year No. of No. of No. of No. of shelf No. of Total no. applications permits IPOs out prospectuses corporations of shelf submitted granted of total out of total no. offering offerings no. of of permits securities permits granted under a shelf granted prospectus 2011 159 137 17 (12%) 93 (68%) 102 144 2012 120 102 2 (2%) 88 (86%) 96 124 2013 137 121 5 (4%) 98 (81%) 133 240
5 Data regarding capital raising and offerings in 2012-2013
In 2013, the business sector raised approximately NIS 5,166 million in stocks, stock options, and convertible bonds, NIS 4,204 million of which were raised locally. This as compared with NIS 2,784 million in the previous year, NIS 2,396 million of which were raised locally. This year, the business sector raised approximately NIS 28,449 million through the issue of bonds (excluding convertible bonds), as compared with approximately NIS 25,479 million in the previous year. In addition, the business 6 sector raised approximately NIS 1,096 million through the exercise of warrants, as compared with approximately NIS 513 million in the previous year.
3 Refers to prospectuses filed on the basis of the 2012 annual reports up to prospectuses filed on the basis of financial reports for the third quarter of 2013. 4 The data refers to prospectuses filed and prospectuses which have been granted permits between February 1 of each year and January 31 of the following year.
5 Capital raising data in this chapter were taken from reports published by the Stock Exchange. 6 Including the exercise of warrants by subsidiaries.
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Table 2: Issues and offerings by way of shares, convertible securities and bonds in 7 2012-2013 2012 2013
Shares, warrants and convertible bonds: a. Public offerings Local shares and warrants 1,952 3,910 Local convertible bonds 443 293 Foreign issues 388 962 b. Private offerings Local shares and warrants 748 1,206 Local convertible bonds 100 258 Foreign issues (by dual listed companies) 270 606 c. Exercise of warrants
8 Stock options 85 388 9 Participation unit options 64 5 Convertible bond options 0 46 Total shares, warrants and convertible bonds 4,050 7,674 Bonds: a. Public offerings Corporate bonds 25,250 28,449 Certificates of deposit 229 0 b. Private offerings10 Corporate bonds 8,030 5,412 TACT institutional bonds 5,330 1,719 Bonds of unlisted companies 476 462 c. Exercise of bond warrants 364 657 Total bonds 39,678 36,699 Total funds raised from the public and private offerings 43,728 44,373
7 Excluding index products. 8 NIS 7.7 million of which by subsidiaries in 2013; there were no exercises by subsidiaries in 2012. 9 There were no exercises by subsidiaries in 2013; NIS 0.8 of which by subsidiaries in 2012. 10 Excluding NIS 5,514 million for structured bond issues to subsidiaries in 2012, and excluding NIS 5,323 million for issuing certificates of deposit to subsidiaries in 2013.
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2. Current Reports
A corporation whose securities have been offered to the public is required to file various reports under the Securities Law and regulations while its securities are held by the public. These requirements include filing immediate reports, periodic reports and quarterly reports. As part of the ISA's ongoing monitoring of financial statements, the Department continually examines, using various sampling techniques – financial statements filed by reporting corporations, so as to ensure that fair disclosure principles is met, as well as compliance with the Securities Law, Regulations, and provisions and with generally accepted accounting and reporting principles, the purpose of which is to ensure fair disclosure. In addition, corporations' current reports are reviewed, and – if necessary – such corporations are instructed to amend their immediate reports or annual and quarterly financial statements. In other cases, corporations are instructed to clarify published reports, complement information and/or disclose additional information to the public. When a violation of the Law is discovered, there are a number of enforcement tracks available – financial sanctions, administrative enforcement or criminal enforcement.
Review of financial statements
During 2013, the ISA’s staff continued to initiate reviews of financial statements filed by reporting corporations, whether or not they have filed prospectuses with the ISA. The financial statements to be reviewed are chosen in accordance with an internal risk model, which takes into account the time that has elapsed since a report filed by a corporation was last reviewed as well as the corporation's financial position.
In reviews conducted this year, the ISA’s staff focused on the proper implementation of International Financial Reporting Standards (IFRS), examined various legal issues, reviewed valuations filed with the reports, and focused on shortening and improving the reports.
The following are the main issues examined by the staff :
1. Accounting: International Financial Reporting Standards – hereinafter cited as IFRS; International Accounting Standards – hereinafter cited as IAS. a. Business combinations (IFRS 3), the existence of control (IFRS 10), adequacy of accounting for business combinations under common control, existence of significant influence (IAS 28), adequacy of accounting for moving from one measurement basis to another, while examining whether a material change has occurred in the nature of a holding (such as moving from control to significant influence);
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b. Revaluation of investment property (IAS 40), including the adequacy of evaluations included in valuations and the reasonableness of their underlying assumptions; c. Classification of current and non-current assets as well as current and non- current liabilities (IAS 1); d. Adequacy of classification of real estate properties and property, plant and equipment in financial statements (inventory, investment property, property, plant and equipment); e. Adequacy of disclosure regarding testing for the going concern assumption underlying the preparation of the financial statements (IAS 1), as well as the phrasing of the auditor’s opinion as regards this issue; f. Impairment of tangible and intangible assets (IAS 36), impairment of financial instruments, and especially impairment of available for sale financial assets (IAS 39); g. Identification of cash generating units for the purpose of assessing goodwill impairment (IAS 36); h. Classification of a financial instrument as a financial liability or equity instrument (IAS 32); i. Assessing the manner and timing of recognizing income, including the income reporting basis (net or gross) (IAS 18); j. The manner of presenting restricted cash, including cash borrowed from banks for real estate projects (IAS 7); k. Functional currency (IAS 21).
2. Legal a. Issues regarding the identity of a corporation's controlling shareholder; b. Approval of transactions with a controlling shareholder or transactions in which a controlling shareholder has a personal interest; c. Approval of remuneration for officeholders in a corporation; d. Interest and marginality of interest of external directors and independent directors; e. Assessing the conduct of the board of directors and its committees, including the issue of directors' personal interests; f. Distributions, including purchase of own shares; l. Independence of auditors; m. officeholders' conflicts of interests and limits on activities.
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3. Valuations In 2013, the staff conducted in-depth assessments of a number of valuations, in some cases – with the help of external experts. 11 Such steps have led to increased disclosure as regards certain issues pertaining to valuations, including: substantiating underlying assumptions; including information such as projections in relation to past results as part of the valuations; substantiating fair value by using additional methods; creating methodologies, etc.
Table 3: Initiated review of financial statements in 2011-2013
Year No. of financial statements reviewed 2011 65 2012 49 2013 31
Transactions with controlling shareholders
Transcations of publically-traded companies in which controlling shareholders have a personal interest exemplify most explicitly the issue of agents in centrally- controlled companies, which characterize the Israeli market and may damage the public’s confidence in the capital market. For this reason, the Companies Law limits a company’s ability to enter into such transactions to transactions that benefit the company and have undergone approval according to a procedure which includes the support of a special majority of shareholders who have no personal interest in approving the transaction. Transactions involving the personal interest of a controlling shareholder and which are subject to the special approval procedure, are detailed in Section 270(4) of the Companies Law. These transactions include irregular transactions carried out with a controlling shareholder or in which a controlling shareholder has a personal interest, or private offerings in which a controlling shareholder has a vested interest, as well as approval of the terms of employment or term of office of a controlling shareholder or a relative thereof. Acknowledging the implications of such transactions, the Securities Law treats them in a special manner:
11 Regarding audits in general and valuations in particular, please see Section 3: Audits and Outsourcing in the Corporate Department.
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The Controlling Shareholder Regulations determine disclosure requirements that apply to reporting companies in connection with the special approval procedures required for such transactions. Even when a transaction with a controlling shareholder does not require specific approval in a shareholders’ meeting, the company is required – under the Periodic and Immediate Reports Regulations – to disclose it in an immediate report as well as in its periodic report. In addition to reviewing disclosures of such transactions, the Corporate Finance Department reviews various issues related to transactions between a company and its controlling shareholders as to whether they meet the provisions of the Companies Law, such as determining whether transactions are irregular; whether transactions between companies and other parties constitute transactions in which a controlling shareholder has a vested interest; determining whether shareholders are interested parties regarding the approval of a transaction; whether the asset or operation around which the transaction evolves is material; whether the approval process of a transaction by various company organs is adequate; qualifications of external directors; how the audit committee operates, etc. The ISA's staff devotes special attention to examining transaction approval procedures by the boards of directors and audit committees of companies. In addition, the ISA's staff examines reports regarding the voting results in general meetings.
Table 4: Transactions with controlling shareholders in 2011-2013
Total no. of immediate reports regarding transactions between a company and Year its controlling shareholder
12 13 No. of reports No. of reported transactions 2011 569 – 2012 442 776 2013 432 679
In past year, Amendment 20 to the Companies Law – which deals with remuneration of senior officeholders in public companies – went into effect. The Amendment is based, inter alia, on the recommendations of a committee chaired by former
12 The data relate to the number of meeting summons reports for approving transactions with controlling shareholders issued during the year. 13 These data include 318 transactions classified as "other" in 2012, and 270 in 2013, which have been classified as "other" and may have included transactions with parties other than a controlling shareholder.
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minister of justice Prof. Yaakov Neeman, whose aim was to create a well regulated decision making process regarding remuneration of officeholders or their relatives, while structuring the deliberation process of the relevant parties. The Amendment includes three new requirements: to establish a remuneration committee as part of the board of directors, which would be structured so as to ensure its independence regarding remuneration issues in the company; to determine a remuneration policy which would take into account considerations and principles outlined in the Amendment, which takes a long term view of the relationship between officeholders' performance and their remuneration; to approve compensation policies and tenure terms which take into account the position of shareholders from among the public, and in special cases even grant them the right to veto management's decision. In addition, the Amendment to the Companies Law added the provisions of Schedule A (parts a and b), which are required to be included in the remuneration policy and the tenure and employment terms of officholders. After Amendment 20 went into effect, the Department staff issued disclosure provisions and staff bulletins (SLB 101-16) on the issue, which reflect its positions on issues regarding the implementation of the Amendment. In addition, the Department staff handles, on an ongoing basis, inquiries by companies requesting clarifications regarding the Amendment as well as regarding comments which the Department's staff forwards to companies when a meeting convening report regarding the approval of a remuneration policy is issued. In order to handle the implementation of Amendment 20, the Department's staff was in touch with over 300 companies. The disclosure draft directive regarding Amendment 20 was published in August 2013. In September 2013, a clarification was published, according to which the draft directive has no immediate effect regarding companies convening meetings to approve remuneration policies. In September and October 2013 public comments were received. The disclosure directive draft is being passed into legislation, and the Department's staff is working on drafting regulations accordingly. Later on, the Department's staff published clarifications regarding disclosure required for various details outlined in the amendment, including a requirement to disclose the relation between the tenure and employment terms of an officeholder and the average and median wages of the company's employees. Private Offerings Private offerings in Israel are regulated by two sources: the Companies Law and the Private Offering Regulations. The Companies Law prescribes the approval mechanisms needed in order to carry out various types of private offerings and regulates the level of disclosure and detail required for each type – according to the scope of capital issued, the type of proceeds (cash and securities or otherwise) and the type of offerree. According to the Companies Law, the general meeting is
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required to approve private offerings following their approval by the board of directors only when the offering is a “substantial private offering” as defined in the Companies Law.14 The Companies Law also requires that a private offering be approved when the controlling shareholder has a personal interest in it, whether or not it constitutes an irregular transaction. This approval is to be granted under a special format prescribed by the Companies Law. The Private Offering Regulations determine three levels of disclosure: exceptional private offerings, which require the most extensive disclosure; substantial private offerings; and insubstantial private offerings, as defined in the Private Offering Regulations. Private offering reports are reviewed by ISA staff as part of the ongoing review of companies' reports. According to the provisions of the Private Offering Regulations, the ISA is authorized to request explanations, further details, information and documents, and – if necessary – instruct that an immediate report be amended or that a shareholder meeting be postponed to a date no earlier than three business days and no later than 21 days from the date on which the amendment to the report was published.
Table 5: Private offerings (substantial and exceptional) in 2011-2013
Year Total no. of reports regarding private offerings 2011 135 2012 142 2013 136
Purchase offers The Purchase Offer Regulations require the filing of a purchase offer specification in three cases:
1. An ordinary purchase offer, i.e. – an act of an offeror intended to induce holders of a listed company's securities or convertible securities to sell securities to the offeror; 2. A full purchase offer, as defined under Section 336 of the Companies Law;
14 According to the Companies Law, a "substantial private offering" is an allocation where one of the following transpires: (1) An offering of 20% or more of the voting rights in a company prior to the issue, when all or part of the consideration is not paid in cash or securities listed for trading, or is not according to market conditions and as a result of which the holdings of securities by a principal shareholder (i.e. -- a shareholder holding 5% or more of the issued capital or voting rights of a company) shall increase, or which shall result in an individual becoming a principal shareholder following the issue; (2) An offering which shall result in an individual becoming a controlling shareholder in the company;
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3. A special purchase offer, as defined under Section 328 of the Companies Law.
Those seeking to make a purchase offer to the shareholders of a listed company must do so by means of a written specification, as prescribed by the Purchase Offer Regulations. Under the Purchase Offer Regulations, the ISA is authorized to demand explanations, further details, information and documents regarding information included in a purchase offer specification, and regarding any other matter which the ISA believes should be included in the specification pursuant to the Regulations. Furthermore, the ISA may even demand that the specification be amended.
Under this authority, offerors were required to add to their specification various details regarding the following issues: the manner in which the minimum response percentage for accepting a full purchase offer is required under Section 337 of the Companies Law; deduction of the company's stocks held by the company's subsidiary; agreements between the offeror and other parties; personal interests of offerees, etc.
Table 6: Purchase offers in 2011-2013 Ordinary Full purchase Special Total no. of purchase offer Year purchase offer offer purchase offer specifications 2011 12 44 0 56 2012 8 31 6 45 2013 6 22 2 30
Bond settlement agreements and bond trustees In the past decade, extensive debt has been raised by means of public bond offerings, as an alternative to borrowings from banks. The global credit crisis and its local consequences have adversely affected the issuing companies' ability to repay bondholders and subsequently to recycle their debts.
Ongoing processing of debt settlement agreements As part of its ongoing processing of debt settlement agreements, the ISA reviews, inter alia, the following: disclosures made by companies both as part of the settlement and prior to it; disclosure provided by a controlling shareholder in cases where the settlement includes the controlling shareholder's commitment to repay bondholders, whether through independent sources of his own or through a company under his control; the need to obtain the court's approval to an agreement by nominating an expert in light of Amendment 18 to the Companies Law, including the timing of addressing the court for the purpose of nominating a specialist; and the feasibility of issuing the offered securities and their listing for trade as required by law.
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As part of agreements made under the auspices of the court, in accordance with Section 350 of the Companies Law, the ISA is usually required to express its position regarding: the manner in which a class meeting is assembled; the disclosure provided to holders of securities of a corporation prior to deciding whether to approve the agreement; and the need to nominate a specialist in order to review the proposed settlement. Furthermore, the ISA occasionally presented its position to the court, of its own accord, pursuant to Section 35O(b), in cases where the ISA considered it its duty to protect the interests of investors in securities. Following the large number of debt settlements in the economy since the beginning of the global credit crisis and the significant impact of the debt settlement phenomenon of the financial system and public's confidence in that system, a public committee was nominated in May 2013 for the purpose of examining debt settlement agreements in Israel. It is headed by Ms. Yael Andorn, CEO of the Ministry of Finance. The role of the committee, of which the ISA is a member, is to examine and develop recommendations for regulating various aspects of debt settlement agreements, including setting principles for debt settlement agreements for borrowers of various sectors and their impact on providing and pricing credit, setting processes for developing and approving debt settlement agreements, setting principles for imposing limits on controlling shareholders in corporations which are under debt settlement agreements and examining the need for disclosing settlement agreements regarding non tradable debt. As of this date, the committee has yet to publish its interim recommendations.
Amendments 50 and 51 to the Securities Law – Trustees
In August 2012, Amendments 50 and 51 to the Securities Law were published in the Official Gazette, after having become effective in November 2012. The Amendments reinforce the protection of bondholders in three important aspects: (1) They strengthen the trustees' role and position regarding bonds and explicitly pass into law their duty to supervise and ensure that the issuer meet its liabilities towards bondholders; (2) Provide bondholders with vested rights; (3) Set rules regarding convening bondholder meetings. For more information please see Section 3(a) in the Legal Counsel chapter, which deals with primary and secondary legislation in the reporting year. Since Amendments 50 and 51 came into effect, the Corporate Finance Department has been examining the impact of the Amendments, including by receiving responses from corporations, trustees and institutionals affected by the Amendments, and conducting discussions with them. In addition, the Department's staff is working to pass into law regulations required as a result of the enactment of Amendments 50 and 51.
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Table 7: Debt settlement agreements in 2011-2013 Year No. of Adjusted nominal value of the Total adjusted % companies 15 debt included in the settlement nominal value of agreements16) in NIS millions) tradable debt 17 (in NIS millions) 2011 26 5,797 254,493 2.35% 2012 31 9,998 262,447 3.81% 2013 10 5,814 263,631 2.21%
Ending of the reporting requirements
During the past year, the ISA promoted an outline for amending regulations regarding additional alternatives for ending companies’ reporting requirements (under Amendment 2 to the Periodic and Immediate Reports Regulations), beyond the existing alternatives under the current Regulations. The proposed regulations are awaiting the approval of the Ministry of Finance.
Table 8: Corporations which ended their reporting requirements in 2011-2013
Year Total no. of companies 2011 30 2012 33 2013 26
3. Audits and outsourcing by the Corporate Finance Department In the past few years, the Corporate Finance Department has conducted audits of reporting companies, mainly under Section 56F of the Securities Law. According to this Section, audits of reporting companies may be carried out by persons who are not ISA employees, including accountants, lawyers, land appraisers, actuaries and other professional service providers. The purpose of these audits is to examine whether the provisions of the Law have been met. Furthermore, they are intended to complement the Department's ongoing supervision of reporting companies and reports issued by them, so as to promote transparency and fair disclosure by corporations and uphold investors' interests.
15 A company may appear in the table more than once if it was party to a number of settlement procedures with bondholders holding different bond series it has issued, or if it was a party to a second or third settlement procedure in case previous attempts have been unsuccessful. 16 As of the date the company has entered settlement procedures. 17 Corporate bonds and convertible bonds (as of year's end).
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In 2013, the Department created an independent audit unit, whose sole purpose is to carry out audits. For this purpose, the ISA recruited two employees with audit experience. The purpose of creating this unit is twofold: a. To reduce the number of audits conducted through outsourcing when adequate expertise can be found or developed within the Department – while examining the audit issue, the ISA concluded it is currently interested in reducing the number of audits conducted by outsourcers on legal and accounting issues which are at the core of the Department's work, and develop audit capacities within the Department. Audits will continue to be outsourced in areas in which further specialities are needed, which are beyond the scope of the Department's capabilities, such as land appraisal- or actuarial capabilities, etc. b. Cross sectional audits – most audits conducted until 2013 were ad hoc audits of reporting corporations. The creation of the new audit unit will enable the Department to specialize and create a new infrastructure for conducting cross sectional audits. In 2013, audits were conducted on the following issues:
1. Dividend distribution – the cross sectional audits examined the following: a. Whether and how companies which have distributed dividends or repurchased stock ("distributions") examined the ramifications of such distributions. The audit was conducted using distribution tests prescribed by the Companies Law – the profit test, and mainly – the solvency test. b. Whether the companies which made such distributions included the disclosure required by the Reporting Regulations or the directive predating them.
2. Individual audits – conducted in four public corporations on the following issues:
a. R eal estate Examining the role of the board of directors and its committees in appraising real estate properties in two reporting entities; unreasonableness of real estate appraisals in Eastern Europe in the past few years; audit enforcement decision No. AU-1302 regarding two reporting coporations jointly holding the properties. The audit focused on examining the evidence collected in an accounting audit conducted in the company and the quality control of that audit, since the accountants' handling of the company's financial statements were found to be faulty; examining the reasonableness of the valuation which was designed to examine impairment of properties in Eastern Europe;
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b. Internal audit (ISOX) Evaluating the corporation's assessment of the effectiveness of internal control during an interim period, after the conduct of a senior member of management was found to be faulty;
c. Impairment Conducting audits of valuations of foreign activities for assessing impairment of investment (IAS 36);
d. Actuarial issues Examining actuarial work performed by a reporting corporation in relation to IAS 19 on the issue of employee benefits.
4. Underwriter registry
Entities wishing to act as an underwriter must first register with the Underwriter Registry, maintained by the ISA. The ISA is also authorized to strike underwriters from the Registry.
Table 9: Underwriter registry data in 2011-2013 Total no. of active No. of foreign No. of inactive Year underwriters underwriters underwriters 2011 23 2 46 2012 22 2 46 2013 21 3 28
In 2012, a class action lawsuit was filed against Landmark Group Ltd., which also dealt with the issue of the underwriters' liability regarding misleading details allegedly included in Landmark's prospectus. For more information regarding the above lawsuit, please see the Legal Counsel Chapter, under Coordination and Consultation for Civil Legal Proceedings
5. Dual listing
Under dual listing rules, corporations traded on the NASDAQ, NYSE, AMEX, or LSE (Main Market, Primary Listing) may – as of 2005 – list their stocks listed on the abovementioned exchanges on the Tel Aviv Stock Exchange, on the basis of reports identical to those filed by said corporations abroad, all in accordance with Chapter E3 of the Securities Law.
In 2013, three companies were listed in Israel, becoming dual listed companies, as compared with two such companies in 2012; three reporting corporations began reporting under the dual listing format, as compared with none in 2012, in which no company started reporting under the dual listing format.
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As of the end of the reporting year, there was a total of 44 dual listed companies on the Stock Exchange. In 2013, one dual listed company became a reporting corporation, as compared with two in 2012, and four dual listed corporations were delisted, as compared with two in 2012. Dual listed corporations report according to the foreign law which applies to them. When examining these reports, the ISA takes into account the fact that these companies are supervised by the American Securities and Exchange Commission (SEC) or the British Financial Services Authority (FSA), which implement some of the strictest supervision regimes in the world. This constitutes the basis for the ISA's decision to grant allowances under Chapter E3. In addition, in accordance with Chapter E3, in cases where the ISA considers exercising its authority, it first contacts the SEC or FSA, as needed, before exercising its authority regarding a reporting entity. The Israel Securities Authority is authorized to exempt dual listed companies wishing to offer their securities in Israel from disclosure in prospectuses. In April 2012, the Israel Securities Authority published an exposure draft regarding a change in the treatement model and proposed exemptions for dual listed companies issuing bonds solely in Israel. After receiving public comments, the Israel Securities Authority's plenum decided to change the disclosure model for dual listed companies issuing bonds solely in Israel. The disclosure model, which will apply to future issues of bonds, will not require reporting under Chapter F of the Securities Law, nor require disclosing any further information which is not required by the applicable foreign law, provided that no warning signs – as defined by law – have been detected regarding the company's ability to meet its liabilities. If warning signs were to be detected, the company will be required to provide further disclosure, inter alia due to potential conflicts of interests between its shareholders and bondholders, in which case there may be a difference between information required by the shareholders and that required by the bondholders. The following disclosures will be required: disclosure regarding warning signs in relation to the corporation and requirement to file an expected cash flow report in cases specified by the regulation; disclosure regarding the manner in which the board of directors examined the company's liquidity position, in case one of the warning signs or grounds exist; immediate reports for outstanding bonds held by bondholders; details regarding dividend distribution; early redemption of bonds; compromises or agreements; disclosure regarding debt settlement agreements.
C. Regulation The Department conducts extensive regulation activity in order to preserve the interests of the investing public. In this context, the Department strives to meet the Israel Securities Authority's goals for the next few years, which include three issues:
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regulation, deregulation and development of the capital market. In terms of regulation, the Department develops disclosure requirements so as to best serve users, reflect material and relevant information and increase the use of reports for the purpose of making investment decisions. In terms of de-regulation, the Department strives to locate disclosure requirements which create a regulatory burden and may be reduced without compromising the interests of the investing public. In terms on market development, the Department is involved in a large number of projects, whose aim is to make th capital market more accessible to public companies, diversify the investment instruments available to investors and develop financing models based on the capital market which would provide a solution for fields which have not served as investing targets in the capital market.
1. Projects handled in 2013
(a) Market development The Corporate Finance Department's work plan includes weighing alternatives to the development of the capital market. In this context, the Department strives to remove obstacles and create financing models, which would provide financing alternatives through the capital market to cash-intensive fields, which are currently financed mainly by the banking system and private loans from institutionals. Such projects require a complex and creative regulatory infrastructure, which includes – inter alia – tax incentives and government support. The Department cooperates with the relevant government ministries in order to develop a general outline with significant economic feasibility. The following projects are included in this framework: 1. Research and Development Companies A representative of the Department and a respresentative of the Stock Exchange headed an inter-ministerial committee appointed by the Chairman of the ISA. The committee developed means of financing technology companies through the Tel Aviv Stock Exchange. The recommendations included encouraging IPOs for relatively large technology companies, encouraging the founding of traded venture capital funds, as well as encouraging and creating traded research and development partnerships which would invest in, and support, technology companies as well as early stage start ups. The Committee handed in an interim report on June 4, 2013, and published its final recommendations at the beginning of 2014.
2. REIT funds A Department representative is heading an inter-ministerial sub-team which is examining the regulatory obstacles for instituting REIT funds for the purpose of financing, constructing and operating rental housing projects. The team will propose solutions for these obstacles, in order that REIT funds can serve as a significant source of financing for rental housing as part of the National Housing Project.
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3. Entrepreneurial real estate projects The Department's staff is examining ways and means of making the Stock Exchange an efficient and convenient alternative to the banking system for financing entrepreneurial real estate projects.
4. Commercial papers
The Department's staff , along with the Investment Department, is examining possibilities for removing obstacles for developing a commercial paper market (tradable and non-tradable). From a traded corporation's standpoint, a commercial paper is a direct competitor to short term bank credit and provides it with ongoing credit for its operation. From an investor's standpoint, commercial papers serve as a direct alternative to bank deposits and provide a higher return.
5. Credit funds for SMEs
The Department's representatives serve as members of an inter-ministerial team, which is examining the creation of tradable funds, which would serve as an additional and efficient source of funding for SMEs in order to make it easier for such companies to raise funds.
6. Opening the market for structured financial instruments
The Department's staff is re-examining the conditions which will enable issuing structured financial instruments, which have been banned from the market following the global financial crisis.
7. Municipal funding
In this project, the staff is developing models which will enable municipalities and municipal corporations to issue bonds to the public as an alternative to obtaining financing through the banking system. 8. Financing infrastructure projects
In this project, the staff is developing a model for creating tradable funds for investment in Private Public Partnership (PPP) infrastructure projects. The entry of new investors into the field of project financing is expected to reduce financing and capital costs, and – as a result – reduce the projects' cost for the State.
(b) The regulatory allowances project 1. Small-cap companies
Allowances – in September 2012, the ISA published its Roadmap Plan, which included an outline for regulatory allowances. As part of this outline, the team assessed the possibility of creating a regulatory scale among companies which will be defined as either small-cap or large-cap companies. In continuation to the preliminary proposal in this matter, an exposure draft of which was
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published, and after the public comments were received and further discussions were held, the ISA submitted to the Knesset a proposal for creating a regulatory scale, which would include four allowances for small-cap companies. The proposal was approved in January 2014 and published in the Official Gazette in March 2014. Definition of a small-cap corporation – in order to qualify as small, a corporation needs to meet two preconditions. If a corporation has issued stock to the public, its market cap should be lower than NIS 300 million, and it cannot be listed on either the TA 100 Index or the Midcap 50 Index. For corporations lacking market capitalization (e.g. – in IPO or suspended from trading), the test will be the corporation's equity capital (capital less non-controlling interests), using the same thresholds. If a corporation has issued bonds – their denominated value on the test date should be lower than NIS 200 million. The test date is January 1st of every year (and on another date for the stock test). According to the proposal, a transitional period will be provided to small-cap corporations transitioning to large-cap corporation status.
According to the proposed tests, approximately 70% of the Stock Exchange's members, whose total market cap is 6% of the total market capitalization of all traded corporations, will be defined as small-cap companies. This model is similar to the American one. Allowances provided to small corporations – corporations qualifying as small will be allowed to adopt – in whole or in part – the allowances detailed in the regulations. Corporations will not be required to adopt the allowances, and may continue reporting as large corporations.
The allowances in this outline apply to four issues: a. Revoking the requirement to publish a report on internal control and an auditor's report on the effectiveness of internal control. Nevertheless, the requirement for a managers' declaration persists, and should be filed using an updated and adjusted format; b. Raising the materiality threshold for attaching valuations to 20%; c. Ra ising the materiality threshold for attaching reports for an associate to 40% in quarterly financial statements. The requirements regarding disclosure and annual financial statement remain unchanged; d. Revoking the requirement to submit a risk report (in accordance with the Galai Committee recommendations), except for small corporations which are materially exposed to market risks. Disclosure requirements – the outline also addresses disclosure requirements which should be provided by corporations regarding their qualifying as small-cap corporations and the allowances they choose to adopt. Notwithstanding the nature of the proposed allowances, small-cap corporations will not be listed separately.
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2. First series of allowances During 2012, the ISA published a proposal for regulatory allowances, for the purpose of identifying regulatory requirements which place undue burden on regulated entities and examine proposals to reduce it. The proposed allowances were examined from the regulated entities' standpoint, while preserving the interests of the investing public. On January 26, 2014, the Knesset approved the Allowances Law,18 which passed into law the first series of allowances. This series includes the following sections: Prospectus allowances a. Extending the period for raising funds under a prospectus – an amendment to the Securities Law, which will extend the time in which securities may be offered under a shelf prospectus to a period of 36 months, in lieu of 24 months as is the case today. b. Revoking the requirement to describe the securities to be issued within a shelf prospectus (revoking the "Offering Chapter") – the disclosure required regarding the offered securities will only be provided in the shelf offer report, in accordance with the actual offered securities, without the need to provide information that is of no use. Regarding issuing bonds (a new series), it is proposed that a corporation will be required to appoint a trustee and to enter into an indenture of trust only close to the date on which it intends to "remove" it from the shelf. c. Adjusting the schedule which applies to ordering securities offered through a prospectus – according to the Regulations, the period for submitting orders for securities is to begin no earlier than five business days from the date on which the prospectus was published. It is proposed to create exceptions in the following cases: (a) Date of the publication of the prospectus draft (counting the days from the publication of the last draft, without taking into account the date on which the prospectus was published, as long as it is published within five business days); (b) Passing into law an accepted practice in bond issues, where if a draft indenture was published prior to a bond issue, the period for submitting orders begins only after three business days (in lieu of five business days), as long as the last draft indenture published included immaterial changes in relation to the final indenture. d. Abridging the prospectus – (a) Revoking the requirement to describe the main elements of the indenture in the prospectus and prospectus offer report. Passing into law an existing practice, whereby it is sufficient to
18A bill for Allowances and Encouragement in the Capital Markets Law (Legislative Amendments) of 2014.
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include the indenture itself, as well as the table of contents in the indenture; (b) Abridging the description of the company's articles of association – it will be possible to provide a description of the sections of the articles of association detailed in the prospectus, as part of the description of the company's articles of association, by way of reference to a corporation's earlier publication (and even for a longer period than currently prescribed in the regulations). In addition, a corporation shall be required to provide detailed information, in the prospectus, regarding exceptional provisions in the articles of association which condition provisions included in the Companies Law; (c) Revoking the requirement to include in a shelf offer report by way of reference – reports shall be regarded as automtically attached to a shelf offer report, which will no longer need to include a list of individual reports. However, this does not derogate from the corporation's responsibility for disclosure to the investing public. e. Attaching financial statements to prospectuses, private offering reports and conflict of interests reporta – in December 2012, an exposure draft was published for an amendment to the Securities Regulations regarding attaching financial statements. Its purpose is to equate the rules pertaining to prospectuses to those pertaining to current reports, in terms of the preparation format of financial statements and board of directors' report and their signing. According to the proposal, a prospectus may include the required current reports by way of reference. In addition, it proposes to provide allowances to corporations offering their securities to the public for the first time, and equate the preparation format of these corporations' interim financial statements to that of reporting corporations' interim financial reports, as part of their current reports. The proposed amendments includes four components:
1) Attaching to prospectuses financial statements, an events report, a shelf offer report, reports regarding transactions with a controlling shareholder and a private offer reports, and allowing to include financial statements by way of reference to current reports. 2) Changing the preparation format of interim financial statements in Initial Public Offering (IPO) prospectuses, so that they are prepared according to a quarterly rather than annual format, similarly to reporting corporations. 3) Changing the preparation format of the interim board of directors' report attached to the prospectus, so that it is prepared in a quarterly rather than annual format, similarly to current reports, while allowing for the inclusion of board of directors' reports by way of reference to current reports.
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4) Changes to the board of directors' report that do not impact the financial statements and do not arise from changes in the financial statements shall not require the financial statements to be resigned. During 2013, public comments regarding the proposed amendments have been received and examined. Following that, the ISA's staff published the final model, whose main principles are as detailed above. In January 2014, the Knesset approved the proposed amendment to the law, in which the prospectus period was extended to 36 months. In February 2014, the Knesset Finance Committee approved an amendment to the Securities Regulations (Terms of an Offering by Way of a Shelf Prospectus) of 2005, which passed into law the extended shelf prospectus period, as well as an amendment to the Securities Regulations (Period for Submitting Orders for Securities Offered in a Prospectus) of 2005 and Securities Regulations (Shelf Prospectus of Securities) of 2005 regarding an offering's schedule. The remaining proposals are currently pending the Knesset's approval. Financial sanctions Due to the experience gathered regarding imposing financial sanctions in previous years, the amendment allows for reducing financial sanctions according to the case at hand, in terms of amount, as follows: a. Changing the mechanism for determining the sanction amount – it is proposed to amend the schedule to the relevant laws, so that the sanction mechanism prescribed in them is replaced by a sequential sanction mechanism, which adequately takes into account the measure most relevant to the sanction amount to be imposed on the violator. In most cases, the proposed amendment will lead to a reduction of the sanction amounts imposed on violators, and in other cases will leave the sanction amount unchanged. b. Determining a maximum amount for an ongoing and recurring violation – it is proposed to determine a maximum amount for an ongoing violation and an ongoing recurring violation, and grant the ISA the authority to exercise discretion when imposing additional amounts for these violatons. Regarding violations which pertain to delinquent filing of financial reports, it is proposed to set a maximum amount which may be imposed. c. Extending the authority to reduce financial sanction amounts – it is proposed to provide the ISA with wider discretion than is currently the case, and allow it to reduce the sanctions by greater percentages, as well as increase some of the reduction percentages currently prescribed by the Regulations, extending the current criteria for reduction.
Ending reporting requirements for reporting corporations The conditions prescribed in the Periodic and Immediate Reports Regulations, which enable companies to terminate their reporting requirements, are very
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limited. Therefore, it is proposed to prescribe in the Regulations additional options for ending the reporting requirements, according to the following criteria: 1) A corporation whose securities have been delisted, and the number of holders of its securities from among the public is not greater than thirty five; 2) A corporation whose securities have been delisted, and the number of holders of its securities from among the public is no greater than two hundred, as part of a court proceeding and under the supervision of the court; 3) A corporation subject to liquidation proceedings, which has submitted to the court a request for the disposal of its activities for the purpose of repaying its debts to debtors, was appointed an officer, and approved by the general meetings of the corporation's securities holders by a majority required under Section 350 of the Companies Law and has obtained the approval of the court; 4) Two years have passed since the securities of a corporation have been delisted, and the ISA has weighed the corporation's specific circumstances – lack of any business or economic activity or holding of valuable assets; lack of officeholders or officers appointed to the corporation by the court; lack of a legal proceeding to which the corporation, its controlling shareholder, its officeholders or its securities holders are a party and which is related to the corporation or its activity; the corporation does not comply with its reporting requirements – and the ISA has reached the conclusion that there is no significant interest to the public in the corporation's continuing to function as a reporting corporation, and that there is no need for the ISA to supervise that corporation. The last alternative also requires an amendment to the Securities Law, which would authorize the ISA to inform the corporation that it has concluded its reporting requirements under special circumstances to be presecribed by the regulations, and under conditions and on dates determined by the Minister of Finance in the regulations.
3. Second series of allowances During 2013, an additional series of proposed allowances was drafted regarding, inter alia, immediate reports, including the following: Allowances regarding reporting dates – immediate report regarding information which has come to the company's knowledge after 5 PM shall be submitted no later than 1 PM on the following trading day (as opposed to 9:30 AM today). The purpose is to provide the company with a reasonable amount of time to prepare for issuing an immediate report and for improving its quality, and in order to take into account the needs and time differences of foreign- based companies, allowing them to work within regular work hours. All for the
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purpose of preserving the interests of the investing public to receive immediate reports in a relatively short time from the date of said event.
Holdings of interested parties and senior officeholders – report regarding changes in holdings of interested parties (including institutional groups) will be required only after crossing a cumulative threshold of 2%, from the reporting date, of holdings in the corporation or the most recent immediate report regarding a change in the holdings of that interested party (in lieu of the reporting requirement for any change in the holdings of an interested party and a cumulative change of 1% for an institutional reporting group). In addition, an interested party whose holding percentages have crossed the 10% holdings threshold, shall report immediately upon crossing that threshold, and as long as the percentage of that threshold is more than 10%, it shall report after crossing a cumulative threshold of 1% (rather than 2%) in holdings. In addition, the allowance shall not apply to controlling shareholders and officeholders. The latter shall still be required to report any changes in their holdings. An additional change made in this context is in the date of reporting the holdings of interested parties, which shall only be provided on a quarterly basis (rather than on a monthly basis), even if the change exceeds 2%. In addition, the requirement to report holdings of interested parties in a reporting corporation (the "parent company"), which holds securities in a reporting corporation (the "subsidiary"), which is held by the parent company, shall be revoked. In lieu of said report, the subsidiary shall be required to report a change in the holdings of a controlling shareholder or senior officeholder in the parent company.
Issuing a report regarding negotiations and witholding publication – the current situation, which requires reporting as early as the negotiation stage and before signing a material agreement (in addition to the authority to withold publication, if there is fear that it may prevent the completion of the deal or significantly worsen the agreement's terms, as long as the information has not been made public) causes corporations to question whether negotiations on a certain deal are sufficiently advanced to give rise to a reporting requirement, and if so – whether it is authorized to withold a report regarding the negotiations. There is no doubt that a negotiation may become a material event for the investing public, and the courts have prescribed tests to identify the point in time in which negotiations give rise to the reporting requirement. Nevertheless, the existing law acknowledges the difficulty regarding reporting negotiations, granting reporting corporations the right to withhold information. Due to the abovesaid, the proposed amendment includes the following elements: (1) It is proposed to enable corporations to withold reports regarding negotiations towards signing a material agreement, without limitation to
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cases currently prescribed in Regulation 36(b) to the Regulations; (2) Regarding other events, the right to withold information under certain conditions, as currently prescribed by Regulation 36(b) to the Regulations, shall continue to be in effect; (3) The right to withold information regarding negotiations will cease to apply from the moment in which a company enters into a preliminary agreement (whether in writing or verbally); (4) The current rule, whereby if the information is made public it requires the company to publish an immediate report, will continue to be in effect and will also apply to negotiations; (5) Currently, Regulation 36(b) determines that the right to withold information ends five days before the last day in which a corporation's convertible securities can be converted, so that the public may reach an investment decision while still holding the securities. It is proposed to pass into law the current practice, whereby the ISA's team holds that information regarding negotiations cannot be witheld if a prospectus has been published, a purchase offer is underway or a similar process is taking place.
These changes do not derogate from the scope of the prohibition to enter into transactions while possessing inside infromation, unless the reporting requirement does not apply. Report regarding nomination or the end of a term of office of a senior officholder – the requirement to issue a report will be limited to specific officeholders (CEO, members of the board, CFO, chief operating officer), while others will be included in the quarterly report. Allowances regarding immediate reports on issues for which additional disclosure is provided (in reports regarding convening general meetings or periodic reports) – the requirement to issue an immediate report regarding recommendations and decisions by the board of directors which are expected to be published as part of the reports regarding convening general meetings or periodic reports, non-extraordinary transactions with a controlling shareholder and extraordinary transactions with an officeholder shall be revoked. Additional allowances – inclusion by way of references; it will be possible to reference reports regardless of their size or level; the requirement to "cover" a transaction report with a controlling shareholder and a purchase offer specification; the chairman of the ISA (or another authorized employee) shall have the power to grant exemptions regarding the requirement to attach valuations, financial statements and opinions regarding transactions with a controlling shareholder or an exceptional private offer; the period for offering securities to employees shall be extended to 36 months, similarly to shelf prospectuses.
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Allowances and development of the capital market – ways of making offerings to the public
During 2013, the ISA published an exposure draft of proposed legislation regarding allowances and development of the capital market – updating of the mechanisms for offering securities to the public in order to provide companies and underwriters with a wide range of tools and mechanisms for offering securities. Offerors will be able to choose an offering mechanism which is best suited to a specific offering depending on its characteristics, according to the advantages or disadvantages of each mechanism. The main elements of the proposal are as follows: the non-uniform offering mechanism will be updated, so as to reduce the minimum underwriting liability required; updates of uniform offerings – investors qualifying as "eligible clients" will be removed from the list of those eligible to participate in institutional tenders, and submit a uniform offer, including a range and quantities, will be possible; the dates in which orders may be submitted will be updated, so as to allow more time; the requirement for underwriters to sign published prospectus drafts for IPOs in accordance with the draft prospectuses shall be revoked. (c) Improvement of financial statements
In 2010, the ISA launched the Financial Statements Improvement Project for reporting corporations, with the aim of rendering financial statements more relevant and useful to the public for the purpose of making investment decisions. The project’s key points were published for public comment in 2011. In 2014, the ISA's staff will publish a proposed amendment to the Securities Regulations, implementing all the elements of the project. The Project includes, inter alia, modification of the reports’ format so that each chapter contains disclosure requirements with a similar or identical purpose; determining industry-specific disclosure requirements; clarification of the principles of materiality and reporting from management’s point of view; as well as establishing extensive disclosure provisions for aspects of corporate governance.
1. The new reporting format The new format for financial statements will include four main chapters, according to the following order:
a. Management’s discussion and analysis report: This purpose of the board of directors’ report is to provide investors with the explanations they need in order to understand the trends and developments in the corporation's business from management's point of view. In its present format, the board of directors' report includes various items of information
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beyond the board's explanations regarding the state and development of the company’s business and those that are irrelevant to its purpose.
The proposal for the management's report includes the following elements: (1) Management's review – a business review regarding the developments in the corporation's business, its financial position, financial performance, equity capital, cash flows and liquidity; (2) Goals and business strategy – description of the corporation's strategy, its business goals and development expectations (business plans for the coming year which are not in line with the ordinary course of business); (3) Additional forward looking information – adding forward looking information, including profit forecasts and the corporation's future financial results, such as revenues; expected gross / operational profit; earnings before interest, taxes, depreciation and amortization (EBIDTA); average revenue per unit (ARPU); etc.; (4) Realization of previously reported forward looking information – the manner in which previously reported forward looking information has been realized management's explanations for extraordinary deviations from past reports. b. Description of the company’s business report: (1) Industry-specific disclosure – the Barnea Committee recommended the development of industry-specific disclosure requirements. Following its recommendations, and following changes in accounting principles, regulations regarding natural gas and oil went into effect in 2013, and in December 2013, an updated draft regulation was published in the field of investment property.
(2) Financing and liquidity chapter – creation of a new sub-chapter in the description of the company’s business report, which integrates financing and liquidity risk aspects, in light of the lessons learnt from the latest financial crisis. In its current format, the description of the company's business includes only limited reference to the issues of finance and liquidity. Disclosure aspects regarding finance and liquidity are also found in the consolidated financial statements under the disclosure provisions prescribed in the GAAP and Securities Regulations (Annual Financial Statements) of 2010. The sub-chapter is expected to include the following elements:
1. Current finance position – material loans; credit lines; repurchase of securities; dividend distribution; limitations on obtaining new credit and transferring resources between a company and its investees. 2. The corporation's liquidity – the corporation's liability balance according to repayment dates; disclosure regarding working capital and the corporation's working capital management policy; Solow data;
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disclosure regarding expected cash flows; analysis of debt service for the next two years. 3. Finance strategy – description of the corporation's finance strategy regarding its financing aspects, its capital structure and debt-to-capital ratio, the manner in which the strategy is to be realized and any changes made to it.
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c. Financial information: In December 2012, an exposure draft of a proposed amendment to the 19 Securities Regulations regarding financial reporting was published. The proposed changes deal with clarifying certain regulations, adjusting them to changes that have occurred since their passing into law, updating of disclosure requirements as well as additional allowances regarding disclosure requirements and revocation of disclosure provisions which the ISA staff has found to be superfluous. In February 2013, public comments were received, following which the ISA re- examined all additional disclosure requirements prescribed by the Annual Reports Regulations, and a number of changes were developed for amending the original proposal. These changes included additional disclosure requirements – some of which were taken from those prescribed in the Annual Reports Regulations and others from the original proposal – which constitute allowances for reported corporations. The proposed amendment is pending the Knesset's approval.
d. Corporate governance chapter: A separate corporate governance chapter, which includes disclosure provisions and specific principles, will serve as a convenient basis for users of financial statements in order to quantify the quality of corporations' corporate governance so that it is reflected in the pricing of their securities, thus indirectly enticing corporations to improve the quality of their corporate governance. In this context, the ISA's staff proposed that some of the current disclosure provisions included in the Securities Regulations will be revoked or updated, while others will find their way into the Corporate Governance Questionnaire. The purpose of the latter is to the simplify the current disclosure requirements, which include redundancies, reduce the amount of information and increase its relevance to the investing public, including remuneration of officeholders, internal auditors, independent auditors, as well as transactions with interested parties and controlling shareholders.
19 Securities Regulations (Annual Financial Statements) of 2010 (hereinafter – the Annual Reports Regulations); Securities Regulations (Periodic and Immediate Reports) of 1970 (hereinafter – the Periodic and Immediate Reports Regulations); Securities Regulations (Private Offering of Securities in a Public Company) of 2000 (hereinafter – the Private Offering Regulations); Securities Regulations (Transaction between a Company and its Controlling Shareholder) of 2001 (hereinafter – the Transaction with a Controlling Shareholder Regulations); and Securities Regulations (Details of a Prospectus and Draft Prospectus -- Structure and Form) of 1969 (hereinafter – the Prospectus Details Regulations).
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The report will consist of four main parts: Part 1 – disclosure regarding the corporation's members of the board and senior officeholders; Part 2 – disclosure regarding remuneration of the corporation's senior officeholders; Part 3 – transactions with controlling shareholders and interested parties in the corporation; Part 4 – the Corporate Governance Questionnaire. In September 2012, the ISA published a disclosure directive regarding the Corporate Governance Questionnaire, and its effective date was set to the 2012 annual financial statements. During the first year of implementation, corporations implemented the questionnaire, enabling investors to assess the quality of corporate governance in various public companies (including the exposure of faults in corporations' conduct) in an efficient and focused manner. Following the experience gained during the first year of implementation and through the public's comments, a number of changes have been made to the questionnaire – e.g., a number of questions have been deleted, in order to improve, as far as possible, the quality of data and value that can be drawn from the questionnaire. In the next phase, after the questionnaire will have been passed into law, the questionnaire will also apply to bond companies.
2. Industry-specific disclosure a. Natural gas and oil industry – in March 2011, the ISA published a directive for oil and gas companies regarding their industry's reporting policies. In 2012, the ISA worked on passing the directive into regulations. A final version of the regulations was approved by the Knesset and published at the beginning of 2013. b. Life sciences – In October 2012, the ISA published for public comments a draft disclosure directive regarding companies in the life science industry. Following the public's comments, the ISA decided to forgo the disclosure directive publication phase, and proceed directly to amending the relevant regulations. This amendment is expected to be passed into law during the first half of 2014. c. Investment property – see reference to the publication of an updated regulation draft above, in the section dealing with projects handled in 2013 under "Financial Statements Improvement Project". d. Abridging of financial statements – In addition to promoting legislation in order to improve the understandability of the reports and quality of the disclosure as described above, the ISA is working towards improving the quality of reporting under the existing regulatory provisions. In 2011, the ISA issued a call to the public, requesting its opinions regarding causes for financial statements' length and cumbersomeness and ways in which the
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problem can be solved. In December 2012, after having examined the public's comments and conducted meetings with various parties charged with preparing or using the financial statements, the ISA published its position on the issue. As part of the ISA's role to preserve the interests of the investing public, it attaches great significance to simple, relevant and reliable reporting. In its position paper (SLB), the ISA stated it expects corporations and all entities relevant to the reporting process to do their best in order to uphold the necessary procedures so as to ensure that their reports meet these criteria. In an effort to facilitate the process for reporting corporations, a long list of examples and implementation suggestions was included in the SLB. In addition, the ISA invited reporting corporations to enlist the ISA's help in solving various problems relating to this issue. In addition, the SLB stated that the ISA staff intends to focus on improving financial statements in this respect in its ongoing reviews of reports and prospectus drafts. In reviews conducted during 2013, the ISA's staff placed emphasis on focused and clear disclosures.
(d) Accounting projects 1. Supervision of Independent Auditors (PCAOB)
Financial statements constitute a significant part of the overall disclosure to investors. For this reason, inter alia, there exists a profession, the purpose of which is to independently audit the information contained in these statements. Various reasons, including flaws discovered in the work of auditors and the problematic system by which these auditors are paid by the entities they audit, have led most developed markets to the conclusion that an independent body should be established, the purpose of which would be to supervise the work of independent auditors auditing reporting companies. In 2012, a draft bill was published for public comments, whose purpose is to establish the legal basis for such a body. During 2013, the ISA examined the public's comments and conducted further discussions with capital market players and government ministry officials, in order to promote a legislative draft on the issue. 2. Updating of distribution tests The Companies Law prescribes two distribution tests – the profit test and the solvency test. In order to define the surpluses underlying the profit test, the Law refers to the Israeli Accepted Accounting Principles (IAAP). Following the adoption of the International Financial Reporting Standards – IFRS – in Israel, significant changes were made to financial statements in this respect. In 2013, the ISA's staff examined the need to update the distribution tests prescribed by the Companies Law, both in terms of rendering the solvency test more robust and in updating the profit test, while emphasizing the ramifications of adopting the IFRS for this test. The ISA's staff consulted with the Ministry of Justice and capital market entities in order to promote a legislative amendment which would change the distributions tests as well as their implementation.
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3. Amendment to the Securities Regulations regarding changing the IFRS adoption format – proposal to revoke the early adoption option
During the reporting year, the ISA published a proposed amendment to the Securities Regulations regarding changing the IFRS adoption format. Since 2008, the accepted accounting principles in Israel are the IFRSs, as published – on an ongoing basis – by the Israel Accounting Standards Board (IASB), with no intervention by an Israeli body. Thus, corporations reporting in Israel may chose the early adoption option of the provisions of the new standards published by the IASB even prior to their mandated effective date. This as opposed to the accepted norm in the European Union countries, as well as in Australia and Canada – where the IFRSs are adopted only after a locally regulated adoption process (endorsement). Thus, in many cases, Israel allows early adoption of IFRSs while they have not yet be adopted in other countries. After receiving public comments, the ISA decided to amend the law so as to allow for early adoption of IFRSs, unless the ISA, after consulting the IASB, will prohibit their early adoption. The decision period was set at six months after the publication of a standard. It was also proposed that the ISA be authorized to allow early adoption on a case-by-case basis (for a single corporation or a number of corporations) , even if a decision was made to prohibit such early adoption for the remaining corporations. During 2014, the ISA will promote the amendemnt of the relevant regulations. 2. Requests for pre-rulings
The pre-ruling procedure allows companies to submit legal and accounting queries prior to taking action, in order to evaluate the proper course of action. Pre -rulings usually deal with complex issues that have innovative aspects or are broad in scope, where the answer is not self-evident. The ISA prioritizes queries according to urgency and necessity. In line with the above mentioned characteristics, there are three main kinds of requests for pre-rulings:
Request for a pre-ruling regarding a future transaction by the requesting party; Request for a pre-ruling regarding the proper accounting treatment of a transction which the requesting company has engaged in or is a party to; Request for a no-action letter, i.e. – a statement confirming that the ISA will not take any enforcement action against the company under the circumstances described by the company in its request. The ISA handles the requests according to a procedure on this issue published on its website. In 2013, 95 pre-ruling requests were submitted to the Corporate Finance Department, as compared with 93 such requests in 2012.
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Table 10: Requests for pre-rulings in 2011-2013
Year No. of accounting requests No. of legal requests Total no. of requests 2011 25 51 76 2012 63 30 93 2013 50 45 95
3. FAQs, staff and plenum position papers & accounting and auditing enforcement decisions
FAQs Since the IFRS was adopted in Israel, the ISA publishes on its website frequently asked questions (FAQs) regarding reporting issues in accordance with the IFRS, its implementation, as well as additional disclosures under the Securities Regulations and directives. The website features the ISA staff's accounting and legal decisions, which have a wider significance for the investing public and reporting entities. The ISA thus wishes to increase transparency and reduce uncertainty among reporting corporations.
Staff and plenum position papers Staff and Plenum position papers, or bulletins (SLBs), reflect professional positions on issues regarding the implementation of the securities laws. The ISA and its staff publish SLBs which can help the public to apply them in similar circumstances. At times, the ISA issues staff position papers regarding corporations' immediate reports, which also appear on the ISA website. In addition, the ISA staff publishes notifications to companies on its website, under the title Notifications to Companies. (a) The following is a summary of the Staff and Plenum SLBs & FAQs published in 2013 Update of Decision No. 99-4 regarding Guidelines for Testing the Materiality of Errors in Financial Statements and Staff Legal Bulletin No. 105-24 regarding the Format for Issuing Restated Financial Statements
Due to the experience gathered regarding the implementation of the provisions of the decision, as of its publication in March 2012, the ISA decided to add another example to situations in which a corporation may believe – after taking into account qualitative considerations – that an error that has passed one or more quantitative consequential tests (the net profit and comprehensive profit test) will not necessarily be deemed material. This example refers to errors in interim financial statements. Experience shows that there are cases where errors in interim financial statements which pass only the quantitive and consequential thresholds prescribed for materiality, are immaterial to investors for the purpose of making investment decisions. Thus, Section 2d(2) of the decision, according to which, provided the following conditions and circumstances exist, a corporation may believe that such an error is immaterial for the following reasons: (a) The error is immaterial in relation
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to the profit or loss (net and comprehensive) for the year, which includes the interim period in which data the error has been found; (b) the error is immaterial in relation to the expected profit (net and comprehensive) – or loss – for the current year, in which the impact of the error should be expressed (as long as its amendment will apply to the current period); The very examination of the qualiative considerations outlined in the decision, especially when examining whether or not the error impacts seasonality and trend analysis, does not mean that the error is material from a qualitative point of view. Staff Legal Bulletin No. 105-26 – preliminary financial results
Preliminary reporting is used by corporations abroad as a tool for early and partial disclosure of financial results from the full financial statements, as well as figures based on the financial statements (such as EBITDA) and other accepted industry measures, before the full financial statements have been completed. Preliminary reporting is accepted in capital markets worldwide, and is binding in some countries. In November 2013, the ISA published an SLB clarifying that the law does not prohibit publishing preliminary reports, and that the latter may constitute a significant tool, whose advantages outweigh its disadvantages, as long as it is properly and lawfully used. The SLB included guidelines regarding the proper way in which to publish preliminary reports in accordance with the provisions of the law. According to the SLB, the preliminary report should at least include the following reports: profit and loss statement, statement of financial position for the period, cash flow statement for the period, as well as any material information which may be significant for understanding the preliminary reports. The SLB clarified that it can be implemented as early as the 2013 periodic report.
The impact of IFRS adoption – FAQ 21 In February 2013, the ISA published FAQ 21, which included a number of questions and answers regarding the impact and adoption of accounting starndards which deal with consolidated financial statements, joint arrangements, investments in associates and in joint ventures and disclosure of interests in other entities on financial statements filed in 2013. The paper addressed three issues: (1) It clarified that there was no need to attach to the 2012 annual financial statements of a company under joint control, which is of considerable importance to the corporation's business and its activity, that is currently accounted for (prior to implementing the new standard dealing with joint arrangements) according to the proportionate consolidation method, and following the implementation of the new standards, as of January 2013, will be handled according to the equity method; (2) It clarified that a note should be appended to the quarterly reports for 2013, which is to include the qualitative and quantatitive impacts arising from the first time application of the new standard system, in the format prescribed by IAS 8 regarding accounting policies, changes in accounting estimates and errors, and according to Regulation 42a(1) of the Periodic and Immediate Reports Regulations. According to
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the SLB, the impacts of each of the standards on the various line items in the financial statements should be presented separately. (3) The SLB clarified the scope of disclosure required in updating information regarding the company's business and in the board of directors' report attached to the quarterly statements for 2013, in relation to binding adoption of the new standards system. (b) Accounting and auditing enforcement decisions Decisions on accounting issues Following the Department's review of financial statements published by reporting corporations, the ISA issued accounting enforcement decisions detailing measures taken in cases of erroneous accounting in financial statements. In 2013, the ISA’s staff published one enforcement decision on the subject of presenting properties – in financial statements – as investment property rather than inventories.
Decisions on auditing issues The ISA’s staff attaches great importance to conducting adequate audits of the financial statements of reporting companies, and takes a number of steps to ensure that this goal is met. As part of the ISA's ongoing review of financial statements published by reporting entities, the ISA’s staff encountered a number of cases where a company’s auditor did not meet the requirements of his profession. In such cases, the ISA’s staff confronts the entity in whose financial statements such lapses were found, and if necessary – the company's auditor as well. In addition to action taken against individual companies, the ISA’s staff brings some of the cases to the attention of the public, including publishing enforcement steps taken regarding them.
Reports regarding going concerns
In 2013, the ISA's staff published two reports, outlining its findings and recommendations regarding accounting for the going concern assumption in financial statements and the adequacy of disclosure provided regarding this issue. In addition, the reports address auditing issues regarding drawing attention to the going concern issue. The ISA also published two enforcement decisions regarding audit evidence, documenting audit work and quality control while in audits.
4. Staff and plenum legal position papers
(a) General position papers Plenum decision regarding corporations No. 2013-1: change in the model of handling and providing exemptions to dual listed companies issuing bonds solely in Israel The dual listing arrangement went into effect in Israel in 2000, with the enactment of Chapter E3 of the Securities Law. The arrangement basically allows securities traded on certain foreign exchanges to be traded in Israel. This arrangement
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excludes such companies from the requirement to report under the Israeli Securities Law, enabling them to continue reporting only in accordance with the foreign law which applies to them. The arrangement applies to listings, but not to IPOs. In 2004, a dual listed company issued bonds in Israel for the first time. It was decided that in this case, no additional disclosure requirements were necessary. Since then, a few dozen bond issues have been made by dual listed companies, all of which were conducted solely in Israel. Issuing bonds solely in Israel by a dual listed company is not the same as issuing stocks traded in Israel as well as on a foreign exchange. The bonds are not traded in the United States, and therefore are not supervised by the SEC or the market. Two material developments have occurred since bond issues of dual listed companies have been exempt from reporting locally. First, the Israeli capital market has become an accessible and convenient platform for issuing corporate bonds. Thus, the use by dual listed companies of the option to issue bonds solely in Israel has grown as well. In addition, Israel has undergone a bond crisis in the past few years, which has led to disclosure requirements specific to bond issuing companies. These developments have given rise to a reassessment of the exemption provided to dual listed companies issuing bonds solely in Israel. It was decided that dual listed companies whose financial statements include warning signs, will begin to provide specific information to bondholders, as required from bond companies listed on the Tel Aviv Stock Exchange, as long as the company has warning signs. The Israel Securities Authority will be responsible for enforcing these disclosure requirements.
SLB No. 101-16: Amendment 20 to the Companies Law – FAQs
In December 2012, Amendment 20 to the Companies Law went into effect, regarding remuneration of officeholders in reporting corporations. Due to the numerous questions submitted to the ISA since the Amendment was published, the ISA's staff decided to publish its answers to questions sumitted to it regarding the Amendment, through cooperation with the Ministry of Justice. This was done in the form of an SLB, and included the following issues: validity of tenure and employement agreements finalized prior to the Amendment coming into effect; the manner of granting annual bonuses before adopting a remuneration policy; manner of approving a discretionary grant for an officeholder; the issue of a director's personal interest in approving a company's remuneration policy, etc. SLB No. 101-17: An external director's interest in a company
The SLB discusses the issue of whether an interest exists, and whether it is negligible, when an external director in a company or his relative are employed in another company in a significant position, and the company in which he serves as a director has significant business ties with the other company. According to the SLB, in order to interpret the term "interest" according to Section 240(b) of the Companies Law, business ties shall be considered relevant if such ties exist with the
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other company and with the CEO of the other company, the chairman of the board of the other company, the controlling shareholder of the other company and the representatives of the other company who are materially involved in actual business ties with the company in which the external director serves. In addition, the ISA's staff expressed its opinion that when weighing the negligibility of an external director's interest when the director or a his relative has business ties with the company, the relevant circumstances should be weighed in their entirety, such as the significance of the business ties from the point of view of the other company in which he serves, his role, his influence and involvement in the other company, the time that has elapsed since he was employed by that company and whether ties with a relative of the external directors exist. SLB No. 103-29 :Findings regarding the adequacy of disclosure regarding collaterals and/or pledges provided by reporting corporations to guarantee the repayment of bonds
While conducting its ongoing reviews, the ISA discovered material faults and failures in disclosures provided regarding pledges. The ISA's staff shared its findings with the public in this SLB, which explains to reporting corporations the disclosure required regarding pledges provided to guarantee the repayment of bonds, both on the date of the bond issue and as part of the issuer's current reports, until such time as the bonds are fully repaid. This disclosure includes reference to various types of pledges, including stocks of an investee, pledged surplus accounts and asset pledges.
SLB No. 103-30: What gives rise to a requirement to amend a prospectus
According to this SLB, a shelf prospectus is required to be amended for the purpose of offering securities to the public under that shelf prospectus in the following cases: (a) Initial Public Offering (IPO) of stock by a corporation whose bonds are traded; (b) Offering of securities as part of a purchase offer by way of exchange; (c) Allocation or transfer of securities under Section 15a(a)(3) of the Securities Law;1 (d) Offer of a series of bonds covered by a collateral / pledge (excluding negative pledge). According to the ISA, the above types of offerings of securities constitute "complex" offerings. Amending a shelf prospectus is designed to enable the ISA's staff to examine the offer and its components in these specific cases, and be satisfied that the investing public has been provided with adequate disclosure for the purpose of making investment decisions.
SLB No. 103-31: The period of time required to elapse from the publication of a shelf offer report until the date on which orders can be submitted
Limiting the requirement to extend the time frame (more than five hours of trading) to cases where a periodic or quarterly report was published close to the date of the shelf offer report. In other words, if a shelf offer report was published close to the date on which financial statements other than those attached to the shelf prospectus have been published, the period for submitting orders shall begin only after three business days have elapsed since the date on which the financial
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statements were published. The additional time is needed due to the fact that financial statements include comprehensive and up to date information for a specific period of time (quarter or year) regarding the corporation's business and its financial position, thus requiring a period of time longer than five trading hours in which to assess and process the information provided in these financial statements. SLB No. 105-25: Abridging of financial statements
The ISA attaches great significance to simple, relevant and reliable reporting. As part of decision 105-25, which was published in 2012, the ISA announced it expects corporations and all other parties relevant to the reporting process to devote the efforts and procedures required. The SLB included implementation examples and proposals, with the aim of helping corporations implement the principles outlined in the SLB. During the reporting year, the ISA published an update of the SLB, which includes numerous other implementation examples.
SLB No. 199-10: Material guarantee for the repayment of bonds by a controlling shareholder
In February 2013, the ISA's staff published an SLB which deals with the disclosure controlling shareholders are required to provide when deciding to grant a corporation under their control or bondholders a material guarantee or material future commitment to provide capital for the purpose of supporting the repayment of debt to bondholders in order to support the going concern assumption. The SLB does not refer to disclosure in cases where a guarantee or commitment is provided to a corporation which has not issued bonds, nor to a guarantee provided by a controlling shareholder for the benefit of a banking corporation.
The SLB outlines the reasons and legal grounds that give rise to a disclosure requirement on the part of the controlling shareholder regarding its financial ability to meet his obligations as aforesaidm as well as the scope of that guarantee. The SLB outlines the staff's position, whereby cases where a material guarantee or commitment is provided by a controlling shareholder for the benefit of a corporation under its control and/or to the bondholders of that corporation, give rise to a disclosure requirement which will enable a reasonable investor to assess the controlling shareholder's ability to meet its commitments. A guarantor corporation will be required, inter alia, to include its financial statements. If a guarantor is the only controlling shareholder, it will be required to include extensive financial information about itself, which will reflect its ability to repay the guarantee. The reason is that without such as disclosure, a reasonable investor cannot adequately assess the probability that the bonds be repaid or their economic value, and will be unable to reach an informed decision regarding the corporation's securities.
The SLB also emphasized that an immaterial guarantee provided by a controlling shareholder warrants a more limited disclosure, which would focus on the identity
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of the guarantor, the legal validity of the guarantee and its terms and conditions, as well as a disclosure regarding the company's assessment as to the controlling shareholder's ability to meet its commitments and the basis for that assessment. If the guarantee was taken into account as an alleviating factor when assessing a company's likelihood of continuing as going concern, the company should mention in the notes to its financial statements the nature of the guarantee, and present the company's assessment as to the ability of the controlling shareholder to meet its commitments, in accordance with the accepted accounting principles. The consequences of not providing such a disclosure are, inter alia, a possible suspension of trading in the company's securities, sanctions for violating various disclosure provisions under the Securities Law, sanctions for violating the prohibition on using inside information and civil liability for damages due to a misleading detail in a report. (b) SLBs published following public reports and position papers filed with the court In 2013, the ISA's staff issued seven SLBs in response to reports issued by corporations. All SLBs were concerned with the issue of controlling shareholders: a. February 2013 – regarding a report issued by Ortam Sahar Ltd.: While examining the materiality aspect when determining if a subcontracting project with a controlling shareholder is to be considered an exceptional transaction, the company should have at least used – in addition to the two consequential tests used by it (the annual revenues test and gross annual profits test) – the two following tests: the total scope of transaction in relation to the companies' total back order amount test, as well as the test of the total gross profit amount expected from the transaction in relation to the equity capital. b. March 2013 – an SLB regarding a report issued by Clal Insurance Enterprises Holdings Ltd.: a transaction made by the company with a material creditor of its controlling shareholder, which was in financial distress, is a transaction in which the controlling shareholder has vested interest. In addition, a sale of an operation which leads to the company's withdrawal from activity in a certain field cannot be considered a transaction conducted in the company's ordinary course of business, even if it is a holding company. In addition, proving that there are market conditions when a unique asset for which there is no active market is sold, cannot be considered a transaction conducted under market conditions. Nevertheless, the ISA's staff decided not to overrule the company's position, according to which Harel was not a material creditor of the controlling shareholder when the transaction was carried out. c. May 2013 – SLB regarding a report issued by Vulcan Automotive Industries Ltd.: a transaction to approve the employment terms of the chairman of the board – who previously served as the company's controlling shareholder – which was made close to the date on which control was transferred from him to a new
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controlling shareholder, is a transaction requiring approval under Sections 270(4) and 275 of the Companies Law, since it is a transaction in which the controlling shareholder has a vested interest. d. June 2013 – SLB regarding a report issue by Telkoor Telecom Ltd.: when a son is employed by a company under his father's control, the son should be regarded as being in his father's employment, thus – they are regarded as a "one and the same person" in accordance with its meaning under the definition of "holding" and "acquiring" in Section 1 of the Securities Law. e. August 2013 – SLB regarding a report issued by Investment House Growth Ltd. regarding a controlling shareholder's personal interest in a transaction between the company and a third party which has business ties with the controlling shareholder, as well as the controlling shareholder's personal interest in an investment transaction of the company in a corporation in which the controlling shareholder has also invested. f. September 2013 – SLB regarding a report issued by Brill Shoe Industries Ltd., regarding a joint holding of shareholderes in the company, who cooperate regarding their holdings on an ongoing basis. g. November 2013 – SLB regarding a report issued by Intercolony Investments Ltd. regarding the issue of its controlling shareholder's personal interest in a transaction with a third party, following transactions between the controlling shareholder and the third party, which were made one after another.
In addition, during 2012, the ISA staff submitted seven position papers to the court regarding legal proceedings of public companies. All position papers were filed with the Tel Aviv District Court as part of mediation proceedings or arrangements under Section 350 of the Companies Law, including the following: h. January 2013 – a position paper in which the ISA pronounced its opinion, according to which shares allocated as part of an offer which is made as part of a merger under Section 350 of the Companies Law rather than under a debt settlement agreement or a prospectus, are not elegible for exemption from lock up under Section 15c(a)(1) of the Securities Law. i. January 2013 – a position paper in which the ISA pronounced its opinion, according to which shares allocated in a public shell, in addition to approving an arrangement under Section 350 of the Companies Law – under which the sale of the shell was approved – are subject to the lock up provisions under Section 15c(a)(1) of the Securities Law. j. February 2013 – a position paper regarding circumstances justifying granting an exemption from appointing an expert in accordance with Section 350r of the Companies Law, as well as circumstances justifying granting an exemption from claims – as part of a debt settlement agreement – to the company's officeholders and controlling shareholders.
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k. March 2013 – a position paper in which the ISA pronounced its opinion, according to which there is no justification for granting a company an exemption from publishing a prospectus in a proceeding under Section 350 of the Companies Law, regarding an arrangement with bondholders in a solvent company.
l. June 2013 – a position paper regarding a creditor's right to petition the court for relief in accordance with Section 350 of the Companies Law, and when the court may enforce a decision on an unwilling company.
m. June 2013 – a position paper regarding the right of an individual bondholder in an insolvent company to petition the court for the company's liquidation without such a decision being made by a bondholder's meeting and/or against the decision of a bondholders' meeting.
n. June 2013 – a position paper in which the ISA pronounced its opinion, according to which a debt settlement agreement cannot be approved, as defined under Section 350 of the Companies Law, in accordance with Section 35g of the Securities Law.
o. September 2013 – a position paper regarding the requirement to publish a prospectus when allocating shares of a dual listed company to shareholders of a private Israeli company as part of a merger procedure under Section 350 of the Companies Law.
p. September 2013 – a position paper regarding the distinction between voting by bondholders in meetings convened in accordance with the Securities Law and votes of creditors convened in accordance with the Companies Law.
D. Enforcement – Financial Sanctions and Administrative Enforcement Pursuant to the provisions of the Securities Law, the ISA has been authorized to initiate financial sanction proceedings as well as administrative enforcement proceedings due to violation of the Securities Law and Regulations. In 2013, the handling of financial sanctions was transferred from the ISA's supervisory departments (the Corporate Finance Department and Investment Department) to the Administrative Enforcement Department, which is now in charge of such proceedings. For more information regarding financial sanction proceedings and administrative enforcement proceedings initated during the reporting year, please see Chapter 5.9: The Administrative Enforcement Department.
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5.2 The Investment Department
A. General
1. The Investment Department's purview The Investment Department is in charge of regulating and supervising various entities which are responsible for managing public funds totalling over half a trillion shekels. These entities include industries such as mutual funds, exchange traded notes and portfolio management. In addition, the ISA supervises holders of investment consulting and investment marketing licenses, which provide services to a large portion of Israel's citizens, who have invested their money in the capital market, as part of the banks' consulting arms as well as independently, through companies and individuals.
In addition, the Department is responsible for dispensing permits and licenses, which are needed in order to maintain the abovementioned activity.
2. Main Activities in 2013 (1) Promoting the Allowances Law and Regulations and the provisions related to its realization in all of the Department's fields of activity. (2) Amendment 21 to the Joint Investment Law, which deals mainly with applying a supervisory legislative regime to ETNs – promoting the legislative draft, publishing drafts of numerous amendments pursuant to the law and handling the public comments submitted on this issue. (3) Amendment 15 to the Joint Investment Law – promoting the legislative amendment, whose aim is to make foreign funds accessible to the Israeli investing public, increasing competitiveness in this area and bringing about the development of the capital market. (4) Decreasing management fees charged by mutual funds – the ISA initiated a move to decrease the maximum distribution fees paid by mutual funds, as well as a complementary move whereby mutual fund managers will commit, for a limited time, to decrease their management fees.
(5) Establishing an industry specific reporting infrastructure for the ETN industry.
3. Main activities planned for 2014
(1) Implementation of the allowances which were first handled in 2013; (2) Market development: developing a new product – LDF (Loans and Deposits Funds) – further promotion of legislative amendments to establish research and development funds; developing a commercial paper market;
(3) Further promotion of Amendment 21 to the Joint Investment Law;
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(4) Further promotion of Amendment 15 to the Joint Investment Law and preparing for foreign funds;
(5) Developing and promoting further allowances in the Department's areas of activity. B. Mutual Funds
1. General
As of the end of 2012, the number of mutual funds stood at 1,257, all of which were open- end funds, with three funds in the process of liquidation. During the year, 110 new open-end mutual funds were created. 130 funds ceased operations, 127 of which merged with other mutual funds and the rest were liquidated. As of the end of the reporting year, there were 19 active mutual fund managers (three fund managers ceased operations during the year and one was added), as compared with 21 fund managers in 2012. As of the end of 2013, the number of active mutual fund trustees stood at five, with two additional trustees licensed to serve as mutual fund trustees but not serving as such. In 2013, the average size of a mutual fund reached an all time high since the Joint Investments in Trust Law of 1994 first went into effect in 1995, reaching NIS 184 million. The number of active mutual funds decreased for the first time. This is part of efficiency processes taking place in the industry, which included mergers between fund managers, leading to mergers between mutual funds with either similar investment policies or low asset value. The value of assets held by mutual funds as of the end of December 2013 reached an unprecendeted high, standing at NIS 230.8 billion, as compared with NIS 170.1 billion as of the end of 2012 (see Table 11). The increase in the value of assets in 2013, which stood at NIS 60.7 billion, arises mostly from excess originations – valued at NIS 52.6 billion – as well as from capital gains valued at NIS 8.1 billion.
Table 11: No. of mutual funds and value of assets under their management in 2009- 2013 Year No. of funds Value of assets (in NIS Average fund size (in NIS billions) millions) 2009 1,202 133.2 111 2010 1,247 156.6 126 2011 1,261 142.3 113 2012 1,277 170.1 133 2013 1,257 230.8 184
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Under the provisions of Section 73(c1)(1) of the Joint Investment Law, mutual funds must be classified in publications in accordance with provisions set forth in the Regulations by the Minister of Finance. A list of defining titles for classification purposes is published on the ISA website. The following table includes data as of 2013 year end.
Table 12: Statistics on mutual funds, by class, as of December 31 2013
Class (by main title) No. of funds Value of Size of average Percentage (as of assets (in NIS fund (in NIS of fund December 31, millions) millions) assets 2013) Flexibility 26 1,655 63.7 0.7%
Foreign – general 1 18 18.0 0.0%
Israeli stocks 120 8,818 73.5 3.8%
Foreign stocks 108 5,376 49.8 2.3%
Leveraged & 22 1,025 46.6 0.4% strategic
Money market 42 61,081 1,454.3 26.5% fund
Israeli bonds – NIS 200 31,032 155.2 13.4%
Israeli bonds – gov't 168 32,149 191.4 13.9%
Israeli bonds – 6 182 30.3 0.1% foreign currencies
Israeli bonds – corporate and 216 34,515 159.8 15.0% convertible
Israeli bonds – 264 49,486 187.4 21.4% general
Foreign bonds 55 3,712 67.5 1.6%
For non-Israelis 5 61 12.2 0.0% only
Fund of funds 24 1,646 68.6 0.7%
Total 1,257 230,758 100%
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Chart 1: Asset value as a percentage of total funds, by funds' class, in 2012-2013
2. Permits to hold means of control in fund managers and licensing of fund managers and trustees
Permit applications are handled pursuant to the Permits to Hold Means of Control in Fund Managers and Licensing of Fund Managers Procedure, available on the ISA website. Five applications for permits to hold the means of control in a fund manager were handled and approved during the reporting year, as well as one application for a permit to serve as fund manager. 20 Permits to serve as mutual fund trustee are handled pursuant to the Mutual Fund Trustee Approval Procedure, which is also available on the ISA website. During the reporting year, two applications for permits to function as mutual fund trustees were submitted, both of which were approved.
3. Prospectuses
Granting permits to publish prospectuses
The prospectus of an open-end mutual fund remains valid for a period of up to twelve months from the date of publication. In order to ensure continuity in the offering of mutual fund units to the public, fund managers must publish a prospectus at least once a year. In 2013, 1,289 permits to publish prospectuses were granted, 110 of which were for prospectuses of mutual funds offering their units to the public for the first time (as compared with 1,304 permits in 2012, of which 91 were for mutual funds offering their units to the public for the first time). In addition, permits were granted for the publication of 19 prospectuses for fund managers (Part B of a fund prospectus).
4. Reporting
a. During the reporting year, there was an increase in the number of reports published by fund managers. In 2013, 30,642 reports21 were published (as compared with 27,634 reports22 in 2012), as follows: 30,307 reports required of mutual fund managers under the Law and Regulations (as compared with 27,255 in 2012). 335 reports required of mutual fund trustees under the Law and Regulations (as compared with 379 in 2012).
20 The permits are fewer than in the past, since holders of single fund managers tend to submit a joint permit application. The permits, however, are personal and granted separately to each holder. 21 The number pertains only to public reports (reports issued to the public) and does not include non- public reports. 22 Reporting of separate events in a number of funds consolidated in one reporting form for the sake of convenience is counted as a number of reports.
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b. During the year, new reporting forms were added: S072 – Report on Increasing a Fund Manager's Fees; N022 – Report on Increasing a Trustee's Fees; S129 – Report on Exposure to Revalued Assets; and S79 – Report on Change in the Minimal Number of Purchasable Units.
c. Regulation 22(a) of the Joint Investment Trust Regulations (Reports) of 1994 requires fund managers to submit to the ISA a monthly report which includes data regarding the fund's assets, liabilities, proceeds and expenses in accordance with a format included in the amendment to the Regulations. On May 8, 2013, a circular was published for fund managers and trustees which outlined changes and clarifications regarding the monthly report. The circular, written by ISA staff, included all positions published regarding monthly reports and answers provided on the issue, and also included clarifications regarding questions which were not yet published, in order to express the staff's clear, up to date and comprehensive response to the various matters at hand.
5. Participation of mutual fund managers in general meetings
Section 77 of the Law requires fund managers to participate and vote in general meetings of a corporation whose securities are held by their fund, if the meetings are convened to approve motions that may harm the interests of unit holders, including approval of interested party transactions, and motions that may favor the interests of unit holders. Section 77(c) of the Law requires fund managers who participated in such general meetings to file a report with the ISA and Stock Exchange regarding their votes at the meeting. The table below includes data regarding the participation rate of fund managers in general meetings in which they are required by law to participate and vote. 23
Table 13: Participation rate of fund managers in general meetings in which they are required by law to participate and vote, in 2009-2013 Year No. of Participation by Participation by Participation by meetings less than 30% of 30% to 70% of more than 70% of managers managers managers No. of Rate No. of Rate No. of Rate meeting meeting meeting s s s
23 In the absence of data regarding Securities held by mutual funds during the course of a month, the assumption was that if a fund held the security at the end of the previous month for the purpose of determining participation in the general meeting, as well as at the end of the month in which the general meeting was held, this constitutes holding the security at the date of the general meeting. In addition, it was assumed that a meeting in which at least one fund manager took part is one in which other fund managers are required to participate in and that meetings summoned using the T133 MAGNA forms (Report of a Transaction with a Controlling Shareholder) and T138 (Report of a Private Offering) – included at least one motion which required the fund manager holding the securities of that company to participate and vote.
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2009 705 91 12.9% 212 30.1% 402 57.0% 2010 1,005 20 2.0% 135 13.4% 850 84.6% 2011 865 55 6.4% 78 9.0% 732 84.6% 2012 670 22 3.3% 55 8.2% 593 88.5% 2013 880 21 2.4% 52 5.9% 807 91.7%
Chart 2: No. of trust funds in 2009-2013
1277 1280 1261 1257 1247 1260
1240
1220 1202 1200
1180
1160 2013 2012 2011 2010 2009
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Chart 3: Asset value of trust funds in 2009-2013 (in NIS billions)
230.8 250
170.1 200 156.6 142.3 133.2 150
100
50
0 2013 2012 2011 2010 2009
6. Onsite audits of mutual fund managers
During the reporting year, the ISA audited mutual fund managers as follows: a. Field audits – Four field audits of mutual fund managers were conducted by Investment Department staff members and external auditors. The audits focused on selecting and managing investment policies and the control environment. b. Fund managers were required to report to the ISA regarding the implementation of recommendations issued following audits conducted in by the ISA in 2012. c. Cross sectional audits (by correspondence) were conducted in fund managers regarding brokerage and operation. The audits, which began in 2012, were completed during the reporting year. d. Audits of securities activities by fund managers were conducted through analysis of irregular transactions, both entity-specific audits and subject-specific cross-sectional audits.
7. Supervision of mutual fund trustees
As part of the supervision over mutual funds trustees, the ISA: a. Reviewed various aspects of trustees' eligibility, including preserving their independence and lack of conflict of interests throughout their activity; b. Assessed trustees' reaction to lapses by fund managers; c. Performed both broad- and spot reviews of trustees to examine various issues which arose during routine supervision of fund managers; d. Followed -up on trustees' quarterly reports in their new format; e. Held coordination and feedback meetings with the Trustee Association on a number of issues.
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8. Regulatory activities During the reporting year, the Investment Department drafted and promoted legislative proposals and legislative amendments as follows: (a) Developed an outline for regulating offers of units by foreign funds to the Israeli public During the year, the ISA staff examined various outlines in which to apply a model for making foreign funds accessible to the public, holding numerous meetings with Israeli and foreign fund managers in order to develop the right outline for offering said units to the Israeli public. Later on, the ISA outlined the conditions for granting permits to foreign funds to offer their units locally, the banks' compensation model for distributing foreign funds so as to prevent bias and conflicts of interest by the banks' consultants, and examined the legislative amendments required in order to implement the plan, while protecting the interests of unit holders and minimizing possible damage to the local fund industry. For more information regarding the proposed regulations, please see Section e below, in this chapter: Legislative activity involving the Investment Department, as well as Chapter 5.6: The Legal Counsel Department.
(b) Regulation allowances As part of the implementation of the Roadmap Plan by the ISA, the ISA's staff re-examined numerous provisions regulating the activity of mutual funds, mapping possible allowances and changes which may be implemented without compromising covenances, while preserving the interests of unit holders. Duri ng this process, the ISA gave significant weight to responses provided by fund managers in the series of annual meetings held with them. The mapping was translated into legislative amendment proposals both in main and secondary legislation (please see below in Section e in this chapter: Legislative activity involving the Investment Department as well as in Chapter 5.6: The Legal Counsel Department).
(c) Reduction of mutual funds' management fees The fact that all distributors collect the maximum amount of distribution fees has created, according to the ISA staff, a barrier which makes it impossible to continue reducing management fees. In light of the developments in the mutual funds industry (increase in the value of assets under management, in addition to a significant increase in the purchase of mutual fund units through consultants in banks), the ISA initiated a reduction of the maximum distribution fees, as well as a complementary move, whereby fund managers committed to reduce, for a limited time, the management fees for funds under their management by a percentage which will reflect the full reduction in their own distribution fees. This complementary move is intended to ensure that investors will benefit from the reduction of distribution fees, and will enjoy an immediate reduction of their management fees. For more information regarding the regulations enacted for the purpose of implementing this move, please see below, in the section dealing with Legisla tive activity involving the Investment Department as well as the chapter dealing with the activities of the Legal Counsel Department.
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Fund managers provided a commitment to the Israel Securities Authority, whereby their fees for all funds under their management would be the highest of: (a) The percentage of fund managers' fees as of December 31, 2012 (hereinafter: the "determining date"), less the percentage of management fees to be saved in effect as a result of the enactment of the regulations; (b) The percentage is not higher than 10% above the new percentage of maximum distribution fees pursuant to the amended regulations (hereinafter – the "percentage of adjusted management fees"). Fund managers have committed to refrain from raising their fees and the added percentage in funds under their management, after the aforesaid adjustment, beyond the adjusted management fees for a period of six months from the date on which the fees have been reduced. Chart 4: Downward trend in funds' management fees, in 2007-2013 (by simple average and weighted average)
Simple average:
2.50%
2.00%
1.50%
1.00%
0.50%
0.00% 2007 2008 2009 2010 2011 2012 2013
Weighted average:
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1.80% 1.60%
1.40%
1.20% 1.00%
0.80%
0.60% 0.40%
0.20% 0.00% 2007 2008 2009 2010 2011 2012 2013
(d) Regulating fund managers' duty to participate in general meetings and their engagement with proxy consultants Fund managers are required to participate in general meetings of corporations whose securities they hold. Due to the increased demands regarding corporate governance in the past few years and the importance of voting by institutionals in general meetings of public companies and bond companies, in addition to the growing reliance of institutionals on proxy consultants as well as the concentrated structure of the consulting market in Israel, the ISA's staff prepared an extensive regulatory infrastructure. This infrastructure will reflect the recommendations of the committee for evaluating the steps needed to increase the involvement of institutionals in the capital market (the Hamdani Committee, 2008). The recommendations include, inter alia, regulation of the consulting companies. As part of this move, the ISA issued an exposure draft which included proposed adequate rules for regulating the activity of consulting companies in reglaion to voting in general meetings.
Due to the large number of general meetings, and the burden – financial and otherwise – involved in participating in them as well as the purpose of the requirement to vote in general meetings, the ISA's staff drafted regulations intended to achieve convergence between cases where a special majority is required in general meetings and cases in which participation is mandatory. According to the proposed principle, the duty to participate will arise when there is a need to protect minority rights, and – in a small number of cases – on issues where the required majority for approval is a regular majority. In addition, the regulation process included defining the types of cases and conditions in which a fund manager may rely on external consultants in order to develop voting recommendations. (e) Staff bulletins During the reporting year, the staff issued nine staff bulletins to fund managers and/or trustees on various issues. These included, inter alia, the following issues: activity of a fund manager in the course of a trading day, its results and the requirement to revalue a fund's asset as a result; trust funds intended for dominant investors; designating a derivative as a
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fund's underlying asset; as well as several updates of circulars published in previous years, such as principles and rules for selecting a name for a fund.
In addition, the ISA issued a circular regarding findings in audits conducted in fund managers, ETN issuers, license holders (findings from audits regarding compliance with the provisions of the Advice Law as well as on the issue of prohibition of money laundering and funding of terrorism) and banking corporations during 2012. (f) Pre-rulings The pre-ruling procedure allows companies supervised by the Investment Department to submit legal and accounting queries prior to taking action, in order to evaluate the proper course of action. Pre -rulings usually deal with complex issues that have innovative aspects or are broad in scope, where the answer is not self-evident. The ISA prioritizes queries according to urgency and necessity. There are two main kinds of queries:
R equest for a pre-ruling regarding a future transaction by the requesting party; Request for a no-action letter, i.e. – a statement confirming that the ISA will not take any enforcement action against the company under the circumstances described by the company in its request. During the reporting year, 27 pre-ruling requests were submitted to the Department in the area of the Joint Investment Law. The pre-ruling queries and answers therto are published on the ISA's website. (g) FAQs During the reporting year, the ISA staff continued to publish, on an ongoing basis, FAQs addressed to it by supervised entities in the mutual funds sector on various issues, with the aim of increasing transparency vis a vis supervised entities and clarifying the legal environment in which they operate.
(h) Updating defining titles under the provisions of Section 73(c1)(2) of the Joint Investment Law In order to improve the information conveyed to the public regarding mutual funds, the regulations outline a formula for publishing information regarding the price of mutual fund units and their returns, and the ISA was authorized to prescribe a list of defining titles under which the funds will be classified and publish it on its website, updating it from time to time. During the reporting year, the title "mixed" – which classified only a small number of funds – was revoked. Following the update, the funds were classified under other titles.
(i) Annual meetings with fund managers This year, as last year, the ISA staff focused on maintaining an ongoing dialogue with fund managers, holding annual meetings with fund manager representatives, in order to deepen their knowledge of the funds and discuss various relevant issues. Numerous issues raised in these meetings found their way into changes made to the Regulatory Exemptions paper published by the ISA, as well as into circulars, pre-prulings and FAQs. (j) Transitioning to supervision by "point of contact"
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On January 1, 2013, the ISA's staff began supervising mutual funds in accordance with the "point of contact" model, in which a specific representative of the ISA is responsible for a specific fund manager or its representatives. The transition to this format was made in order to allow for accessibility of fund managers to all members of the unit, for better distribution of the workload and for increased involvement and understanding by the staff, while continuing cooperation with the heads of the professional teams, industry players, other external parties and parties within the ISA. The purpose of this process is also to get thoroughly acquainted with supervised fund managers, provide a unified response to the target audience, while emphasizing knowledge preservation by the unit. A pilot trial was held, and in June 2013, fund managers were informed of the transition to the new supervision model. Later on, each member of the team updated fund managers under his/her supervision. This move has implemented work methods currently implemented for ETN issuers and portfolio managers – in the mutual fund field. Thus, supervision over all investment intermediaries for whom the department is responsible is carried out by using the "point of contact" method.
(k) Market development In the reporting year, the Department staff supervised mutual funds using teams responsible for developing the capital market in various ways: 1. Commercial papers market – a large team examined the changes required in order to promote the commercial paper market, especially the manner and extent to which mutual funds' involvement may be increased in this market. 2. R&D funds – setting up a legislative infrastructure for the promotion of new funds, whose establishment was recommended in the report of the Committee for Promoting Investments in Public Companies Active in the Research and Development Fields. These funds will be offered based on existing legilsation for traded close-end mutual funds, will be traded on the Stock Exchange and be eligible for government support. The purpose is to encourage the activity of technology and biomed companies while providing the public with an opportunity to invest in these companies in their first stages of development through mutual funds specialized in R&D investments. 3. Loans and deposits funds (LDFs) – During the reporting year, the staff developed a new product, loans and deposits funds, which will be a sub-category for NIS-based money funds. LDFs will be a product whose yields will reflect yields embodied in jumbo deposits and short term loans (up to one year to maturity) of the Israeli government and will be invested in highly solid assets. It will thus serve as an adequate alternative to bank deposits, which currently offer interest rates that are significantly lower than these yields, while maintaining relatively low volatility. The need for differentiating this product from other money funds was deduced from the limited success of money funds in the banks' consulting units. The money fund tool was indeed successful, but taking into account its characteristics and purpose – as an alternative to bank deposits for the public at large – it can be safely said that its potential was not exhausted. In terms of its characteristics, an LDF will be especially solid. While the duration of a money fund's
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portfolio is limited to 90 days, the duration of an LDF's portfolio will be limited to 60 days. An LDF's underlying assets will be limited to bank deposits and short term loans whose maturity is no longer than one year; it will be issued on pre-determined dates and will be bought or sold on a specific day, once a week. All these characteristics can provide fund managers with high certainty regarding the scope of expected originations and redemptions and reduce the possible volatility in the fund's price, bring investors to examine this volativlity in terms of weeks rather than days, and provide high certainty regarding reaching positive nominal yields between those dates. In addition, as opposed to existing information regarding mutual funds (past yields), information regarding LDFs will also include indications regarding the "annual yield estimate" embodied in the fund's underlying assets, to be published once a week, close to the offering date, thus enabling potential investors to evaluate the investment in relation to alternatives offered by banks. In order to promote this product for the public at large, the ISA decided to exclude LDFs from the provisions of the Advice Law, thus enabling them to be sold by unlicensed as well as licensed intermediaries. The purpose of this exclusion is to promote the distribution of the product both through banks and alternative channels (such as insurance agents), which is why the regulation includes an appropriate remuneration infrastructure.
9. Enforcement measures concerning fund managers
Financial sanctions
Under the provisions of the Advice Law and Joint Investment Law, the ISA was authorized to use financial sanctions as well as administrative proceedings in case the provisions of the laws are violated. In 2013, the handling of financial sanctions was transferred from the ISA's supervisory departments (the Corporate Finance Department and Investment Department) to the Administrative Enforcement Department, which is now in charge of such proceedings. During the reporting year, the ISA examined various violations by fund managers and trustees, but decided – due to the specific circumstances of these cases – not to impose financial sanctions on them. C. Exchange Traded Notes (ETNs)
1. General
As of the beginning of 2013, five groups of issuers were active in the Exchange Traded Notes (ETN) sector, with each issuer including a number of companies. During 2013, following a decision by the Antitrust Authority regarding merging ETNs issued by the Dash Apex and Meitav group investment houses, Meitav investment house sold its ETN activity to Psagot investment house, which merged it with its existing ETN activity. Following this move, only four groups of issuers remained in the ETN market.
By the end of the year, the number of ETNs reached 531, as compared with 464 ETNs at the end of 2012.
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Chart 5: No. of ETNs in 2009-2013
600 531 500 437 459 464 400 412 300 200 100 0 סידרה1 2009 2010 2011 2012 2013
The value of public holdings of ETNs reached NIS 101.3 billion as of the end of 2013, as compared with NIS 68.9 billion as of the end of 2012, an increase of approximately NIS 32.3 billion (47%). This increase arises mainly from an increase of approximately NIS 11 billion in deposit ETNs issued since the beginning of 2013, an increase of approximately NIS 6.6 billion in ETNs tracking local indices as well as a result of an increase in index rates. It should be noted that the ETN market has grown by 75.6% since 2010, after instruments tracking innovative indices both in Israel and abroad were issued, in addition to the increase in indices.
Chart 6: Value of public holdings of ETNs in 2009-2013
120
100 101.3
80 68.9 60 57.7 56.8 49 40
20
0
2009 2010 2011 2012 2013
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2. Prospectuses The ETN market includes a small number of issuers. In order to answer market demand in real time, issuers make wide use of shelf prospectuses, which enable them to offer the public and list ETNs for trading within a short period of time. The main advantage of a shelf prospectus is that following its approval, an issuer may issue the products included in the prospectus without the need to obtain additional approval by the ISA. The offering can therefore be made within a very short period of time – even a few days. During 2013, the ISA approved seven new shelf prospectuses, which included 67 series of ETNs, eight of which were ETNs tracking new indices, as compared with one such approval in 2012, which included a single ETN series which did not track a new index. It should be noted that as part of the ISA's regulatory allowances program, the effective period for prospectuses will be extended from two to three years, so as to streamline the companies' ongoing offerings. In 2013, 21 amendments were made to shelf prospectuses, which included 125 series of ETNs, 49 of which tracked new indices, as compared with four such amendments in 2012, which included 57 ETNs, 14 of which tracked new indices. During 2013, 52 shelf offers were published under shelf prospectuses, as compared with 19 shelf prospectuses published in 2012. When reviewing prospectuses, the Department’s staff examined, inter alia, the following: the financial statements; the economic summaries of ETN series; the scope of disclosure provided for new indices; the disclosure regarding credit risk, market risk and public holdings of financial instruments; disclosure regarding the ETNs' exposure profile; as well as disclosure regarding the ETNs' conversion mechanism (please see below for more information regarding ETN trading). In addition, the staff reviewed issues regulated in trust deeds of ETN series.
3. Reporting
ETN managers report in accordance with the Securities Law, its regulations, and specific disclosure requirements concerning information on ETN series which have been issued to the public. The Department's staff followed up on the reports, examining whether the companies meet their disclosure requirements. The Department staff examined, inter alia, annual, quarterly and immediate reports, as well as prospectuses and shelf offerings. In addition to these reports, ETN firms publish reports specific to this field, such as:
a. A daily report regarding details of the valuation of ETNs and indexed products (forms T124 and s124) – a report published daily, prior to the beginning of trading, by each ETN firm. The report includes information for the purpose of evaluating ETNs. b. A monthly report regarding credit risk exposure (forms T203 and S203) – the report includes data on managing entity-level24 and issuer-level credit risk exposure, for each
24 “Managing entity” refers to ETN managers, i.e. – to an investment house holding a number of ETN issuers.
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ETN series, with details regarding the source of the credit risk (banks, brokers, etc.) and the nature of exposure to each credit risk source (deposits, notes, derivatives, lending of securities, ETNs, etc.). c. A monthly report regarding public holdings (forms T204 and S224) – outlining the value of public holdings for each ETN series and total for all series of the issuing company and managing firm together. d. A quarterly report regarding an ETN's yield and its comparison to the yield of its tracked index – the report is included in the list of required reports as of the beginning of 2013, and includes yields for ETNs, their tracked indices, as well as that of an additional comparable index, which takes into account the proceeds of the dividends paid by stocks comprising the index.25 In addition, an explanation is provided for the diffferences between the various yields.
During the reporting year, ETN managers filed 5,276 reports (as compared with 6,269 reports in 2012 and 5,517 reports in 2011).
Chart 7: No. of reports filed by ETN managers in 2009-2013
12,000
10,434 10,000
8,000
6,269 6,000 5,833 5,517 5,276 4,000
2,000
0
2009 2010 2011 2012 2013
25 For ETNs tracking a commody or a commodity index, the comparative index is one which weights profits and losses arising from the rollover of futures contracts on commodities.
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During 2013, ETN companies also began reporting using industry-specific forms (S forms). The above data includes reports made using report forms designed for reporting corporations (T forms) as well as forms designed specifically for ETNs (S forms). For more information regarding ETN reporting, please see below.
4. Regulatory activities
(a) Pre-ruling requests In 2013, the Department staff handled four requests for pre-ruling, the same number as in 2012. The pre-ruling queries and answers are published on the ISA's website. (b) Disclosure directives During the reporting year, the Department staff published two disclosure directives, which were approved by the ISA Plenum in 2012, as follows:
1. Disclosure directive regarding names of ETNs
The directive determines uniform rules for naming ETNs, since names are used to identify funds, and thus, if they are inaccurate or lack material information, the public may be misled and may incur damage. 2. Disclosure directive regarding valuations of ETNs and comparison between their returns and those of the tracked index
The purpose of the directive is to provide uniform rules so as to allow comparison between ETN returns and those of their tracked indices, as a result of the various conversion formulas and backing means used by each ETN or issuer. (c) FAQs During the year, the Department staff published on its website a set of FAQs dealing with various issues handled by the Department during the course of the year.
(d) Circulars published by the ISA The ISA published a circular which includes insights derived from audits, which addresses audits performed during 2012 in license holders (Findings Regarding Compliance with the Provisions of the Advice Law and Regarding Prohibition on Money Laundering and Financing of Terrorism), mutual fund managers, ETN issuers and banking corporations.
5. The ETN trading reform
Unlike mutual funds, where a unit can be created and redeemed in accordance with the value of its underlying assets as of the end of a trading day, an ETN is a traded instrument, which can be bought or sold in the course of trading on the Stock Exchange. Currently, there is no requirement for market making in the ETN field during trading. During 2013, ETN companies adopted a new model for regulating ETN conversion, following a joint initative by the ISA and Stock Exchange. As a result of the new model, the public will be able to buy and sell ETNs at prices closer to their underlying assets. The new models significantly improves market making during trading, removing barriers in terms of origination and conversion procedures outside trading.
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The adopted model prescribes unified conversion rules for all companies and ETNs. In order to facilitate the conversion procedure, each ETN issuer nominates a member of the Stock Exchange to handle its conversion requests from among the public and commits to publishing the conversion form on its website. In order to reduce the limitations on the conversion right, it was decided than the minimum amount for conversion would be NIS 150,000. In addition, conversion fees were significantly reduced: ETNs were divided into a number of categories, with each category having a maximum conversion fee rate , which ranges from 0.1% for ETNs tracking tradable indices to 1% for ETNs tracking less tradable indices and ETNs with special characteristics. It was also determined that no conversion fees would be collected from holders in case of mandatory conversions which were not initiated by the holders. These rates are being constantly evaluated, and currently, Stage B of the trading reform is under way, which includes a further reduction of these rates. In addition, each issuer has engaged in an agreement with a member of the Stock Exchange, where the latter will handle the origination mechanism for that issuer, for a prescribed maximum amount. The purpose of the origination mechanism is to enable the issue of new ETNs at a price derived from the ETN's formula, disregarding its price on the Stock Exchange, thus making the market supervision over the prices of the ETNs during trading more efficient.
6. The ETN reporting reform
During 2013, the ISA completed a reporting infrastructure specific to ETN reporting. As of November 2013, ETN issuers file some of their reports using an industry specific form system (S forms), which is adjusted to the nature of their activity, while previously, they used the same forms as reporting corporations, which resulted in an increased burden in terms of disclosure requirements.
The purpose of the industry specific forms is to adjust the reporting forms to events specific to ETNs, enable reporting that is focused on information specific to ETNs, and enable the input to enter the IT systems of various users of that information, including investor advisors and information suppliers. Another result of this transition is the removal of redundancies in terms of disclosures required by the issuers, in accordance with the ISA's Roadmap target. The transition to reporting using the ETN-specific system is part of the preparation by the ISA staff for the enactment of Amendment 21 to the Joint Investment Law. Under the Amendment, the ETN field will be supervised pursuant to the Law.
The new forms introduced this year consitute the first phase of establishing a new reporting system. Thus, after transitioning to reporting using the new report system, there are still reports made by ETN companies using the older forms, which are suited for reporting corporations. The ISA's staff aims to have all ETN companies report solely through the ETN- specific reporting system by the time Amendment 21 goes into effect.
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7. Opening the market for leveraged ETNs During 2012-2013, according to the Roadmap published by the ISA, the ISA's staff cooperated with ETN issuers and the Stock Exchange for the purpose of developing an outline which will enable the opening of the market for leveraged ETNs. During 2013, the outline was implemented as part of the Stock Exchange's Rules and Regulations, enabling the opening of the leveraged ETN market, as follows: On October 29, 2006, the Stock Exchange's board of directors approved temporary directives regarding compound ETNs. As part of the temporary directives, it is now possible to issue, inter alia, leveraged ETNs with or without a balance mechanism. These temporary directives were in effect until January 28, 2009. While they were in effect, ETN companies issued various leveraged ETNs with various types of exposures (long and short), with various balance mechanisms (without, with daily balance) and using various leverages (X 2 or X 3). Since the temporary directives are no longer in effect, leveraged ETNs cannot be issued. This has created a competitive advantage for companies which have issued leveraged ETNs with balance mechanisms while the directives were still in effect, while new companies are barred from entering the market. In addition, it is impossible to issue new leveraged products which do not exist in the market, as well as leveraged products on foreign indices, nor is it possible to extend existing series. Thus, companies cannot meet the demand for the ETNs, which has led to distortions in ETN prices during trading on the exchange (lack of relation between the value of the ETN during trading and the value of its udnerlying assets).
On December 6, 2012, the Stock Exchange's board of directors approved temporary directives regarding listing for trading of balanced leveraged ETNs. The ISA approved the amendment to the Stock Exchange' Rules and Regulations, which now allows for issuing leveraged ETNs tracking various assets (such as foreign indices, commodities, a group of commodities, futures contracts traded on a foreign stock exchange, indices tracking classes of contracts, international indices which include stocks traded on the Tel Aviv Stock Exchange). In addition, a number of rules for issuing leveraged ETNs tracking the Tel Aviv 25 Index were issued (regarding frequency of balancing, leverage rate, manner of balancing, etc.) In the second half of 2013, after completing the amendment to the Rules and Regulations, the ISA granted approvals for prospectuses and prospectus amendments which include 12 series of leveraged ETNs with a balance mechanism, five of which were issued by the end of the year, tracking local indices (two of which were extensions of existing series) as well as seven series of ETNs tracking foreign indices. The value of the public's holdings of leveraged ETNs with a balance mechanism, as of the end of 2013, stands at approximately NIS 256 million.
8. Revoking the requirement for a minimum percentage of public holding for issuing index products
The Stock Exchange's Rules and Regulations previously required that a series of index products listing for trading for the first time feature a minimum percentage of public
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holdings, following the offering, that is no lower than NIS 15 million. In effect, the requirement for a minimum amount led to companies to provide discounts during offerings in order to reach the required minimum of NIS 15 million in public holdings. However, immediately after offerings were completed, parties granted discounts sold their holdings, pocketing the difference. This practice has, in fact, voided the requirement for a minimum public holdings amount. Thus, in 2013, the ISA staff amended the Securities Exchange's Rules and Regulations, revoking the mimimum requirement. D. Investment advisors, investment marketing agents and investment portfolio managers
1. General
As of the end of the reporting year, there were 4,768 licensed individuals (880 of whom were portfolio managers, 3,329 were investment advisors, and 559 were investment marketing agents).
Table 14: Total no. of licenses granted to individuals – Portfolio managers, investment advisors and investment marketing agents in 2009-2013
Portfolio Investment Investment Year managers advisors marketing agents 2009 212 365 151 2010 162 198 179 2011 152 248 144 2012 138 274 161 2013 173 229 147 Total no. of 2,642 7,136 1,435 licenses granted
Table 15: No. of license applicants added each year in 2009-2013
Year No. of License applicants
2009 2,060 2010 2,875 2011 2,455 2012 1,972 2013 1,553
As of the end of the reporting year, there were 158 licensed companies (of which 120 were portfolio management companies, as compared with 134 portfolio management companies in 2012), 18 were large companies (as compared with 20 large companies in 2012), 13
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investment advice firms (as compared with 11 investment advice firms in 2012), and 25 were investment marketing firms (as compared with 28 investment marketing firms ). 26
The following are data regarding the value of assets managed by companies with portfolio management licenses, as of December 31, 2013. The data are based on reports submitted by companies pursuant to Section 27(a) of the Advice Law and Regulation 8 of the Investment Advice Regulations (Equity Capital and Insurance) of 2000.
Chart 8: Total value of assets under management by portfolio management companies in 2009-2013 (in NIS billions)
240 237 234 230 232 223 220
210
200 198 190
180
170
2009 2010 2011 2012 2013
26 A "large company" is defined as a company in possession of a portfolio management licence, which met at least one of the following conditions on December 31: (1) The company had -- along with other companies with a portfolio management license belonging to the same group -- more than 50 clients, and the total value of their assets was more than NIS 5 billion; (2) The company had -- along with other companies with a portfolio management license belonging to the same group -- more than 1,000 clients.
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Chart 9: Total value of assets under management for institutional and private investors by portfolio management companies as of December 31, 2013
Value of Assets under management: NIS 234 billion
Total value of assets under management for 138 institutional billion 96 investors billion (provident fund, 59% mutual fund, 41% pension fund)
Total value of assets under management for private investors
As of December 31, 2013, the value of portfolios of non-institutional clients the majority of whose assets (more than 50%) were invested in mutual funds stood at NIS 18 billion, and constituted approximately 13% of the total value of these clients' managed assets.
Table 16: Value of non-institutional clients' assets under management as of December 31 2013 No. of % of total % of total assets under companies in companies management for non - each range institutionals clients for all companies Companies with a 26.7% maximum of NIS 50 million 32 0.5% under management* Companies with NIS 50 million to NIS 100 million 18 15% 1% under management Companies with NIS 100 million to NIS 500 million 40 33.3% 7% under management Companies with NIS 500 million to NIS 1 billion 10 8.3% 6% under management
Companies with NIS 1 11 9.2% 17.4% billion to NIS 5 billion
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under management Companies with over NIS 5 9 7.5% 68.1% billion under management Total 120 100% 100%
2. Licensing
During the year, 549 licenses were issued to individuals (173 to portfolio managers, 229 to investment advisors, and 147 to investment marketing agents).
Table 17: Licenses granted, converted and revoked during 2013 Portfolio Investment Investment Total management advice marketing companies companies companies Valid as of December 173 134 11 28 31, 2012 Deduced due to 4 1 conversion Voluntarily cancelled 15 10 2 3 Revoked by the ISA 1 1 Added due to 4 1 conversion Granting licenses 1 1 Valid as of December 158 120 13 25 31, 2013
(a) Exams As part of the licensing of investment advisors, investment marketing agents and investment portfolio managers under the Advice Law, two exam sessions were held in 2013, as in every year – in May/June and November/December – on the following subjects:
1. Securities laws and professional ethics; 2. Accounting; 3. Statistics and finance; 4. Economics; 5. Professional A; 6. Professional B (for those seeking an investment portfolio manager license).
During the reporting year, 5,230 exams were held for 4,299 examinees, of whom 2,072 passed (see Chart 10 below).
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Chart 10: No. of licensing examinees (by no. of exam units) in 2009-2013
12000
9690 10000 9137
7485 8000 7323
6000 5230
4000
2000
0 2009 2010 2011 2012 2013
Table 18: Exam success rates in 2013 No. of Annual success rate Subject Examinees (%) 27 Professional ethics 1 100 Securities laws and professional 766 51 ethics Accounting 691 43 Statistics and finance 794 50 Economics 798 40 Professional A 1,077 53 Professional B 172 58
Exemption from exams The Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Services Regulations (Application for License, Examinations, Internship and Fees) of 1997 (hereinafter – the Licensing Regulations) specify that candidates holding a relevant degree, within the meaning thereof under the Licensing Regulations, are entitled to exemptions from the three basic exams: economics, accounting, as well as statistics and finance. During the reporting year, 833 applications for exemptions were processed, of which 766 were approved.
27 An examinee who passed an examination at one of the two examination dates during the year is considered as having passed the examination.
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Chart 11: Processing of exemption applications in 2009-2013
6000
4970 5000 4295
4000 3600
3097 3000
2000
833 1000
0 2009 2010 2011 2012 2013
(b) Internship The abovementioned Licensing Regulations also regulate the compulsory internship for all applicants. During the reporting year, 307 internship applications were approved, of which 85 were for investment advising, 93 for investment marketing, and 129 – for portfolio management.
Chart 12: Processing of internship applications in 2009-2013
700 615 600 535 524
500 436
400 307 300
200
100
0 2009 2010 2011 2012 2013
(c) Requests handled by the committee authorized under Section 8a of the Advice Law The committee authorized by the ISA to provide licenses under Section 8a of the Advice Law discussed 22 cases regarding the following issues: exemptions from examinations, partial or full exemption from internship; and recognition of leave days during internships.
(d) Foreign Service Provider Registry During 2013, one foreign service provider was registered in the Foreign Service Provider Registry, along with one licensed corporation.
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(e) Handling credibility of license holders
During 2013, the ISA's licensing unit handled the following cases:
1. Following an audit conducted by the ISA in a portfolio management company, the company's license was revoked, after the audit found that the company was, in fact, managed by a controlling shareholder who was barred from serving as an officeholder in the company due to criminal proceedings filed against him, in accordance with the ISA's authority to revoke licenses under Sections 10(a)(2) and 10(a1)(1) of the Advice Law. 2. Reques t to renew a license filed by a man convicted of a fraudulently influencing the price of securities while his license was suspended. The request was approved under certain conditions.
3. The ISA decided to disqualify exams in two cases, in which examinees were caught violating disciplinary rules. It was also decided to bar the examinees from taking exams in the next two exam dates.
3. Supervision
As of the end of 2013, there were 120 portfolio management companies, 25 investment marketing companies and 13 investment consulting companies active in Israel, totalling 173 companies. In addition, a total of 4,768 individual license holders were either employed by banking corporations, portfolio management companies, or investment marketing and investment advice firms or working independently. Out of all individual license holders, there were 3,329 advisors, 880 portfolio managers, and 559 investment marketers. Due to the large number of supervised entities, resources had to be reallocated for efficiency purposes, so that the various inputs fit the risks embodied in the various supervised entities. Supervision is carried out using a modular supervision model based on a risk management policy, which reflects the heterogeneous nature of the supervised entities.
Supervision over investment advisors, investment marketing agents and portfolio managers focused mainly on the following issues:
(a) Ongoing rapport with the supervised entities and close accompaniment The activity of the Department in 2013 included ongoing rapport the with supervised entities. The ISA is responsible for following these entities closely, a task which constitutes a significant part of the Department’s work and is designed to guide supervised entities regarding proper conduct and allow for a direct relationship between the ISA and its supervised entities. The Department conducts meetings with those in charge of enforcement at the supervised entities, including periodical update meetings, and supervises internal enforcement programs, etc. As part of the ongoing rapport, the ISA requires supervised entities to monitor their own work on a number of issues related to the Advice Law and report their findings to the ISA. In addition, the Department staff participates in the meetings of the investment portfolio managers’ Compliance Officers’ Forum and in quarterly meetings with bank representatives from the Association of Banks in Israel. In addition, this year, the ISA staff held meetings with various groups of license holders.
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(b) Auditing During the reporting year, two types of audits were conducted regarding compliance with the provisions of the Advice Law: (a) Cross-sectional audits – examining one particular issue in a large number of companies. During the reporting year, one cross-sectional audit was conducted, as follows:
1. The audit was conducted by way of correspondence, in which the audited companies were requested to provide the ISA with documents.
2. Company-specific audits –audits on specific issues related to the Advice Law in licensed companies and advisory departments in banking corporations.
During the reporting year, the Department conducted 18 company-specific audits, ten of which were completed during the year and eight are yet to be completed. Four of the company-specific audits were conducted onsite, in the offices of the companies or bank branches, and in 14 – which were conducted by way of correspondence – the companies or banks were requested to provide the ISA with documents.
Cross-sectional audits During the reporting year, the Department completed a cross-sectional audit regarding compliance of banks with the Advice Law provisions dealing with new regulations regarding reporting to clients. The audit included 25 companies.
In addition to the cross-sectional audits, the Department examined, during the reporting year, activities in securities conducted by portfolio managers by way of transaction analysis of current and irregular trading reports, as well as by firm-specific audits of portfolio managers.
During the reporting year, the Department also collected extensive information from all 14 banking corporations which engage in investment advice for the purpose of conducting a comparative review of the banks’ activities in the investment advice field.
Company-specific audits
1. During the year, the ISA conducted one in-depth audit in a portfolio managing company regarding the control environment and compliance with the Law. In addition to the above audit, two audits which began during the previous reporting year have yet to be completed. Some of the audits are conducted using the Department staff, while others are outsourced.
2. During the reporting year, nine issue-specific audits were conducted in licensed companies, by way of correspondence. These audits examined one or more of the following issues: agreements with clients; documenting clients’ preferences and drawing written agreements with them; adequate disclosure; notification of interests in financial assets; prohibition of preferential treatment; management fees; receiving unlawful incentives; insurance and equity capital. In addition to said audits, five audits which began during the reporting year have yet to be completed.
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3. In 2012, the Department completed two audits in advisory departments of banks. These audits examined one or more of the following issues: duty of trust; identification of client preferences; adapting services to client preferences; prohibition of preferential treatment; duty of care; documenting investment advisory sessions; supervision and guidance of advisors and quality of advisory services. In addition to said audits, four audits which began during the reporting year have yet to be completed.
4. Du ring the reporting year, the Department conducted four audits on portfolio management training in licensed companies and one audit which focused on investment advice in a banking corporation.
Audits examining compliance with the Prohibition on Money Laundering Law and Prohibition on Money Laundering Order
During the reporting year, the Department conducted two audits on this issue with portfolio management companies that are non-banking Stock Exchange members (NBMs). The audits were conducted by way of outsourcing. The audit examined the companies' compliance with the Money Laundering Order, including: identification requirement; verification of identifying details; statement regarding controlling shareholder and beneficiary; identification in person; keeping record of identifying documents; regular and special reporting to the Money Laundering Prohibition Authority; the existence of a computerized database.
Four issue-specific audits were conducted regarding money laundering, and this issue was also examined in seven portfolio management companies as part of an inter-sectional audit, which included other audit issues regarding the companies' compliance with the provisions of the Advice Law.
In addition, as part of a cross-sectional audit regarding compliance of portfolio management companies with the provisions of the Advice Law relating to the duty to know one's client, mentioned above, companies were examined in terms of the "know your client" duties pursuant to the Prohibition on Money Laundering Order.
(c) Ongoing follow-up on license holders
1. An alysis of trading activities conducted by portfolio managers in order to indentify illicit activity; 2. Follow-up on websites of supervised entities.
3. Follow-up on news items regarding supervised entities.
Furthermore, companies whose annual financial statements indicated that they failed to meet equity and/or insurance requirements as of the end of the reporting year were required to take the necessary corrective action immediately, so as to comply with the Law. Failure to do so would lead to revocation of their licenses.
(d) Review of quarterly and annual financial statements
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Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Regulations (Reports) of 2012 went into effect on December 14, 2012.
Information regarding insurance requirements, its alternatives and equity capital included in licensed companies' quarterly and annual financial statements was examined by the Department's licensing unit.
Companies which did not file their financial statements – either annual or quarterly – on time, as well as companies whose quarterly or annual financial statements' data were misstated, were required to file them or amend them immediately.
(e) Investigation of alleged violations of the Advice Law
The Investment Department investigates alleged violations of the Advice Law. These investigations are carried out following public complaints or following suspicions that arise during the ordinary course of the Investment Department's activity. In addition to conversations with those persons submitting the complaints, investigations include meetings with banks and Stock Exchange members in order to obtain further information, as well as a detailed examination of the findings. When these investigations are finalized, a decision is made regarding the course of action for each case, bearing in mind, inter alia, public interest, reliability of the information, and the quality of evidence.
During the reporting year, 111 cases of prima facie criminal and/or disciplinary violations were investigated, including 17 cases from the previous year. Of the 111 cases investigated, 93 cases were closed, as follows:
40 cases were handled in the following manner: 14 cases were submitted for auditing;
In six cases the ISA issued letters to relevant persons concerning flaws identified during the investigations, requiring them to remedy the flaws and report thereof to the ISA; four cases were transferred to other departments; 15 cases were forwarded to handling outside the ISA.
53 cases were closed for one or more of the following reasons: no violation of the Law was found; lack of evidence; non-cooperation by the complaining party or inability to contact the complaining party; lack of public interest due to the time that elapsed between the violation and the filing of the complaint.
As of the end of the reporting year, 18 cases were still pending. (f) Meetings with license holders
Meetings with licence holders allow for a direct relationship between the ISA and its supervised entities. These meetings allow the ISA to clarify its stances on various issues related to the Advice Law, as well as for license holders to respond and bring additional issues to the ISA's knowledge. The ISA's staff regards its meetings with licensed entities as a means for communicating messages and strengthening the relationship, good faith and communications between the parties, so as to improve regulation processes and promote professional and fair conduct by supervised entities. During the meetings, the ISA's supervisors present the principles underlying their work – the core significance rather then
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technical details – while providing specific examples and holding fruitful discussions. During the reporting year, the ISA's staff held four meetings with license holders. In addition. the ISA initiated periodical meetings with investment advisors (Investment Advisors Forum). These meetings – which focused on professional issues and ways to improve the efficiency of investment advisory sessions – included advisors from all banks engaged in investment advice (a single representative from each bank) and Department staff members.
(g) Training
I n order to improve the level of compliance by licensed companies, the ISA provides training to all new companies and independent license holders. Training sessions are conducted with each company separately, close to the date on which licenses are granted. Training sessions are carried out face to face, with the management and employees of each company. During training sessions, the company's representatives review the main points of the Advice Law and Prohibition on Money Laundering Law, including the company’s duties towards its clients and regulators. In addition, company representatives receive information on problems and flaws found in audits conducted in other companies, along with information on how to avoid such pitfalls. Training is conducted in small groups, which allows training supervisors to address specific questions raised by company representatives. In 2013, a training session was held for a new company, emphasizing its duty to act first and foremost for the benefit of its clients, and further stressing the need for an internal company control and enforcement system.
4. Regulatory activities
(a) Directives
1. Internship Directive: During the reporting year, the ISA published an Internship Directive, with the aim of explaining the concept of "proper internship". The directive includes guiding principles for interns and their trainers regarding training an intern, with details regarding the theoretical content and practical expereince which the intern must undergo during his/her internship. The directive is expected to go into effect on March 10, 2014. 2. Amendment to a directive regarding providing disclosure on the Analysis Disclosure: The amendment to the analysis disclosure, which was published in 2007, was made during the reporting year as part of the regulatory allowances included in the ISA's Roadmap Plan. The amendment deals with information which should be disclosed regarding a possible conflict of interest for analysts preparing analyses or entities in which they are employed, and maintains that, in principle, a banking corporation is exempt from disclosure regarding the existence of credit and its own account, as well as related accounts and accounts managed by related corporations. The exemption arises from the existence of a regulatory separation between the analyst and other activites of the bank in which he/she is employed. 3. Amendment to the directive regarding understanding clients' needs: during the reporting year, the ISA prepared the grounds for the directive's third amendment, which is related to the core relationship between license holders and their clients. The
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proposed amendment was made as part of regulatory allowances included in the ISA's Roadmap, and includes numerous material allowances for the process of understanding clients' needs. The proposed amendment was drafted after holding a thorough, ongoing dialogue with license holders, in order to create an efficient and thorough process, for the purpose of truly recognizing clients' needs as a basis for providing client-customized service. 4. Directive regarding participation in conferences: the amendment to the Conference Directive, which was made during the reporting year, is the third amendment to the directive – introduced in 2006 – and was part of the regulatory allowances included in the ISA's Roadmap Plan. The amendment includes an allowance regarding participation in conferences, whose purpose is to allow investment advisors to be exposed to additional professional information relevant to their profession, without violating the purpose of the directive. 5. Directive for large-scale portfolio management companies regarding remuneration of external directors: The directive was published during the reporting year, following the enactment of the Corporate Governance Law for Fund Managers and Portfolio Managers (Legislative Amendments) of 2011, regulating the remuneration of external directors in large-scale portfolio management companies. According to the directive, these companies will adopt the arrangement applicable to fund managers. (b) Critiria regarding Section 8a of the Advice Law Section 8a authorizes the ISA to provide licenses to applicants who do not meet the requirements for passing the exams or completing their internship, if it is convinced that, under special circumstances, an applicant may be considered as eligible for obtaining a license, given his/her education and professional experience. Five years ago, the ISA adopted a number of criteria for providing exemptions from exams and internship, and following experience gained during this period, the ISA decided to amend those criteria. The amended criteria have been published on the ISA's website.
(c) Staff bulletins The ISA publishes staff bulletins stating its positions on interpretations of the law in matters with broad implications, which pertain to a number of queries or to the market as a whole, and which the ISA deems to be lacking in clarity, in need of further clarification, or too broad and thus in need of specification.
During the reporting year, the staff issued six staff bulletins on various issues pertaining to the provisions of the Advice Law and regulations thereof: a bulletin regarding the number of internship days during an internship period and grounds for granting approval; a bulletin regarding annual financial statements filed with the ISA; a bulletin for investment marketing license holders or portfolio mangement license holders with an interest in a financial asset; a bulletin for portfolio management companies regarding reporting to clients on their portfolios' returns; and bulletins regrding the use of electronic media and computerized graphic signatures.
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In addition, the ISA issued a bulletin regarding findings in audits conducted in fund managers, ETN issuers, license holders and banking coporations, regarding compliance with the provisions of the Advice Law as well as on the issue of prohibition of money laundering and funding of terrorism during 2012.
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(d) Pre-rulings During the reporting year, 16 pre-ruling requests concerning the Advice Law and the Prohibition on Money Laundering Law were received by the Investment Department, two of which are still pending. (e) FAQs
During the reporting year, the ISA staff continued to publish on its website, on an ongoing basis, FAQs addressed to it by supervised entities with the aim of increasing transparency vis a vis supervised entities and clarifying the legal environment in which they operate.
5. Enforcement – financial sanctions and administrative enforcement
Under the provisions of the Advice Law and the Joint Investment Law, the ISA is authorized to use financial sanctions as well as administrative proceedings in case the provisions of the laws are violated. In 2013, the handling of financial sanctions was transferred from the ISA's supervisory departments (the Corporate Finance Department and the Investment Department) to the Administrative Enforcement Department, which is now in charge of such proceedings. For more information regarding these proceedings during the reporting year, please see Chapter 5.9 below: The Administrative Enforcement Department. E. Legislative activity involving the Investment Department The Department's staff is involved in onging regulation of areas under the Department's purview, and – as a result – in developing proposals for amending legislation, drafting alternative outlines and developing new arrangements in order to develop the industries for which it is responsible. In addition, the staff is involved in drafting legislative proposals required in order to pass the proposed arrangements and amendments into law, handling public comments, assessing them, amending proposals in light of them and promoting them. During the reporting year, the Department's staff drafted and promoted, inter alia, the following legislative proposals and legislative amendments (for more information please see Chapter 5.6: The Legal Counsel Department).
1. Regulations published during the reporting year
Joint Investment Regulations (Distribution Fee) (Amendment) of 2013 (please see also Section 3: Legislative Amendments and Secondary Legislation).
2. Complementary regulation published during the reporting year List of actions constituting violation of the trust duty and care duty pursuant to Section 120a of the Joint Investment Law and pursuant to Section 38k of the Advice Law:
The Administrative Enforcement Law includes amendments to the Joint Investment Law and the Advice Law. According to the Amendment to the Joint Investment Law, the ISA shall publish a list of actions which reflect a lack of care, good faith or diligence which a reasonable fund manager or trustee would employ under similar circumstances. In fact, an action included in the list constitutes an administrative violation, for which a panel of
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enforcement committee members may impose on the violator administrative enforcement sanctions. A similar arrangement is prescribed by the Advice Law, according to which an act included in the list of actions and ommissions prescribed by the ISA – which attests to acting in a manner inconsistent with that of a reasonable license holder under similar circumstances – also constitutes a violation which may warrant an administrative proceeding as abovesaid. The lists were published on the ISA's website on April 8, 2013, and went into effect on September 4, 2013.
3. Legislative proposals (primary and secondary)
(a) Proposed Joint Investments in Trust Law of 1994 (Amendment 15) of 2013 (reapproved by the plenum following amendments after comments by the industry); (b) Joint Investment in Trust Regulations (Offer of Units by Foreign Funds) of 2013 (published for public comments on the ISA's website). (c) Joint Investment in Trust Regulations (Distribution Fee) (Amendment)) of 2013 – an amendment whose main purpose is to adjust the regulations to distribution of foreign funds. Published for public comments on the ISA's website; (d) Indirect amendments of the Advice Law and Joint Investment Law as part of a broad legislative initative for implementing regulatory allowances in the capital market; (e) Joint Investment in Trust Regulations (Participation of a Fund Manager in a Unit Holder Meeting) of 2013 – an updated proposal was developed, to be published for public comments; (f) Enacting regulations and amending regulations regarding eligibility of officeholders in a fund manager, fund trustee and large portfolio management company – the proposed regulations were approved by the ISA plenum following a review of public comments and were forwarded to the Minister of Justice; (g) Joint Investment in Trust Regulations (Equity Capital of a Fund Manager and Eligibility Conditions of Board Members and Members of the Investment Committee) (Amendment) of 2013 and Joint Investment in Trust Regulations (Requirement to Nominate and Eligibility of Officeholders in a Fund Manager and Trustee) of 2013; (h) Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Regulations (Requirement to Nominate and Eligibility Conditions of Officeholders in a Large Portfolio Management Company) of 2013; (i) Proposed Joint Investments in Trust Law (Amendment 21) (Exchange Traded Notes and Exchange Traded Funds) of 2012 and Regulations thereof – during the reporting year, the Department continued to develop the proposal: it received and discussed public comments, held meetings with industry players and the Securities Exchange, and made changes and improvements to the proposed amendment. In addition, the ISA continued to develop and draft the amendments required in order to implement the provisions of the law. The regulations listed below were published for public comments, and some obtained final approval by the Plenum after a review of the public's comments. (j) Joint Investment in Trust Regulations (Report by a Manager of a Traded Joint Investment on Results of an Offering and Revocation of an Offering) (Amendment) of 2013;
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(k) Joint Investment in Trust Regulations (Joint Investment Reports) of 2013; (l) Joint Investment in Trust Regulations (Proof of Ownership) of 2013 ; (m) Joint Investment in Trust Regulations (Redemption Formula) of 2013; (n) Joint Investment in Trust Regulations (Classification of Exchange Traded Notes and Exchange Traded Funds for Publication Purposes) of 2013; and Joint Investment in Trust Regulations (Classification of funds for Publication Purposes) (Amendment) of 2013; (o) Joint Investment in Trust Regulations (Activity of an Exchange Traded Fund Manager During Trading on the Securities Exchange) (Amendment) of 2013; (p) Joint Investment in Trust Regulations (Transition from a Tracking Fund to an Exchange Traded Fund) of 2013; (q) Joint Investment in Trust Regulations (Publication of a Unit Price, Redemption Price and Unit Value) (Amendment) of 2013 – approved by the ISA Plenum but are being reassessed; (r) Joint Investment in Trust Regulations (Calculating Returns of Exchange Traded Notes and Exchange Traded Funds) of 2013; and Joint Investment in Trust Regulations (Calculation of Returns) (Amendment) of 2013; (s) Joint Investment in Trust Regulations (Personal Restrictions on a Board Member, Member of an Investement Committee and Employee of a Joint Investment Manager) (Amendment) of 2013; (t) Joint Investment in Trust Regulations (Equity Capital and Insurance for an Investment Manager and Trustee) (Amendment) of 2013 – published for public comments, but has yet to receive final approvement by the ISA Plenum; (u) Joint Investment in Trust Regulations (Material Change in an Exchange Traded Note's Investment Policy) of 2013; (v) Indirect amendments of the Joint Investment Law and Advice Law as part of a proposed Law to Increase Competition and Alleviate Concentration of 2013. F. Legal proceedings related to the Investment Department For more information regarding legal proceedings related to the nvestment Department's purview, in which the ISA was involved, please see below in Chapter 5.6: Legal Counsel, sub- chapter b: The Department's Activities – Section 3: Coordination and Consultation for Civil Legal Proceedings. Civil Appeal 3242/11 Excellence Nesuah Investment House Ltd. v. Menachem Fert et al.; TA 1792/09 Fert et al. v. Excellence Nesuah Investment House Ltd; Civit Appeal 995/13, 625/13 Landmark Group Ltd. et. al v. Harel PIA Mutual Funds Ltd., Asher Sapir and the Israel Securities Authority.
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5. 3 Department of Economic Research & Development, and Strategic Counseling A. General
1. The Department's purview
The role of the Department of Economic Research & Development, and Strategic Counseling (hereinafter – the Economic Department) is to provide economic counseling to the ISA’s Chairman and the various departments on economic issues. The Department cooperates with other ISA departments, providing them with economic counseling on a wide range of issues – mostly following a request by the ISA chairman and/or other departments.
The Department develops and maintains computerized databases and indices for the ISA's use, for the purpose of ongoing follow up and assessing the ramifications of decisions and specific events. In addition, the Department is charged with developing other decision support systems.
Economic counseling The Department offers economic counseling to ISA departments on various regulatory issues which relate to trading and the capital market, such as: creating models for mapping and managing systemic risks; assessing the viability of new regulation; assessing the impact of revoking existing regulation; providing opinions in ISA investigations. In addition, the Department takes part in updating information for international organizations.
The Economic Department leads two work teams: the capital market team and the ISA team on systemic risks management. In addition the Department participates in work teams on various issues within the ISA, and/or on behalf of the ISA: committee for perfecting trading and improving liquidity on the Stock Exchange; committee for promoting investments in publically traded research and development companies; capital market forum; the ISA's team on managing systemic risks and the ISA team on high frequency trading.
Strategic counseling
In addition to economic counseling, the Department offers strategic counseling and direction to the ISA’s Chairman and various departments thanks to the research experience of the Department's staff. The Department analyzes economic data and information, monitors capital markets worldwide, and follows up on regulation changes and especially – economic developments. This analysis serves as a basis for the ISA's strategic decisions and supports policy setting in line with the ISA's Roadmap Plan, thus ensuring regulatory efficiency. The Department's added value stems from its systemic view of all regulatory areas under the ISA's purview and its use of assessment methodologies from the world of finance.
2. Main Activities in 2013
Beyond its ongoing work, the Economic Department focused on five main areas in 2013:
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(a) Development – creation and development of the economic information infrastructure supporting the ISA's decision-making process; (b) Systemic risk – overseeing a team within the ISA and participation in an inter-ministerial think tank and an international think tank with the purpose of identifying, monitoring, minimizing and managing systemic risks; (c) Research and study of market trends and developments – assessing developments in the capital market, such as in the area of algorithmic trading; (d) Research and study of regulatory procedures – the Economic Department takes part in assessing future regulation, while assessing the ramifications of past regulation. (e) Economic research – research in areas affecting the policies employed in the Israeli capital market and on issues related to the ISA's purview and targets.
3. Main activities in 2014
(a) Follow up on market development – follow up on key capital market issues, such as the non-banking credit market, algorithmic trading and officeholder remuneration. (b) Economic research – initiating economic studies on various issues related to the Department's purview, such as the impact of regulation changes on the market and changes in the financial industry. (c) Economic opinions – providing economic opinions as needed and required by the ISA's chairman and departments. (d) Activity in public committees – during the reporting year, the Economic Department participated in two committees: the Committee for Increasing Trading Competition and Liquidity on the Stock Exchange and the Committee for Promoting Investments in Public Companies Active in the Research and Development Fields. In 2014, the Department will continue to accompany the committees' activities until the final recommendation stage and follow up on their implementation and results. (e) Systemic risk – The Department will continue to participate in the teams with the aim of identifying, monitoring, minimizing and managing systemic risks. B. The Department's activities
1. Development
As part of its work, the Department develops and maintains, on an ongoing basis, databases and automated tools for the purpose of monitoring and developing the economic and financial information infrastructure, which serves as a decision support system for the ISA.
2. Managing systemic risks
The 2008 economic crisis and the unstable sentiment in world markets ever since have increased preoccupation with the issue of systemic risks – the risk that entire systems will be disrupted as a result of a triggering event (such as a crisis at a specific firm or organization),
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which would result in an overall market crisis.. 28 Academic research and field testing have shown that the crisis has resulted in a need to maintain macro-prudential policies in regulatory authorities as well as in the capital market itself, rather than only in the banking system.
In order to identify, monitor and minimize – in advance, as far as possible – capital market phenomena which may develop into risks with systemic implications, the ISA has formed a special team, which is led by the Economic Department. As part of this role, the Department characterizes the information needed by various ISA departments and existing databases in order to develop tools and indicators which would help identify the level of systemic risk on an ongoing basis. Since the beginning of 2012, an informal inter-ministerial team has been formed, whose purpose is to identify, minimize and manage systemic risks in Israel. The team, which holds bi-weekly meetings, includes representatives from the Bank of Israel, Supervisor of Banks, Ministry of Finance and the Israel Securities Authority. The Economic Department represents the ISA on the team. The following issues were discussed by the team since its inception: general reviews, exposure of supervised entities to Europe, expectations for a credit crunch and the possible ramifications of a potential increase of 2% in the interest rate.
3. Assessing market trends and developments
World capital markets, and the Israeli capital market in particular, are changing quickly due to technological innovations, changes in the business environment, etc. These changes require an ongoing assessment of market trends and possible regulatory changes as a result.
During the reporting year, the Department examined, inter alia, the development of algorithmic trading and high frequency trading. In this context, the Department examined their share of the trading activity, their contribution to the market's liquidity and efficiency, possible pitfalls and worldwide regulatory changes in this area. A preliminary paper on this issue was published in the ISA's website and will be expanded in the future.
4. Regulatory impact analysis
Proper regulation is an ongoing process, which begins with assessing the market and understanding its needs, and ends with examining its impact on the market. The Economic Department takes part in the decision making process prior to enacting new regulation as well as in assessing its impact.
28 The following is a definition of systemic risk, issued by the International Monetary Fund, which was adopted by the International Organization of Securities Commissions (IOSCO): A risk of disruption to financial services that (i) is caused by an impairment of all or parts of the financial system and (ii) has the potential to have serious negative consequences for the real economy.
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(a) Evaluating the broker and dealer regulation Under existing law, most activities and financial intermediaries in the capital market are regulated and supervised by various bodies. However, some of the intermediaries and activities are not regulated by law or lack direct supervision. Thus, for example, the activities of brokers (i.e. – those performing transactions on behalf of others) and dealers (i.e. – those performing transactions for others out of the dealer's own account), lack comprehensive regulation. Currently, broker and dealer activities in Israel are usually carried out through trading floors (in banks and investment houses), in which brokerage services are provided to institutionals and significant private clients, market makers and trading platforms. Currently, the ISA is developing a comprehensive legislative framework for broker and dealer activities, based on worldwide practices. In 2013, the Economic Department began performing Market Failure Analysis (MFA) of the broker-dealer area (as a pioneer study, with further market failure analyses in other areas to follow). Market failure analysis is a conceptual analysis, whose aim is to provide decision makers with the regulatory alternative with the greatest added value as compared with the market solution or current regulation. Thus, the researchers identify the relevant market, market failures or regulatory failures, as well as the main aim of the initiative and relevant failures. Later on, the effectiveness of solutions offered for reducing the failures are evaluated. In the broker-dealer analysis, the aim is for market regulation to be based on its definition (who and what activity will be included in the broker-dealer definition), identifying the market failure and assessing it vis a vis the ISA's aims and regulation options. (b) Assessing the results of the regulation of officeholder remuneration In recent years, there have been changes in the regulation of corporate governance in general and officholder remuneration in particular. In November 2012, the Knesset approved Amendment 20, which complements the last amendments to the Companies Law (Amendments 16 and 17, which were approved in 2011), whose aim was to increase corporate governance in public companies and bond companies (and, in particular, balance the power of controlling shareholders, define the responsibilities of the company's various organs and increase the power of minority shareholders). The purpose of Amendment 20 was to produce an informed and transparent decision making process regarding remuneraton, and impose on officeholders conduct norms which would protect the interests of the company's shareholders or bondholders.
In 2013, the Economic Department continued to follow the issue of officeholder remuneration. This follow up includes ten chapters, which cover all aspects of the officeholder remuneration issue. The follow up is intended to answer numerous questions regarding the manner in which remuneration of officeholders is conducted in company organs in Israel and the transparency of the approval process, the relationship between the remuneration structure and the company's profitability and its impact on the company's business position, as well as the remuneration amount in relation to the officeholder's contribution to the company. A follow up study is evaluating the impact of Amendment 20 on the composition, amount and manner of approving officeholder remuneration in Israel.
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5. Economic Research
(a) Research cooperation between the ISA and academic institutions For the second year running, the Department held a competitive procedure for the purpose of recruiting researchers from academia for joint studies. The purpose of the procedure is to expand the ISA's research infrastructure within the Department. The program included researchers with a master degree or upwards, in a number of relevant fields. The subjects of the studies included: the development of the capital market; correcting economic and regulatory failures; protecting the investing public; increasing investors’ confidence; and increasing public awareness of capital market issues.
(b) Research studies published in 2013: 1. Working paper: Algorithmic trading and high frequency trading in the Israeli capital market – review and initial findings In recent years, algorithmic trading has become increasingly prevalent in the Tel Aviv Stock Exchange. Algorithmic trading is significant in terms of encouraging liquidity and market development, as well as various regulatory issues. The study describes the characteristics of algorithmic trading, reviews its contribution to the capital market both in Israel and abroad and examines its share and contribution to liquidity in the forward and financial instruments market (MAOF). The study found that the share of algorithmic players in the contract volume in the MAOF market peaked in 2011, reaching approximately 40%, while in 2013, it reached 25%. On the other hand, their share of the orders was double, and even higher in orders entered in the first level. In other markets, their share was smaller, and is most evident in the corporate bond market and ETN market. In addition, the study showed that algorithmic research has important advantages in terms of efficiency, liquidity, correct pricing, fairness and stability. The study also found that algorithmic traders contribute to liquidity in the MAOF market according to the CRT index. Their contribution is even greater in cases of low liquidity, and somewhat in crisis periods. The study found that algorithmic trading in Israel is still a long way from that in large Western markets: its scope is more limited, it has developed late in relation to other capital markets in the world, and traders end the day with larger positions in relation to their daily activity volume. The study expects this area to continue expanding and improving in Israel, and also expects current algo traders to be joined by both foreign players and additional local players. The study maintains that any future regulation should preserve the advantages of aglorithmic trading, minimize potential risks and respond to the need to follow up on developments in this area.
2. The relation between a market index and its stocks in high frequency trading The relationship between a market index and the stocks comprising it is a complex one. An index is the weighted average of its components, but when this relation is studied using a resolution of a single day or more, the index has a greater impact on the stocks than stocks
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do on the index. The study examined the manner in which this relation changes when examined in short time spans. According to the findings of the study, which made use of correlation-based study methods, stocks have greater impact on the index in short time spans. These findings have ramifications in terms of high frequency trading, and point to the need to publish the index within shorter time frames, as close as possible to the time resolution of the trading itself. 3. Working paper: Voting in companies' general meetings – voting patterns by institutionals as compared with proxy consultants' recommendations An assessment of the area of proxy consulting to institutionals in Israel revealed that a single consultant controls a large share of the market (approximately 70% of the assets managed by institutionals in Israel). The purpose of the study was to contribute to the understanding of the role of proxy consulting services in terms of corporate governance by studying the proxy consultant's recommendation pattern and its impact on the process of exercising voting rights by institutional investors in public companies. In addition, the study estimated – using event analysis – to what extent the recommendations of the proxy consultant include information relevant to capital market players. The event study yielded that, in most cases, there was an increase in the surplus cumulative yield where the voting in the meeting was consistent with the proxy consultant's positive recommendation, except in cases where the subject of the voting was approval of transactions with interested parties or management agreement with controlling shareholders. In such cases, voting according to a positive recommendation led to zero or adverse response from the market. The study found that entities who use proxy consultant services adopt the consultant's recommendation 97% of the time, while entities which do not use the service vote the same as the consultant's recommendation only 47% of the time. This finding may reflect positions that differ from that of the proxy consultant, rather than stronger support for management by fund managers who do not use the consultant's services.
4. Liquidity in the corporate bond market in Israel in heterogeneous trading volumes The study provides a review of the structure of the corporate bond market in Israel, descriptive statistics regarding the order book and an assessment of order book liquidity in heterogeneus trading volumes. In addition, it assesses in depth book liquidity for a wide sample of Israeli bonds over an extensive period of time. The study analyses an extensive sample of bonds from March 2009 to January 2012. For comparison purposes, the study also assessed in depth book liquidity for stocks traded on the Tel Aviv Stock Exchange in January 2010. Using the information contribution test proposed by Benston and others (Benston et al., 2000), the study yields that in depth book liquidity measures contribute additional information to investors in a stock sample. This recommendation is in line with findings by Benston and his colleagues. Nevertheless, these measures do not contribute additional information in the bond sample.
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5. Working paper: the crisis in the corporate bond market in Israel and pricing of risks in the primary and secondary markets in 2008-2010
The study examined whether there were failures in the development of the corporate bond market, its structure and risk management practices. The first chapter examined the manner in which the tradable financial markets in Israel evolved – in the years prior to the crisis, in relation to other countries – for the purpose of understanding why in other countries the crisis was mainly in real estate and banking, while in Israel – mainly in the corporate bond market. The second chapter of the study examines the characteristics of the bond market and the manner in which risks were priced prior to the crisis. The third chapter deals with models which attempt to estimate the probability that a company will reach a debt settlement agreement or encounter financial difficulties, based on accounting data made public. The fourth chapter includes a summary and recommendations. The study's main findings are as follows: the share of the real estate industry in the corporate bond market is minimal worldwide, but in Israel, this was the industry which raised the most debt in the years that preceded the crisis. As a result, the corporate bond market constituted one of the main focal points of the crisis. However, an in-depth assessment of the crisis reveals that so far, the corporate bond market in Israel was less compromised than other bond corporate markets around the world. In addition, the percentage of insolvent corporate bond companies around the world was higher than in Israel as of the first half of 2010. In Israel, as elsewhere, under-pricing of risks in the bond market was evident in the years that preceded the crisis. However, the pricing of the various risks in the primary market was usually adequate. In addition, issues such as duration, rating and industry were correctly priced by the market. Overall, it is safe to say that the market's risk pricing formula included the relevant variables. But when reviewing the familiar models, from the literature, for forecasting insolvency of a company based on financial ratios, the study found that the models were unable to produce adequate forcasts as to which companies in Israel would become insolvent. The results were improved when the measure was adapted to the Israeli market. The study reviewed the variables which influence the probability of a company becoming insolvent in the real estate industry, yielding that entrepreneurial real estate companies had a higher probability of reaching insolvency in relation to income generating real estate companies. The use of redemption yields when estimating insolvency probabilities provides results which are on par with those of the model based on financial ratios. At the height of the crisis, risk was evidently over priced. Nevertheless, the relative pricing was correctly done, managing to separate between companies which would encounter solvency difficulties and those that would not.
6. "Trader liquidity" as a new liquidity measure in financial markets
Following the financial crisis, which began in 2008, the issue of liquidity in financial markets raised interest in the global financial system. After the crisis, and due to its impact on the global economy, leading economic theories were reassessed in order to mitigate future
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financial crises. Thus, this work offers a new approach to the issue of financial market liquidity. It is customary to link market liquidity to forecast variables related to trading activity – such as trading volume of the monetary value of the trading volume. This study proposed new liquidity measures which are based on new information on the market. Using information collected on unique trader accounts, new liquidity measures were presented based on changes in the composition of market participants (sellers, buyers, or both). In addition to presenting the new measures, the quantitative relation between them was assessed, as well as security price changes as compared with accepted liquidity measures. The results yielded that the gap between the number of buyers and number of sellers has a better forcasting capability as compared with other measures in terms of forecasting security prices. The results presented in the study provide new measures for monitoring and managing market liquidity, and shed a new light on the mechanisms controlling financial markets dynamics.
6. Examples of ongoing analyses performed in 2013
The Economic Department also performs ongoing studies whose purpose is to provide decision makers, in real time, with data in order to monitor the markets and support decision making. Examples of ongoing analyses performed in 2013:
(a) Development of debt settlement agreements in Israel in 2008-2013 The credit crisis which swept world markets in 2008 affected the Israeli corporate bond market as well. A large number of publicly traded companies ran into liquidity difficulties and were unable to repay their debts, inter alia, as a result of their bonds' terms. As a result, beginning in 2009, a growing number of companies initiated bond settlement proceedings with their bondholders. In order to follow the developments in bond settlement agreements, the Department collected a variety of data so as to assess – on an ongoing basis, using statistical tools – these agreements' characteristics (industries, ratings, size of banking and non banking debts, type of procedure, etc). This long term study will focus on the following issues as well: economic valuations of arrangements, institutional investors' behavior and involvement in the arrangement procedures, event studies focusing on announcements regarding the initiation of debt settlement procedures, formal announcements regarding arrangement agreements, etc. (b) Bond issues by Israeli companies in 2009-2013
The Department is following the development of corporate bond issues in 2009-2013 in order to examine the market's speed of recovery from the credit crisis, after it reached its peak in 2008, in order to assess the likelihood of a credit crunch recurring. We are conducting an in- depth analysis of the characteristics of companies that have successfully raised funds in the corporate bond market during these years and the characteristics of their offerings. As part of the study, the Department is collecting data in order to characterize issuing companies, such as ratings, level of leverage, industry, as well as information on the
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offerings and the level of protection offered to investors – proceeds, collaterals, loan covenants for bonds and banks, etc.
(c) Monitoring liquidity In recent years, there has been a decrease in trading volumes both in Israel and in foreign capital markets. A low trading volume raises the fear that the price formation process and security pricing have been compromised. The Economic Department began monitoring, on an ongoing basis, market liquidity in various markets in order to estimate to what extent less trading can adversely affect efforts to increase market efficiency. A number of measures used for this purpose, such as the Ask-Bid margin measure, the CRT (Cost of Round Trip Trade) mesaure,29 cycle speed and market depth (variations by Kyle). The results of the follow up are used for ongoing monitoring of the market and for the purpose of setting policies in committees such as the Committee for Increasing Trading Competition and Committee for Increasing Trading Competition and Liquidity on the Stock Exchange.
(d) Monitoring developments in the number of public companies Since 2007, which was a record year in terms of fund raising and number of companies in the capital market, there have been changes in the number of offerings and delistings on the Tel Aviv Stock Exchange. This trend is in line with trends in other countries. In Israel there has also been a change in the nature of the primary market – there has been a shift from focusing on stocks to focusing on debt. The Economic Department monitors offerings and delistings in the local market and globally on an ongoing basis, in an effort to understand the reason for changes and expected trends. The Department monitors, inter alia, the development of the market for corporate bond offerings, in an effort to estimate the rate of recovery of the market following the height of the credit crisis in 2008, and examine the possibility of a future credit crunch. The market conducts an in-depth analysis of the characteristics of companies that have successfully raised funds in the corporate bond market during these years and the characteristics of their offerings. (e) Monitoring the secondary bond market Since the 2008 credit crisis, the Department has been monitoring the secondary bond market and analyzing its many facets, including: analysis and segmentation of the secondary market in terms of ratings and industries; assessing linkage types and bond characteristics; yield margins from the publicly traded bonds' curve as compared with international markets. These data serve for mapping and predicting bond market difficulties as well as mapping and predicting the risks embodied in it, serving as a basis for other studies performed by the Department.
29 CRT (Cost of Round Trip Trade) -- measures a loss at a given moment for the purchase, and subsequent sale, of a certain number of units.
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5.4 The Investigations, Intelligence and Trading Control Department A. General
1. The purview of the Investigations, Intelligence and Trading Control Department
The Investigations, Intelligence and Trading Control Department (hereinafter – the Investigations Department) implements the chairman's policy regarding increasing deterrence and enforcement and streamlining the handling of investigation cases and administrative probes, as well as to ensure proper trading.
2. Main Activities in 2013
(a) Investigating events – During 2013, the Investigations Department identified and investigated events related to securities trading in institutional accounts, in which officers or employees of said entities conducted activities suspected as securities fraud, for personal gain. In addition, the Department identified and investigated events in which an activity suspected as securities fraud was performed for own trading floors , and cases which were suspected as involving inside information. (b) Administrative probes – the Investigation Department conducts administrative probes and forwards their findings to the ISA's chairman, for the purpose of reaching a decision regarding whether or not to start an administrative proceeding. The probes dealt with violations regarding securities fraud as well as violations of disclosure requirements in prospectuses, immediate reports and financial statements. (c) Trading control – trading control is performed on two levels: ongoing control and supervision – in order to maintain proper and fair trading; activity focused on locating irregular trading activities, which may point to violations of the Securities Law. Suspicious cases are forwarded to the Department. Other irregular trading studies are examined and handled by the Trading Control Unit in cooperation with the relevant parties. During the reporting year, the Department further developed and calibrated the BI (Business Intelligence) system. This included developing and building of automated periodic reports for the purpose of ongoing supervision, as well as development and calibration of complex algorithms which will help identify irregular activities. (d) Judicial inquiries – As part of the ISA's globalization strategy, the Department continued, during the reporting year, to respond to judicial inquiries submitted by foreign authorities, under treaties which the ISA is a party to. (e) Collaborations – the Department continued its collaboration with the Information Technology Department, as well as with other enforcement entities, for the purpose of fighting economic criminal activity.
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Table 19: Distribution of investigation cases forwarded to the Investigations Department, Intelligence and Trading Control Department, by type of violation in 2009-2013 Type of violation 2009 2010 2011 2012 2013 Total
Securities fraud 4 4 4 5 5 22
Use of inside information 6 2 4 - 3 15
Misleading information (in a prospectus, 4 307 1 - 1 13 financial statement or immediate report)
Delinquent filing or non-filing ------
Judicial inquiries 9 13 6 6 9 43
Violations by employees of Stock Exchange
members and prohibited acts by a licensed 1 1 2 - - - investment portfolio manager
Violations under the Joint Investment Law 1 - - - - 1
Violations under the Penal Code: bribery, theft, 2 1 2 - 1 6 obtaining by fraud
Total 3126 27 3217 12 20
30 Two files which have been split off an existing file were added. 31 These data include three files which have been split off existing files. 32 These data include one file which was split off an existing file, and do not include administrative inquiry files opened this year.
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Table 20: Cases where it was decided whether or not there was sufficient prima facie evidence that an offense had been committed in 2009-2013 Cases where it was decided there Cases where it was decided there was no sufficient prima facie was sufficient prima facie evidence Year Total evidence that an offense had been that an offense had been committed committed 2009 0 12 3312 2010 3 9 3412 2011 1 14 3515 2012 0 3 37 363 2013 0 10 3810
Total 4 48 52
33 These data do not include 7 cases of judicial inquiries requested by a foreign country, the findings of which were delivered to the foreign agency. 34 These data do not include 11 cases of judicial inquiries requested by a foreign country, the findings of which were delivered to the foreign agency. 35 These data do not include 7 cases of judicial inquiries requested by a foreign country, the findings of which were delivered to the foreign agency. 36 These data do not include 9 cases of judicial inquiries, which were forwarded to the ISA chairman for the first time this year. See separate table. 37 These data do not include 10 cases of judicial inquiries requested by a foreign country, the findings of which were delivered to the foreign agency. 38 These data do not include 9 cases of judicial inquiries requested by a foreign country, the findings of which were delivered to the foreign agency. In addition, these data do not include 9 cases of judicial inquiries, which were forwarded to the ISA chairman for the first time this year. See separate table.
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Table 21: Distribution of investigation cases forwarded to the District Attorney's Office, by main type of violation type of violation, in 2009-2013 Type of violation 2009 2010 2011 2012 2013 Total
Securities fraud 3 3 1 3 5 15
Use of inside information 4 4 3 2 2 15
Misleading information (in a prospectus, 4 3 2 3 2 14 financial statement or immediate report) Violations under the Joint Investment Law - - - 1 - 1
Delinquent filing or non-filing ------
Violations under the Penal Code: bribery, 2 3 3 3 - 11 theft, obtaining by fraud 39 Violation under the Joint Investment Law - 1 - - - 1 Total 13 14 9 12 9 57
Table 22: Distribution of administrative probe cases forwarded to the Investigations, Intelligence and Trading Control Department, by type of violation, in 2009-2013 Type of violation 2011 2012 2013 Total
Securities fraud 2 2 2 6
Use of inside information - 3 - 3
Misleading information (in a prospectus, 1 - 7 8 financial statement or immediate report) Violations under the Joint Investment 1 2 - 3 Law
Total 4 7 9 20
39 All Penal Code violations were included in a single category.
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Table 23: Distribution of administrative probes forwarded to the ISA Chairman, by main type of violation, in 2012-2013 Type of violation 2012 2013 Total
Securities fraud 3 2 5
Use of inside information 1 1 2
Misleading information (in a prospectus, 2 4 6 financial statement or immediate report) Violations under the Joint Investment Law 3 - 3
Total 9 7 16
As of the end of the reporting year, the Investigations Department has 13 pending cases, where investigation is still ongoing and three pending administrative cases. In addition, eight judicial inquiries are still pending.
3. Main activities planned for 2014
(a) Continue investigations and administrative probes in various areas; (b) Streamline work methods and processes in order to shorten work processes and improve documentation, etc.; (c) Uphold internal controls in the Department; (d) Develop additional algorithms in order to local trading irregularities; (e) Deepen knowledge and examine aspects of algo-trading and high frequency trading) and their impact on trading.
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5.5 Department for Supervision over the Stock Exchange and Trading Platforms
A. General
1. Purview of the Department for Supervision over the Stock Exchange and Trading Platforms (a) Supervision over the Stock Exchange and clearing houses 1. The Department coordinates the ISA’s supervision and control over the proper and fair management of the Tel Aviv Stock Exchange. The Department’s powers stem from the provisions of the Securities Law, especially Chapter H of the Law, which deals with the ISA’s powers regarding setting the Stock Exchange’s Rules & Regulations and its directives as well as its duty to supervise, as aforesaid, the Stock Exchange’s proper and fair management. 2. The Department supervises the Stock Exchange's clearing house, as defined under Section 50a of the Law, in order to ensure its stability and efficiency. For this purpose, the Department assesses, inter alia, whether the clearing house has met its requirements under international standards. 3. The Department ensures that supervision over Stock Exchange members focuses on material issues, by using adequate methods and audit tools, so as to minimize lapses and risks embodied in members' activities. 4. The Department's representatives participate in meetings of the Stock Exchange's board, clearing houses and various committees, serving as observers. 5. The Stock Exchange's proposed changes to its Rules and Regulations and its provisions are reviewed by the Department, and passed on to the ISA plenum for recommendations or approval.
(b) Supervision over trading platforms The Securities Law (Amendment 42) of 2010 was approved by the Knesset on June 8, 2010. Amendment 42 to the Securities Law will become effective on the same date as the Proposed Amendments (Platform of Trader's Own Account – of 2013), which was drafted by the ISA is is pending approval by the Knesset's Finance Committee. The Department is promoting the proposed amendments and preparing the infrastructure for reviewing licensing requests and ongoing supervision.
(c) Broker-dealer regulation 1. Currently, most capital market activities, as well as most financial intermediaries, are regulated and supervised by various regulators, either directly or indirectly. However, some of the activities are not regulated under law or fully supervised. Thus, for example, the activities of those performing transactions on behalf of others (brokers), or those performing transactions for others with the dealer's own account (dealers), or those providing custody services to clients' assets (custodians), lack comprehensive
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regulation, and the concern is that the public – who uses and trusts these intermediaries – is insufficiently protected.
2. The Department is currently working on establishing a legislative framework for thorough regulation of broker dealer activities, as well as those of custodian service providers, in Israel, as is the case worldwide. The provisions of the legal framework will require intermediaries to register or obtain a license, and their activity will be regulated and supervised by the ISA. In addition, requirements will be prescribed regarding disclosure and fiduciary duties.
2. Main Activities in 2013
(a) The committee for Increasing Trading Competition and Increasing Liquidity on the Stock Exchange The Committee for Increasing Trading Competition and Liquidity on the Stock Exchange was established due to the lower trading cycles on the Stock Exchange in the past few years. The Committee started working in May 2013, filing an interim report in September 2013. The Department participated in the Committee's meeting and was responsible for its work. (b) Proposed Amendment to the Prohibition on Money Laundering Law applicable to Non- Banking Members of the Stock Exchange (NBMs) regarding closed-end system account In 2013, the Department promoted a proposed amendment to the Prohibition on Money Laundering Order, which is applicable to NBMs, whose main purpose is to increase competition between NBMs and banks in the brokerage field by expanding the closed-end system account mechanism. The proposed mechanism allows NBMs to open new accounts for clients with various allowances for requirements which apply to NBMs in accordance with the Prohibition on Money Laundering Order, provided that all funds, securities and assets in the account come from a client's account with a banking corporation or other NBM (hereinafter – the Original Account) and go back only to the original account. (c) Memorandum regarding finality of clearing During 2013, the Department promoted a proposed amendment to the Securities Law regarding the finality of clearing. The proposal was developed by the Stock Exchange, in cooperation with the ISA, as a direct continuation of legilsative amendments enacted in the past few years, whose purpose was to increase the stability of the Stock Exchange's clearing houses (hereinafter – the Clearing Houses), in accordance with the covenants recommended by the international unbrella organizations and as a response to the recommendations of the International Monetary Fund's report dated April 2012.
(d) Supervision over trading platforms The Department is promoting a proposed Securities Regulations (Own Account Trading Floors of 2013), regarding regulation of the activity of own account trading floors). As of this date, the regulations draft, whose approval is a precondition to begin supervising this field, is pending approval by the Knesset's Finance Committee. In the past year, the Department strove to complete the legislative procedure and regulation of this field, and developed the infrastructure for a license provision procedure and ongoing supervision.
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(e) Broker-dealer regulation During 2013, the Department – in cooperation with the International Affairs Department and Legal Counsel Department – conducted a comparative review, which included mapping and characterizing entities regulated in the broker-dealer field worldwide, examining the main regulatory requirements which apply to them. A joint team – with the Bank of Israel – was established, with the aim of ensuring that the regulation proposed by the ISA in the broker- dealer field will be consistent, comprehensive and broad-reaching, minimizing gaps and overlaps in terms of requirements. During the year, the team developed the principles behind the regulatory requirements which will apply to the brokers and dealers, including banks.
3. Main activities planned for 2014 a. Follow -up and implementation of the recommendations of the Committee for Increasing Trading Competition and Increasing Liquidity on the Stock Exchange, especially the recommendation to turn the Stock Exchange into a for-profit corporation. b. Implementing and making changes and adjustments to the Stock Exchange's corporate governance principles, due to the important developments which occurred in this field in the past few years, while the existing infrastructure was passed into law and the Stock Exchange's Rules and Regulations many years ago. c. Developing an outline for creating a legislative framework for regulating brokers-dealers and supervising them. The outline will characterize the entities which are to be supervised under the new regulation and the main regulatory areas which will be applied to them, according to the proposal, and will include a proposal for a supervisional structure, taking into account the current division of powers between the various regulators. d. Promoting and completing the legislative procedure and placing trading platforms under a regulatory regime. The Department will complete the preparation of the infrastructures required for the ongoing licensing and supervision procedure of trading platforms, and be responsible for weighing licensing requests submitted to the Israel Securities Authority. B. The Department's activities
1. Supervision over the Stock Exchange and clearing houses
(a) Participation in the meetings of the Stock Exchange's board of directors and committees During the year, the Department's regpresentatives participated in the meetings of the Stock Exchange's board of directors and committees. In this framework, the Department's representatives also participated in meetings of the audit committee, the remuneration committee and the committee for finding a CEO and chairman of the board for the Stock Exchange. (b) Changes made to the Stock Exchange's Rules and Regulations and provisions thereof
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As part of the ISA's supervision over the proper and fair management of the Stock Exchange, the ISA's recommendation to the Minister of Finance is required for any change made in the Stock Exchange Rules and Regulations. The ISA's approval is also required for the Stock Exchange's proposals for new provisions. Thus, the ISA discussed and approved the Stock Exchange's proposals to amend its provisions. In addition, the ISA recommended the adoption of amendments initiated by the Stock Exchange to its Rules and Regulations, as follows:
On January 8, 2013:
The ISA recommended to the Minister of Finance to revise the Rules and Regulations, while approving an amendment to the provisions regarding listing of exchange traded notes. The ISA approved temporary provisions pursuant to Section 46a of the Law regarding listing of balanced ETNs. The ISA approved amendments to provisions regarding amendment of the rules of trading prior to de-listing. The ISA approved temporary provisions – pursuant to Section 46a – regarding listing of foreign securities and extended their validity. The ISA recommended to the Minister of Finance to revise the Rules and Regulations, while approving an amendment to the provisions, regarding reporting to an NBM's clients. The ISA recommended to the Minister of Finance to revise the Rules and Regulations – while approving an amendment to the provisions – regarding IT management in an NBM – updating of the provisions' effective date. The ISA recommended to the Minister of Finance to revise the Rules and Regulations – while approving an amendment to the provisions – regarding regulation of the activity of quote enablers in securities trading. The ISA approved amendments to provisions regarding trading conditions for stocks which serve as options' underlying assets.
On February 18, 2013:
The ISA approved the amendment of a price list (appendix to the provisions) regarding amendment to the manner in which contingent transactions or failed transactions are handled. The ISA approved temporary provisions pursuant to Section 46a of the Law regarding suspension of trading due to a company event.
On May 13, 2013:
The ISA approved the amendment of provisions regarding changes in the criteria for "volatility mitigator" and "English opening". The ISA recommended to the Minister of Finance to revise the Rules and Regulations, while approving an amendment to the provisions regarding amending the rules which apply to limited partnerships.
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The ISA approved an amendment to provisions regarding exemption from preservation rules for R&D companies. The ISA approved temporary provisions pursuant to Section 46a of the Law regarding listing of balanced ETNs. The ISA approved an amendment to provisions regarding limits on open positions in options on stocks – transitioning to a bi-annual update rather than an annual update. The ISA approved temporary provisions – pursuant to Section 46a – regarding minimum price for a stock.
On June 30, 2013: The ISA approved an amendment to provisions regarding the joining of reports regarding off-Exchange translations. The ISA approved an amendment to provisions regarding shorter transfer periods to custodians for clients who are not residents of Israel. The ISA approved an amendment to provisions regarding trading in weekly options on the TA 25 and "order / cycle" ratio.
On September 3, 2013:
The ISA recommended to the Minister of Finance to revise the Rules and Regulations, while approving an amendment to the provisions regarding foreign securities – proposal to include the rules in the Stock Exchange's Rules and Regulations and its provisions. The ISA approved amendments to provisions regarding restriction on open positions – amendments to the provisions and derivative outline. The ISA recommended to the Minister of Finance to amend the Rules and Regulations, while approving an amendment to the provisions regarding suspension of trading due to a company event.
On December 18, 2013:
The ISA approved an amendment to the temporary provisions and extending their validity pursuant to Section 46a of the Law regarding listing of balanced ETNs. The ISA approved an amendment to provisions regarding capital data on which the Stock Exchange relies when updating the indices. The ISA approved an amendment to provisions regarding linkage and rounding of the fee amounts included in the price list. The ISA approved an amendment to provisions regarding increasing the maximum amount of a corresponding derivative order. The ISA approved an amendment to provisions regarding including securities on the preservation list in the closing stage. The ISA approved an amendment to provisions regarding a lapsus calami – quote enablers in securities trading. (c) The Committee for Increasing Trading Competition and Liquidity on the Stock Exchange
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The Committee for Increasing Trading Competition and Liquidity on the Stock Exchange was established due to the lower trading cycles on the Stock Exchange in the past few years, which is hurting both the primary and secondary markets. The vital need for the economy's growth and the need for an efficient distribution of its resources and the existence of financial instruments which enable high level risk management make the Stock Exchange a highly significant epicenter of the capital markets, mandating its efficient activity. This is especially the case against the backdrop of growing competition in global capital markets and swift technological developments, which open up new and ever evolving opportunities. In its letter of appointment, the Committee was asked to examine how trading can be rendered more efficient and how to encourage liquidity in the securities listed on the Tel Aviv Stock Exchange, as well as offer alternatives. The Committee was asked, inter alia, to examine the following issues: 1. Launching new financial products; 2. High frequency trading; 3. Trading methods and trading orders; 4. Structure of trading fees; 5. Establishing a securities lending pool; 6. Encouraging foreign investors.
As of May 2013, the Committee held 18 meetings, which included numerous entities active in the capital market in a variety of areas. The Committee examined the issues on its letter of appointment, as well as other issues, as outlined in the report.
In order to provide a swift response to the situation in the capital market, especially the Stock Exchange, an interim report was filed in September 2013. The report included recommendations to be implemented in the near to immediate future, as well as recommendations for evaluating issues whose implementation may take longer, but that – according to the Committee's recommendations – should be evaluated effective immediately. The Committee received the public's comments on its interim report, and elaborated on additional issues before drafting its final report. For the interim report, please see the ISA's website.
(d) Proposed Amendment to the Prohibition on Money Laundering Law applicable to Non- Banking Members of the Stock Exchange (NBMs) regarding closed-end system account In 2013, the Department promoted a proposed amendment to the Prohibition on Money Laundering Order, which is applicable to NBMEs, whose main purpose is to increase competition between NBMEs and banks in the brokerage field. According to the proposal, the closed system account mechanism will be expanded, allowing NBMEs to open new accounts for clients with various allowances for requirements which apply to NBMEs in accordance with the Prohibition on Money Laundering Order, provided that all funds, securities and assets in the account come from a client's account with a banking corporation or other NBME (hereinafter – the Original Account) and go back only to the original account.
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The existing format of the closed system mechanism is limited to custodian transactions, so that at the end of the day, securities, financial assets and funds are transferred back to the original account. The expansion will allow two new channels for closed system accounts: (1) A closed system account which includes custodian services, which will not mandate returning the funds, securities and financial assets at the end of each day; (2) A closed system financial deposit account – financial deposits which are deposited with an NME for purposes other than implementing securities transactions. One of the main proposed allowances is the possibility to rely on face to face identification which was implemented by banking corporations or NMBs in which the original account is managed. This allowance is designed to allow investment house clients to open securities accounts using the internet, thus overcoming the lack of physical accessibility of households to the offices of NMEs. In addition, according to the proposed amendment, the current exemption from the requirement to meet the client will be revoked only for institutionals who are listed in sub- sections (2)-(7) of Section 14 of the order (i.e., the exemption will only apply to all of the entities listed in Section 14, excluding public institutions). On the other hand, a full exemption from the requirement to meet clients will apply to closed system financial deposit accounts.
The proposed amendment was published for public comments, and after the comments were implemented – it was submitted to the Ministry of Finance. (e) Memorandum regarding finality of clearing During 2013, the Department promoted a proposed amendment to the Securities Law regarding the finality of clearing. The proposal was developed by the Stock Exchange, in cooperation with the ISA, as a direct continuation of legilsative amendments enacted in the past few years, in accordance with the level recommended by the international umbrella organizations and in response to the recommendations of the International Monetary Fund's report dated April 2012. The purpose of increasing the protection of clearing houses is to prevent systemic failures due to insolvency by one of the members of a clearing house, and in order to allow for the ongoing and proper functioning of the clearing houses, of trading on the Stock Exchange and the capital market in Israel. On September 16, a memorandum of law was published. The following are its main points: 1. A clearing transaction, including a clearing order given to a clearing house, shall be irrevocable as of the date prescribed by the clearing house rules. 2. The finality of the clearing shall also apply to third parties, including an officeholder nominated as a clearing house member who is under insolvency proceedings. 3. An exclusion to Section 268 of the Companies Order (which determines that the initiation of liquidation proceedings cancels any transaction or transfer) shall apply to a clearing house, in case of insolvency proceedings against a clearing house member.
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4. A clearing house will be allowed to clear clearing orders received prior to the determining date as prescribed by law, even in case of insolvency by one of the clearing house members, in according with the clearing house rules. 5. Arrangements to be prescribed by the clearing house rules regarding the manner in which a clearing house and clearing house members should settle accounts, including arrangements regarding netting, as well as arrangements for determining fair value and for finalizing transactions, will override any lawful provision. These arrangements will remain valid in case of insolvency proccedings of a clearing house member. 6. Clearing houses shall be awarded protection even in cases of insolvency proceedings taking place outside the State of Israel which may bear upon clearing houses in Israel. 7. Insolvency proceedings against a clearing house member can only be initiated after a notice to that effect has been provided to the Israel Securities Authority, and it has been allowed to appear and plead before the court. 8. Insolvency proceedings shall not derogate from a clearing house's right as prescribed by its rules or diminish the actions taken by the clearing house in case of a fault. 9. Without derogating from the clearing house's power to discontinue services to a clearing house member under insolvency proceedings, the court may issue an order, according to which the defences prescribed in this section, as well as the provisions prescribed in the clearing house's rules, shall continue to fully apply to clearing transactions which such a member is a party to even after the insolvency proceedings have begun. Issuing such an order shall not derogate from a clearing house's right to take actions, in accordance with the rules of the clearing house, against any of its members, including the member for which the order was issued, including to cease providing clearing services to that member temporarily, suspend it or terminate its clearing house membership. 10. The clearing house shall not be charged with any charge whatsoever, including reimbursement or compensation for commiting an act or omission, providing that the clearing house has committed that act or ommission in accordance with the clearing house's rules.
(f) Requirement for minimum equity capital and minimal liquidity level in the Stock Exchange and for each clearing house, separately During 2013, the ISA approached the Stock Exchange's board of directors, demanding that it develop a detailed policy, as soon as possible, which would be based on a risk review and methodology, in order to determine the minimum equity capital and minimal liquidity required in the Stock Exchange and each of the clearing houses, in accordance with the risks embodied in their activities, to be discussed by the Stock Exchange's institutions and clearing houses as required.
2. Trading platforms
(a) Finalizing the legislative procedure
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Amendment 42 to the Securities Law was approved by the Knesset in June 2010, and will become effective at the same time as the proposed regulations drafted by the ISA and pending approval by the Knesset's Finance Committee. The Department promoted the proposed regulations in the Finance Committee's sub-committee, which is charged with its approval. The proposed regulations deal with the following issues:
1. License requests Requirements for reporting and providing information. A company wishing to obtain a trading platform license shall attach to its request a report, which includes, inter alia, the following: (1) A periodic report and specific reports regarding the company's stability and scope of activity; (2) An additional details report, which includes various representations regarding the requesting company and its controlling shareholder. In addition to submitting the license request, the company shall be required to submit for the ISA's approval its proposed rules and regulations for proper and fair management of the trading platform, including rules for ensuring the company's compliance with the requirements of the law.
2. Degree of leverage
A leveraged investment allows an investor to invest larger sums than he has at his disposal. The ratio between a transaction's nominal amount and the collateral required will not exceed a certain percentage, and the client's loss will not exceed the amount of the collateral he has pledged.
3. Conflict of interests A conflict of interest between a company and its clients is inherent, since they constitute counter parties. In other words, a company purchases from its clients for its own account or sells to its clients from its own account. Thus, companies will be required to have a conflict of interests policy in place, which will include all types of possible conflicts of interests inherent in their activities as well as procedures aimed at overcoming such conflicts of interest. In addition, companies or their representatives shall be prohibited from providing advice, marketing and portfolio management services for financial instruments. 4. Handling client funds
Clients' funds and assets shall be held in trustee accounts that are separate from company assets, related parties and interested parties. Companies will be required to deposit their clients' funds in banks or financial institutions outside Israel. R egarding financial institutions outside Israel – rating requirements were set, and each company was required to examine additional accepted criteria for assessing credit risk. 5. Reporting
Companies shall file annual and quarterly reports, and will also report – on a monthly basis – regarding profitable and losing accounts, scopes of activity, compliance with the prudential model, credit risks and market risks. In addition, the regulations prescribe immediate reporting requirements.
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6. Prudential requirements
There will be a requirement for minimum equity capital, liquid assets and insurance. The minimum required equity capital is derived from various financial risks embodied in the activity of a platform, such as credit, market and liquidity risks as well as operational risks. The purpose of the model for calculating the minimum equity capital requirement is to incentivize platforms to minimize risk exposure.
7. Other Requirements regulating engagements with clients; documentation and record keeping; adjusting activity to clients' characteristics; companies' advertising and marketing and their reporting system.
(b) Preparing an infrastructure for reviewing license requests and ongoing supervision After the regulations have been approved, a transition period will begin, in which the ISA will review license requests. When the transition period ends, and the ISA will begin dispensing licenses, the Department will begin to supervise the proper and fair conduct of trading platforms on an ongoing basis. In the past year, the Department developed a professional, organizational, legal and technological infrastructure in order to implement these tasks.
3. Broker-dealer regulation a. During 2013, the Department – in cooperation with the International Affairs Department and Legal Counsel Department – conducted a comparative review, which included mapping and characterizing entities regulated in the broker dealer field worldwide, examining the main regulatory requirements which apply to them. b. A joint team – with the Bank of Israel – was established, with the aim of ensuring that the regulation proposed by the ISA in the broker-dealer field will be consistent, comprehensive and broad-reaching, minimizing gaps and overlaps in terms of requirements. During the year, the team developed the principles underlying the regulatory requirements which will apply to broker-dealers, including broker-dealer activities in banks.
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5.6 Legal Counsel Department
A. General
1. Fields of activity and functions of the Legal Counsel Department
The Legal Counsel Department has three primary functions:
1. Legal counsel concerning the ISA's operations and supervisory powers
In this role, the Legal Counsel Department deals with questions of policy and horizontal decision making with respect to a certain area or issue (such as legislation initiatives and legal interpretation of the provisions of law which may affect the economy as a whole, or a sector of entities in it), decisions on specific issues of special significance (for example, enforcement decisions with respect to supervised entities) as well as promoting central projects on the ISA's agenda.
In addition to legal advice to the ISA Plenum, committees and chairman on matters brought before them, the Legal Counsel Department provides legal support to various ISA departments and conducts control over their operations, to ensure that it is in keeping with the ISA's powers, policy and positions.
The Legal Counsel Department maintains, as necessary, interfaces with factors external to the ISA (such as other regulators, the State Comptroller, etc.) and is involved in legal proceedings to which the ISA is party or is involved in (such as criminal, administrative and civil proceedings – including class actions, derivative actions etc.). In addition, the Legal Counsel Department deals with professional training for the ISA's lawyers and participates in various professional forums outside the ISA. 2. Legislation
The Legislation Unit at the Legal Counsel Department is responsible for providing solutions for the ISA's many legislative needs, and for leading and promoting regulation related to the ISA's operations in the different areas under its authority. This unit cooperates with the various ISA departments, each in accordance with the fields it supervises, and with various government ministries, the Knesset and other bodies involved in legislation proceedings. In addition, the unit maintains dialogue with the various supervised entities and with the investing public at different stages of the legislative process.
In the reporting year, following a period of approximately two years in which legislation was dealt with under a separate ISA department, this field returned to the direct authority of the Legal Counsel Department. 3. Organizational Legal Counsel
In this role, the department provides legal advice to the ISA as an organization, similar to such departments in any corporation or public authority, but together with the special
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characteristics related to the structure and powers of the ISA. Recent years saw a significant growth in the ISA (in both the number of employees and scope of operations), and as a result the ISA is required to deal with a growing number of questions on matters related to general legal fields, such as tender laws, labor laws etc.
1. Key activities in the ended year
(a) Regulation allowances plan
Receiving, processing and implementing public comment, drafting proposed legislative amendments as part of the first series of regulation allowances and its submission for the Knesset's approval.
(b) Administrative enforcement and financial sanctions
Further implementation of administrative enforcement and enforcement activities by way of imposing financial sanctions.
(c) Electronic voting system
Approval of primary legislation and promoting regulations to regulate the system's operation.
(d) Rating agencies
Discussions in the Knesset's Economy Committee on the bill before its second and third readings, and publication of the Rating Regulations for public comment.
(e) Private enforcement
Involvement in private enforcement proceedings by way of participation in financing for class actions and derivative actions.
(a) Regulation allowances plan – in the present year, the completion of the Knesset legislative process of the first series of allowances is planned, together with formulating the second series of allowances into a legislative framework. The second series of allowances is also expected to deal with a variety of issues such as allowances in immediate reporting duties, allowances in ways of offering securities to the public and allowances for R&D companies.
(b) Trading floors – promoting enactment of regulations to determine the principles of regulation of trading floors' operations, as part of the discussions held by the subcommittee appointed for this purpose by the Finance Committee.
(c) Completion of regulation concerning rating agencies – completion of discussions in the Knesset Finance Committee, approval of the bill and enactment of the Rating Regulations.
(d) Amendment 21 to the Joint Investment law – further advancement of the bill designed to regulate ETNs, together with advancement of auxiliary regulations.
(e) Regulation of activities of institutional consultancy firms – completion of regulation concerning the activities of institutional consultation firms, together with advancement
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of the Joint Investment Trust Regulations (Participation of Fund Managers in Unit Holders' Meetings) of 2013, dealing with mutual funds' duty of participation. B. The Department's Activities
1. Key matters with which the Legal Counsel Department dealt in the preceding year
In 2013, the Legal Counsel Department was involved in work on key horizontal matters in the ISA's operations, while also dealing with many matters as part of its regular work (refreshing procedures, answering preliminary inquiries, dealing with legal proceedings to which the ISA is party or applications for financing for class actions and derivative actions), while consulting the relevant professional ISA departments. Below are details on the primary issues dealt with by the Legal Counsel Department in 2013:
Regulation allowances plan
Continuing the regulation allowances outline published in September 2012, a first series of the proposed regulation allowances was drafted, and the process of receiving, processing and implementing public comment to proposed legislation revisions was completed. The Legal Counsel Department coordinated and guided the work on this issue. In 2013, the Allowances and Development of the Capital Market Bill (Legislative Amendments) of 2013 was approved in the first reading. Afterwards it was approved by the Finance Committee, and in January 2014 it was approved in the second and third readings at the Knesset. The bill deals with a gradual and balanced reduction of regulatory requirements for entities supervised by the ISA, where this is possible, while protecting the interest of the investing public, with the goal of bringing about development of the capital market, which is a crucial factor in Israel's economic growth. The law includes allowances in the primary fields of activity supervised under the Securities Law. At the same time, the ISA is promoting many amendments to regulations, also dealing with a proportional and balanced reduction of regulation.
(1) Administrative enforcement and financial sanctions
In the past year, the ISA continued in implementing administrative enforcement as well as enforcement activities by way of imposing financial sanctions on supervised entities. The ISA considers further implementation of administrative enforcement to be a significant challenge in the ISA's work. The Legal Counsel Department took part in formulating positions, setting criteria and taking care of the various proceedings and legal and other questions arising from these matters, such as issues concerning the processing of proceedings, manner of performing administrative inquiries etc.
(2) Electronic voting system
In October 2013, Amendment 53 to the Securities Law (Electronic Voting System) was published in the Official Gazette, and its coming into effect set for the effective date of regulations enacted under it.
The law established the legal infrastructure for the operation of an electronic voting system, created by the ISA in order to promote the Israeli capital market by way of increasing the
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involvement of the investing public in decisions presented for discussion in the general meetings of reporting corporations. At present, public participation rates in such meetings is very low for a variety of reasons. The system will enable the security holding public (share, bond and option holders and in the future participation unit holders) to vote online, and to exercise in this way their voting rights in the meetings of reporting corporations in a simple and convenient manner, at no cost, on the basis of a secure platform.
In the present year, the ISA will continue to promote regulations necessary in order to complete the legislative infrastructure for the system's operation. Such regulations will apply, inter alia, to the process of proving ownership of a security, regulation of the matter of online voting and regulating interfaces between the various factors involved in the system's operation.
(3) Regulating the operation of rating agencies
In the past year, the ISA promoted legislation to regulate the operations of credit rating agencies in Israel, while subjecting these to the ISA's supervision. This proposed legislation was designed to protect the investing public, which relies on these rating when making investment decisions, and to ensure that the rating process and the rating itself are reliable, of high quality and independent. The bill determines, inter alia, criteria for the operation of rating agencies and for conducting rating; various provisions to ensure the independence of rating agencies and their dealing with conflict of interest in their operations; as well as supervision and enforcement powers over their operations, including administrative sanctions for the violation of the provisions set. The bill shall require exposure of the methodologies and information on which rating is based, in the scope and manner to be determined, so that it will be possible to assess their reliability and quality. Due to the international nature of rating agencies' operations, the bill was drafted taking into consideration current and emerging arrangements abroad.
The bill was approved in the first reading by the Knesset plenum in July 2013, and was sent to the Economy Committee for the purpose of its preparation for the second and third readings. Simultaneously with promoting the bill, secondary legislation is being promoted, the approval of which is a precondition for the coming into effect of the law.
(4) Private enforcement – ISA operations in connection with class actions and derivative actions
In 2013, the ISA continued its involvement in the field of private enforcement of securities laws and corporate laws, this through two primary channels: (a) assistance in financing class actions in the field of securities and derivative actions, pursuant to the powers vested in the ISA by Sections 209 and 205a of the Companies Law, respectively; (b) examination and involvement in settlements reached in these proceedings.
In 2013, the ISA resolved in principle to assist in financing five new proceedings. Therefore, at the end of the reporting year, the ISA assisted in financing 13 proceedings. Assistance is expressed, usually, in financing expert opinions, which are costly.
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In 2013, the ISA examined all settlements reached in class actions concerning securities and in derivative actions, and was involved in filing position papers on nine settlements. In most cases, these position papers influenced the settlements, as approved at the end of the day, to the benefit of class members.
(5) Regulating the operation of institutional consultancy firms
In light of the recognition of the influence of consultancy firms on corporate governance, the ISA promoted in 2013 the regulation of the operation of institutional consultancy firms. It was decided that institutional consultancy firms' operations will be regulated, at this stage, through indirect regulation, by setting restrictions and incentives for fund managers when engaging consultancy firms. In September 2013, the two layers of indirect regulation were published for public comment. The first layer is a memo to mutual fund managers, dealing with engagement of consultancy firms, detailing the due diligence that must be performed by a fund manager when engaging a consultancy firm, as well as parameters on the matter of relying on the recommendations of consultancy firms. The second layer is a paper of adequate principles for the operation of consultancy firms, designed to outline criteria for the conduct expected from consultancy firms, which shall reflect the ISA's position with respect to the desirable manner of work by consultancy firms.
It is noted that the regulation of consultancy firms' operations is a part of a comprehensive process, coordinated with the Capital Market Branch of the Ministry of Finance and with the Ministry of Justice. This process also promoted regulation of the duty of participation of institutional bodies in the general meetings of reporting corporations, as detailed below under the section discussion "Legislation proposals and secondary legislation" in this chapter.
(6) ISA emergency readiness
In 2013, the Legal Counsel Department continued its involvement in promoting the ISA's emergency readiness. As part of this, procedures were completed for the operation of the ISA and its departments in an emergency. In addition, various emergency scenarios were examined and practiced, relevant to the ISA's function in the capital market. The ISA also took part in the emergency readiness drills conducted by the state.
2. Legislation
1. Special project in 2013 – easing of regulation and capital market development project
The project of easing regulation and developing the capital market is at the heart of the roadmap published by the ISA. The growth in the scope of regulation over the capital market in recent years, and the ongoing crisis with which the capital market is coping, led the ISA to devote resources to a thorough examination of regulation under its fields of responsibility, with the purpose of identifying possible easing of the oversight of the supervised factors, while protecting the investing public's interest.
After an internal examination conducted with the purpose of identifying such allowances, and many meetings held on this issue with market participants, the ISA published in 2012
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the outline of regulatory allowances for public comment. Following discussion on public comments, the ISA formulated its proposals for regulatory allowances. Most allowances require amendment of legislation – primary or secondary. Since this refers to a very large number of allowances, on issues that are not necessary linked to each other, legislative amendments were concentrated in a number of batches, both for the purpose of receiving public comment and for the purpose of promoting proceedings in the Knesset.
The first batch of allowances included amendments to the three laws over which the ISA is charged (the Securities Law, the Joint Investment Trust Law and the Regulation of Advice Law) and to various regulation collections enacted by power of those laws. As foregoing, the Capital Market Easing and Encouragement of Activity Bill (Legislative Amendments) of 2013 was passed in the first reading by the Knesset plenum on November 25, 2013, was approved by the Finance Committee on December 30, 2013, and was approved in the second and third readings on January 20, 2014. a.1 The bill
1. The bill includes allowances on the following matters:
2. Reduction of financial sanction amounts imposed for persistent violations;
3. Extension of the money raising period under shelf prospectuses;
4. Allowances at the conclusion of the reporting duties of reporting corporations;
5. Allowances in the field of dual registration corporations;
6. Allowances in the work of the board of directors and its committees in large portfolio management companies and fund managers;
7. Allowances in the reporting duties of licensees under the Regulation of Advice Law;
8. Establishing a legal infrastructure to enable distribution and access to the deposits and loan fund instrument also to customers that receive no investment advice in banks (see additional details in Chapter 5.2: the Investment Department, in particular see Subchapter B: Mutual Funds, Section 8: Regulatory Activities).
9. Establishing a legal infrastructure to enable publication of paid analysis works by the client. a.2 Regulations and orders
In addition to the primary legislative amendments approved as foregoing in the Allowances Law, the project also includes regulation of amendments in dozens of regulation and order collections by the power of which the allowances were implemented, and inter alia on the following issues: allowances for small corporations; allowances related to prospectuses; allowances with respect to financial sanctions imposed by the ISA; allowances at the conclusion of reporting corporations' reporting duties; allowances in the Securities Regulations on the matter of financial reporting; creating a legal framework to encourage the deposits and loans fund instrument; and allowances in the field of mutual funds.
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Some of the allowances are pending the Finance Committee's decision, and some of them will soon be brought before the committee.
1. Securities Regulations (Conditions for an Offering under a Shelf Prospectus) (Amendment) of 2013; 2. Securities Regulations (Periodic and Immediate Reports) (Amendment) of 2013; 3. Joint Investment Trust Regulations (Reports) (Amendment) of 2013; 4. Joint Investment Trust Regulations (Assets that can be Bought and Held by a Fund and their Maximum Rates) (Amendment) of 2013; 5. Joint Investment Trust Regulations (Calculating Return) (Amendment) of 2013; 6. Joint Investment Trust Regulations (Classification of Funds for Advertising Purposes) of 2013; 7. Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Regulations (Asset for the Matter of a Business Exempt from Licensing) of 2013; 8. Securities Regulations (Annual Financial Reports) (Amendment) of 2013; 9. Securities Regulations (Private Offering of Securities in a Listed Company) (Amendment) of 2013; 10. Securities Regulations (Shelf Prospectus of Securities) (Amendment) of 2013; 11. Securities Regulations (Details, Structure and Form of Prospectus and Draft Prospectus) (Amendment) of 2013; 12. Securities Regulations (Application Fee for Prospectus Publication Permit) (Amendment) of 2013; 13. Securities Regulation (Period for Filing Orders for Securities Offered in a Prospectus) (Amendment) of 2013; 14. Securities Regulations (Application Fee for Prospectus Publication Permit) (Amendment) of 2013; 15. Joint Investment Trust Regulations (Reports) (Amendment) of 2013 – amendment of Regulations 20(27) and 27; 16. Joint Investment Trust Regulations (Assets that may be Bought and Held by a Fund and their Maximum Rates) (Amendment) of 2013 – amendment of Regulations 1, 2 and 2a; 17. Joint Investment Trust Regulations (Purchase and Sale Prices of Fund Assets and Fund Assets' Value) (Amendment) of 2013; 18. Joint Investment Trust Regulations (Options, Futures Contracts and Shorts) (Amendment) of 2013; 19. Joint Investment Trust Regulation (Transactions which may Entail Conflict of Interest, Material Transactions and Off-Market Transactions) (Amendment) of 2013; 20. Joint Investment Trust Regulations (Financial Statements of a Fund) (Amendment) of 2013; 21. Securities Ordinance (Amendment of the Fifth Addendum to the Law) of 2013; 22. Securities Ordinance (Amendment of the Sixth Addendum to the Law) of 2013; 23. Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Ordinance (Amendment of the Second Addendum to the Law) of 2013;
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24. Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Ordinance (Amendment of the Third Addendum to the Law) of 2013; 25. Joint Investment Trust Regulations (Amendment of the First Addendum to the Law) of 2013; 26. Joint Investment Trust Regulations (Amendment of the Second Addendum to the Law) of 2013; 27. Joint Investment Trust Regulations (Amendment of the Third Addendum to the Law) of 2013;
2. Proposed primary legislation and secondary legislation published in the reporting year b.1. Primary legislation
The Securities Law (Amendment 53) (Electronic Voting System) of 2013 {Book of Laws 2410, p. 24}
The above law was published on October 31, 2013 and enters into effect on the effective date of the regulations enacted by power of Sections 35p7 and 35p9 of the law. The foregoing regulations are in the process of preparation.
The public participation rate in decision making in reporting corporations, including public companies, is very low. There are various reasons for this, inter alia related to the fact that the voting process, which requires certification of ownership of securities from stock exchange members, is cumbersome and inaccessible. This move is meant to encourage security holders to exercise their voting rights in meetings, and in this way to increase their involvement in decision making.
The Amendment establishes the legal infrastructure for the creation and operation of an electronic voting system, through which holders of securities (shareholders, bondholders and warrant holders, and in the future holders of participation units) will be able to vote online in meetings in which they are entitled to vote. The proposed model is designed to add to the options available at present to security holders voting in meetings (physical presence at meetings, voting through proxy, delivery of a letter of vote to the convener of the meeting or sending it by registered mail). The system will be created and operated by the ISA. The electronic voting system is designed to assist access to information and the possibility of exercising voting rights for those people eligible to vote in meetings, without burdening them with any costs. b.2. Secondary legislation
1. Joint Investment Trust Regulations (Distribution Commission) (Amendment) of 2013; {Collection of Regulations 7236, p. 900}
In light of developments in the mutual fund industry (growth in the value of managed assets, together with a significant growth in mutual funds purchased through bank advisors), the ISA initiated a reduction of the maximum distribution fees, together with the complementary action of an obligation on the part of fund managers to reduce, for a limited period of time, management fees in the funds they manage – at a rate that reflects the full reduction in
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distribution fees that they are given in reality. As part of this amendment, the maximum distribution fees charged by distributors (banks) from fund managers were reduced. The new rates are as follows: short-term solid funds – 0.2% (instead of 0.25%); monetary funds – 0.1% (instead of 0.125%); all other funds – 0.35% (instead of 0.8% for share funds and 0.4% for other funds).
The regulations were published on April 4, 2013, and their coming into effect was set at thirty days after their publication date.
2. Securities Regulations (Details, Structure and Form of Prospectus and Draft Prospectus) (Amendment 2) of 2013; {Collection of Regulations p. 1238}; Securities Regulations (Periodic and Immediate Reports) (Amendment 2) of 2013; {Collection of Regulations 7257 p. 1294};
These regulations regulate the disclosure rules applicable to reporting corporations operating in the field of gas and oil exploration and production. The developments of the last decade in the gas and oil exploration sector in Israel, including the discovery of significant marine gas reserves and resources, caused significant change in the status and economic importance of this industry, including an increase in the number of reporting corporations operating in this industry, and an increase in their weight in stock exchange trading. This reality justified creating a unique reporting regime for this field of operations.
The need for the amendment arose in light of the fact that the disclosure requirements prior to the amendment were adjusted to an industrial company model, a model that is significantly different from the business model of corporations dealing in the gas and oil sector. Accordingly, the amendment of the regulations set a unique reporting regime for the oil and gas sector, including determining those reports that a reporting corporation operating in that sector must report regularly. It should be noted that the regulations anchored the disclosure directive published in March 2011.
The regulations were published on May 30, 2013 and on June 4, 2013, respectively, and their coming into effect was set for their publication date.
3. List of acts testifying to a breach of fiduciary and care duties
The Administrative Enforcement Law included amendments to the Joint Investment Trust Law and to the Advice Law., The amendment to the Joint Investment Trust Law determined that performing an act included in a list published by the ISA, which testifies that the person performing it did not act with the care, good faith and meticulousness expected from a reasonable fund manager or trustee under similar circumstances, constitutes an administrative violation, for which a tribunal of the Administrative Enforcement Committee shall be entitled to impose on the violator administrative enforcement actions. A similar arrangement was set in the Advice Law, pursuant to which performance of an act specified in the list of actions and neglects defined by the ISA, proving that the person performing these did not act with the care expected from a reasonable licensee under similar circumstances, also constitutes a violation for which it is possible to commence such
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administrative enforcement proceedings. Accordingly, the lists refer to actions or neglects related to each of the foregoing laws.
The lists of act were published on the ISA's website on April 8, 2013, and went into effect on September 4, 2013.
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(c) Proposed primary legislation and secondary legislation in the reporting year c.1. Bills
1. Regulation of the Activities of Credit Rating Companies Bill of 2013
This bill was designed to regulate the activities of credit rating agencies in Israel. Globalization, developments in financial engineering and the Basel II Accord have expanded the role of rating agencies in recent years. The 2008 economic crisis expressed the faults in the activities of those agencies, expressed mainly in conflict of interest, creating a potential bias in rating, and faults related to the lack of transparency in the rating process. The key role played by rating agencies in these crises led to the unanimous opinion, among US and European regulators, that it is necessary to re-examine and increase regulation in this field.
The bill was designed to regulate the activities of rating agencies in Israel and to subject these to the ISA's supervision, with the purpose of making the rating process and the rating itself reliable, high quality and independent, as a means of protecting the investing public.
Inter alia, we propose setting the following conditions: a duty of registering rating agencies, restrictions on conflict of interest in their work, regulation of ways of dealing with conflict of interest wherever it applies, and improving rating transparency. In addition, we propose setting supervisory and enforcement powers over the operations of rating agencies, including administrative enforcement means for violation of the enacted provisions.
The bill was approved in the first reading at the Knesset on July 30, 2013, and in the reporting year it was discussed in the Economy Committee for the purpose of its preparation to the second and third readings.
2. Joint Investment Trust Bill (Amendment 21) (ETNs and ETFs) of 2012
This amendment deals with the regulation of ETNs and ETFs. The need for this amendment derives from the accelerated development of passive investment instruments, that mainly track security, commodity and currency indices (index products or ETNs).
The current legal situation creates regulatory arbitrage between products that are very similar in nature and in their investment purposes. While regulation of mutual funds under the Joint Investment Trust Law constitutes detailed and binding regulation, with close supervision over this field, ETNs – that form an alternative financial instrument to investment in mutual funds – are subject only to disclosure duties and to certain corporate governance duties, under the Securities Law and the Companies Law, which are not well suited for this instrument. The amendment to the law is designed to regulate ETNs in a manner similar to the current regulation concerning mutual funds, mutatis mutandis, as required by the unique characteristics of this field (especially the fact that this is a liability product).
In addition, we propose regulating the activities of a new financial instrument called an "exchange traded fund" (ETF). The ETF will be a tracking mutual fund, with units listed for trading on the stock exchange, with the purchase of its unit possible only during trading. The purpose of regulation in this field is to establish legal infrastructure for a new financial
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instrument, which will expand the currently available variety of financial products, enable fair competition between alternative products, and will make competition more effective.
The bill was approved by the Knesset in its first reading on July 9, 2012. Due to the dissolution of the 18th Knesset, the Knesset was required to approve the application of a rule of continuity. The rule of continuity for the bill was approved on October 29, 2013, and at present the bill is pending the review of the Finance Committee its preparation for the second and third readings.
3. Joint Investment Trust Bill (Amendment 15) of 2010
This bill deals with several issues, the key ones being: regulating the offering of units of foreign funds in Israel and passing the arrangement with regard to the duty of participation in general meetings from law to regulation; changing the liquidation mechanism for funds and making it more efficient and just; amendment of Section 77 – which sets provisions on the matter of imposing on a mutual fund manager the duty of participating in the general assembly of a corporation the securities of which it holds – in such a manner, that the Minister of Finance shall be authorized to determine the arrangements in the regulations in a manner more detailed than the present, while addressing voting decision making processes; provisions allowing collection of differential management fees from unit holders, with respect to the value of units they hold, period of holding them and the identity of the distributor through which they are held.
The bill was approved by the Knesset in its first reading on May 17, 2010. Due to the dissolution of the 18th Knesset, the Knesset was required to approve the application of a rule of continuity. The rule of continuity for the bill was approved on October 29, 2013 The Finance Committee appointed a sub-committee headed by MK Yitzhak Cohen, which began discussions for the preparation of the bill for its second and third readings.
4. Joint Investment Trust Bill (Amendment 15) of 2010 – power to limit the pay of a joint investment trust fund manager
On October 23, 2012, the 18th Knesset's finance committee approved adding to Amendment 15 to the law a provision empowering the Minister of Finance, after consulting the ISA, to determine maximal amounts or rates for the pay of mutual fund managers and fund trustees' pay. In addition, the Committee proposed splitting Amendment 15 to the law into two separate bills: the first part will include the issue of the fund manager's and trustee's pay, and the second part ("Amendment 15") will include all other issues. On November 5, 2013, the 18th Knesset decided, pursuant to the provisions of Section 84(b) of the Knesset Rules of Procedure, to approve the proposal of the 18th Knesset's Finance Committee with respect to splitting Amendment 15 as foregoing.
Due to the dissolution of the 18th Knesset, the Knesset was required to approve the application of a rule of continuity. The rule of continuity for the bill was approved on October 29, 2013, and at present the bill is pending review by the Finance Committee for preparation for the second and third readings.
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5. Amendment of the Securities Law (Finality of Clearing by Stock Exchange Clearing Houses)
This law is proposed as a direct succession of previous legislative amendments, designed to improve the stability of the stock exchange's clearing houses (hereinafter: the "Clearing Houses"), at the level recommended by umbrella organizations dealing with this field globally, and in response to the recommendations of the International Monetary Fund of April 2012. These recommendations stressed the importance of setting provisions in the law to ensure the stability of the Clearing Houses as payment systems, to minimize risks in these systems and to provide legal certainty as to Clearing Houses' operations and the final nature of their clearing. The purpose of improving protections for clearing houses is to prevent a systemic fault due to the insolvency of any clearing house member, and to allow the uninterrupted continuity of the Clearing Houses, of stock exchange trading and of the capital market in Israel.
In September 2013 the law's memo was distributed. The memo is at present in the work processes with the Ministry of Justice. c.2 Proposed secondary legislation
1. The Securities Regulations (Own Account Trading Floors) of 2013
Trading floors ("forex") are defined as computerized systems through which a person may trade with his customers with his own account, as well as computerized systems allowing a customer to trade on such systems. On June 15, 2010, the Own Account Trading Floors Law was published, as part of which Chapter G3 was added to the Securities Law, dealing with trading floors ("forex"). The law was written in the format of framework legislation, and accordingly the Minister of Finance was empowered to determine the principles of regulation of trading floors in regulations.
The regulations deal with the following matters: format of the permit application; permitted leverage level; provisions on the issue of conflict of interest; matching the floor's operations to the customer; provisions on the issue of advertising and marketing trading floors; reports to the ISA; the information that trading floors must bring to the customer's knowledge; equity; insurance and fees. In addition, provisions are proposed with respect to the manner of dealing with customers' money, keeping documents and registering transactions.
The Finance Committee appointed on July 31, 2013, a subcommittee for own-account trading floors, headed by MK Boaz Toporovsky, which holds discussions on the regulation proposal.
2. Regulation of Credit Rating Agencies' Activities Regulations of 2013 (hereinafter: the "Rating Regulations").
The Regulation of Rating Agencies Activities Bill (See Section c.1: Bills above) includes the principles of regulation for the activities of credit rating agencies. The Rating Regulations form complementary regulation for the activities of rating agencies. The provisions of the law shall enter into effect only after the regulations enacted under it shall enter into effect.
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The regulations set specific provisions, inter alia, on the manner of registering rating agencies, terms for registration of rating agencies, reports to be submitted to the ISA and to the public (annual and immediate reporting), manner of publication of ratings and evaluation methods, proper disclosure provisions, manner of registration and documentation of the rating process, provisions on keeping documents and fee amounts.
The Rating Regulations were approved the ISA Plenum in November 2013, after receiving public comment on them.
3. Securities Regulations (Trustees for Debt Certificate Holders) of 2012
These regulations are complementary to the amendment of the Securities Law (Amendment 50) of 2012 and the Securities Law (Amendment 51) of 2012 (hereinafter: the "Trustees Law"). Accordingly, the regulations detail the reporting duties applicable to trustees towards the ISA and the public, including reporting duties applicable to the issuer towards the trustee, and including competence conditions which a trustee must meet (equity, security deposit or insurance). The regulations are a condition for the coming into effect of some of the provisions of the Trustees Law.
The regulations, together with the Trustees Law, are planned to regulate the field of activities of trustees for holders of debt certificates. These are trustees charged with the proper conduct of the corporations issuing debt certificates to the public on the stock exchange. Until now, the regulation of this field was not complete, and the law and the regulations completing it are the result of the ISA's initiative, intended to protect the interest of the investing public.
The regulations were approved by the ISA Plenum in May 2013 and were published for public comment.
4. Joint Investment Trust Regulations (Participation by a Fund Manager in Holder Meetings) of 2013; Joint Investment Trust Regulations (Reports) (Amendment) of 2013;
Section 77 of the Joint Investment Trust Regulations regulates the duty of participation by a fund manager in the general meeting of corporations, the securities of which are held by the fund it manages. As foregoing, as part of the proposed Amendment 15 to the Joint Investment Trust Regulations (see above under the section discussing "Proposed primary legislation and secondary legislation in the reporting year"), we propose amending Section 77, so that instead of the arrangement currently set by the law, the Minister of Finance shall be empowered to determine the arrangement in the regulations in a more detailed manner, while addressing the process of decision making by vote.
This power follows the recommendations of the committee examining the actions required to increase involvement by institutional entities in the Israeli capital market (Hamdani Committee). The committee recommended, inter alia, reducing the participation duty of institutional entities to cases in which they may affect the decision. Following these recommendations, the proposed regulations were formulated, to determine the
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participation and voting duty of a fund manager in holder meetings of a corporation in which it has a voting right.
The regulations were published for public comment, and were approved by the ISA Plenum in January 2014.
5. Securities Regulations (Periodic and Immediate Reports) (Amendment) of 2013; Securities Regulations (Prospectus and Prospectus Draft Details) (Amendment) of 2013; Securities Regulations (Private Placement of Securities in a Listed Company) (Amendment) of 2013; Securities Regulations (Transaction between a Company and a Controlling Shareholder Therein) of 2013
In these regulations, it is proposed to anchor, as a fixed arrangement, the contents of three disclosure directives published by the ISA by power of Section 36a(b) of the Securities Law, on the following matters:
(1) Disclosure regarding real estate for investment activities
Anchoring this guideline is meant to improve the relevance, comparability (between different corporations and between the reports of the same corporation in different periods) and certainty of disclosure rules in the field of income producing real estate, this, inter alia, by reducing redundancy in disclosure rules, arranging information items and improving their level of relevancy. In this manner, the investing public shall be able to make more informed investment decisions.
(2) Required disclosure with respect to voting by interested parties, senior officeholders and institutional entities
Securities laws impose on a reporting corporation the duty of disclosing the results of general meeting votes. In cases where the majority required to make the decision is not an ordinary majority, the corporation is required to also disclose the total number of all shares participating in the vote, the number of shares voting for the proposal and against it, and their ratio out of all shares included in the number of votes for the purpose of the ballot, differentiating between different classes of shareholders as relevant.
Disclosure on how interested parties, officeholders and institutional entities voted in general meetings of the company is of great importance, since this enables efficient supervision over their conduct, and investors are given an opportunity to learn of the way they voted. The disclosure directive determine the corporation's duty to include in meeting result reports details on the way institutional entities, interested parties and senior officeholders voted in meetings where a decision is made through a special majority, as foregoing.
According to the proposed regulation version, the disclosure duty determined in the disclosure guideline shall be expanded so as to also apply with respect to voting in any bondholder meeting. This expansion is proposed in light of the fact that in these assemblies usually decisions are made that materially affect holders' rights.
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(3) Required disclosure with respect to risks and restrictions due to contact with Iran or with an enemy
This disclosure guideline was determined as part of a comprehensive system of regulatory provisions resulting from Government Decision no. 3160 titled "Steps in the Struggle against Iran's Nuclear Program and its Accessory Plans." Pursuant to the guideline's provisions, a reporting corporation is required to disclose the corporation's potential exposure resulting from legal prohibitions on trade with Iran or with an enemy. Disclosure is required in the periodic report and in the prospectus, as part of the general requirement of disclosing legal provisions and restrictions applicable to the corporation. It is proposed that this directive also be anchored as a permanent arrangement under the regulations enacted under the Securities Law.
The regulations are at present with the Ministry of Finance for the purpose of their transfer for the approval of the Knesset's Finance Committee.
6. Joint Investment Trust Regulations (Offering of Foreign Fund Units) of 2013; Joint Investment Trust Regulations (Distribution Fee) (Amendment) of 2013
As part of Amendment 15 to the Joint Investment Trust Law (see above under the section discussing "Proposed primary legislation and secondary legislation in the reporting year"), it is proposed to cancel the ISA's power to give specific exemptions from the provisions of the law to foreign fund managers that desire to offer units to the public. In addition, it is proposed to empower the Ministry of Finance to determine in the regulations conditions under which it will be possible to offer foreign funds, operating pursuant to the laws of the foreign countries regulating them, with their offer prospectus permitted in the country of origin; in addition, it is proposed to impose certain duties in connection with the offering of these funds to the Israeli public.
The proposed amendment reflects the balance between the need to provide protection to Israeli investors and the fact that in reality there will be no ongoing supervision over foreign fund managers. The proposed outline for the offering of foreign funds in Israel includes, inter alia, the following conditions:
(1) It will be possible to offer a foreign fund operating pursuant to US law or to the EU directives; (2) The fund, according to its investment policy, shall not specialize in investments in Israel. (3) It will be possible to offer units of a fund, the values of whose assets is at least USD 20 million, with units offered in Europe or in the USA. (4) The total value of assets of the funds managed by the foreign fund manager and its parent company must be at least USD twenty billion. (5) The fund manager deposited a bank guarantee to the benefit of the ISA at an amount of no less than NIS one million.
It is further proposed to amend the distribution fee regulations and to cancel distributors' right to charge remuneration for the purchase, sale or holding of funds from
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the customers, while at the same time charging a distribution fee from producers as distribution fee.
The amendments were approved by the ISA Plenum in October 2013 and were published for public comment.
7. Prohibition of Money Laundering Order (Duty of Identifying, Reporting and Keeping Records of a Stock Exchange Member, to Prevent Money Laundering and Financing of Terrorism) (Amendment) of 2013
The purpose of this amendment is to increase competition among non-bank stock exchange members (hereinafter: "Investment Houses") and banks in the field of brokerage, i.e. competition in the field of commerce services for securities, mainly to private customers. At present, trading activity in securities among private customers is mainly performed through banks (approximately 75% of trade activity is performed through banks, and the rate is even higher among households). In this state of affairs there is no competition in reality between banks and extra-banking factors such as investment houses.
The proposed solution is designed to make investment houses accessible to retail customers by giving an option to investment houses of managing customer accounts in a closed system. Therefore, it is proposed to expand the current exemption for closed system accounts, and to apply it not only to the execution of purchase and sale transactions of securities and financial assets, but also to their holding and to the management of financial deposits.
The order's draft was approved by the ISA Plenum in November 2013.
8. Accessory regulations to the Joint Investment Trust Law (Amendment 21) (ETNs and ETFs) of 2012
Together with promoting the Joint Investment Trust Law (Amendment 21) (ETNs and ETFs) of 2012 (hereinafter: "Amendment 21") (see Chapter 5.2: Investment Department, and, inter alia, subchapter c, section 6: ETN Reporting Reform), the ISA's staff is working to promote secondary legislation accessory to the amendment, designed to complete the system of regulation of the field of ETNs and ETFs. As part of this, some of the current regulations with respect to mutual funds were adjusted, and these were also applied to ETNs and to ETFs. In addition, proposals for new regulations with respect to ETNs and ETFs were prepared. The collections of regulations include regulations forming a precondition for the coming into effect of Amendment 21. Below are the regulations' details.
(1) Joint Investment Trust Regulations (Material Change in a Fund's Investment Policy) (Amendment) of 2013
The Joint Investment Trust Law allows changing materially the investment policy of a fund only once in a 12-month period. However, the law empowers the Minister of Finance to determine cases and circumstances in which a fund manager shall be allowed to make a material change in the investment policy, even before 12 months have elapsed. Such cases and circumstances were determined in the Joint Investment Trust Regulations (Material Change in a Fund's Investment Policy) of 2007.
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It is proposed that the regulations redefine what constitutes a material change in the investment policy of a joint investment, and to reduce the cases and circumstances in which such material change in the policy is allowed.
The regulations were finally approved by the ISA Plenum in December 2013.
(2) Joint Investment Trust Regulations (Classification of ETNs and ETFs for Advertising Purposes) of 2013
Since ETNs and ETFs are alternative investment instruments, with similar general characteristics, the regulations' purpose is to regulate the format of advertising of data on all funds or notes, or most of them, i.e. advertising on different media, providing the public with an accessible platform for comparison between different products.
The regulations were approved by the ISA Plenum on May 12, 2013.
(3) Joint Investment Trust Regulations (Activities of an ETF Manager in the Course of Stock Exchange Trading) of 2013
The proposed regulations determine a general framework according to which the board of directors, fund manager and the trustee will be bound to approve rules by power of which the fund manager will act during the trading day, of course with respect to the primary parameters entailed in this activity, such as the minimal volume in trading, quote duration etc. The board of directors, fund manager and fund trustee will have to examine every six months the rules determined, and to make changes in them, as necessary.
The regulations were approved by the ISA Plenum in May 2013.
(4) Joint Investment Trust Regulations (Joint Investment Reports) of 2013
It is proposed to integrate the version of the ETN report regulations with the Joint Investment Trust Regulations (Reports) of 1994 (hereinafter: the "Fund Report Regulations") regulating the reports which a fund manager is required to submit into one collection of regulations, so that it applies to any joint investment (funds, including ETF and ETNs).
This move is intended to assist a joint investment manager which may in the future offer three types of joint investment. Such a manager will be able to learn the disclosure provisions applicable to it from one unified collection of regulations, rather than refer to three separate collections of regulations. In addition, this will improve the efficiency of supervision.
The regulations were approved by the ISA Plenum in November 2013.
(5) Joint Investment Trust Regulations (Proving Ownership of a Joint Investment Unit for the Purpose of Voting in the General Meeting) of 2013
The proposed regulations, like the Companies Regulations (Proving Ownership of a Share for the Purpose of Voting in the General Meeting) of 2000, set the mechanism according to which the distributor will certify the ownership of the unit holder of the joint
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investment unit for the purpose of his participation in the general meeting, and in addition determines the details which the distributor must include in such a certification.
The regulations were approved by the ISA Plenum in November 2013.
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(6) Joint Investment Trust Investment Regulations (Calculating the Return of ETFs and ETNs) of 2013; Joint Investment Trust Investment Regulations (Calculating Return) of 2013
This proposed regulation was formulated on the basis of the Joint Investment Trust Regulations (Calculating Return) of 1995, mutatis mutandis, resulting mainly from the unique characteristics of ETFs and ETNs as traded instruments that track the return of a certain tracked asset. The proposal determines the manner in which the redemption price return in ETFs and ETNs is to be calculated, and as well as the return of their tracked assets. In addition, the regulations determine for what periods the return may be presented.
Additionally, it is proposed to amend the Joint Investment Trust Regulations (Calculating Return) of 1995, currently applicable to open funds. As part of this amendment, technical amendments will be made, as well as an amendment of the manner of calculating return, when fund units are split or consolidated.
The regulations were approved by the ISA Plenum in June 2013.
(7) Joint Investment Trust Regulations (Redemption Formula) of 2013
The regulations are designed to maintain the principle of unity, meant to allow an investor weighing an investment decision to compare, in a real and educated manner, between different ETNs – not just ETNs managed by the same ETN manager, but also between ETNs of other ETN managers.
Additionally, the proposed regulations set a daily reporting duty, similar to the daily reporting practice applicable at present to ETN managers, which was regulated in the past as part of directives.
The regulations were approved by the ISA Plenum in September 2013.
(8) Joint Investment Trust Regulations (Material Change in the Investment Policy of an ETN) of 2013
As part of Amendment 21, the ISA proposed a prohibition on making material changes in the investment policy of a joint investment, but only under the conditions determined by the Ministry of Finance.
In light of the uniqueness of ETNs, which are required to track the return of a tracked asset, pursuant to a defined redemption formula, Amendment 21 defined the investment policy in an ETN as the "tracked asset and the manner of tracking it." Accordingly, it is proposed to determine in these regulations that a material change in the investment policy of an ETN is one of the following: (1) a change of the tracked asset of the ETN; (2) a change that changes the exposure profile of the ETN; (3) another change that causes a material change in the nature of the ETN. In addition, it is proposed to set limited conditions under which it will be possible to make such material change.
The tracked asset's change as a material change in an investment policy is also relevant to tracking funds and ETFs whose purpose, as determined by the investment policy, is to
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achieve results as similar as possible to the rate of change in the tracked asset. Therefore it is proposed that these regulations be later on integrated in the Amendment to the Joint Trust Investment Regulations (Material Change in a Fund's Investment Policy) of 2007, discussed above (Section d.2.i(4)), and that these will also apply to funds of this type.
The regulations were approved by the ISA Plenum in December 2013.
(9) Joint Investment Trust Regulations (Personal Restrictions for Directors, Members of the Investment Committee and Employees of a Joint Investment Manager) of 2013
Section 21 of the Joint Investment Trust Law determines, with respect to a director of a fund manager or a member of an investment committee, terms for the purchase or sale of securities traded on the stock exchange, and empowers the Minister of Finance to determine through regulations additional conditions under which they will be able to buy or sale securities traded on the stock exchange. In addition, the section sets a prohibition for employees of a fund manager to purchase securities, but only of those types set by the Minister of Finance through regulations, and also applies this prohibition to members of an investment committee and to persons employed by the fund manager, who participate in making decisions related to certain securities. The foregoing restrictions are similar to the restrictions in effect with respect to a member of the ISA Plenum, its employees and Ministry of Finance employees serving in similar positions, concerning securities.
The regulations were approved by the ISA Plenum in July 2013.
(10) Joint Investment Trust Regulations (Equity and Insurance of Joint Investment Managers and Trustees) (Amendment) of 2013
Pursuant to the Joint Investment Trust Law, a company that desires to receive a permit to serve as a fund manager, and a company that desires to receive a permit to serve as a fund trustee, must meet certain terms of competence, including compliance with equity and insurance requirements at those amounts and under those terms as determined by the Minister of Finance. The equity and insurance amounts required at present are amounts that mainly reflect "earnest money", and are not a safety buffer for compensation. The ISA staff believes that the amounts must be adjusted so that they can serve in some degree as a safety buffer for damages compensation, and not just "earnest money" as foregoing.
It is proposed that a joint investment manager shall be required to provide equity at the sum of NIS one million and 250 thousand, and that a joint investment trustee will be required to provide equity at the amount of NIS two million and 500 thousands. The regulations were published for public comment in May 2013.
(11) Joint Investment Trust Regulations (Shifting from an Tracking Fund to an ETF) of 2013
Section 102 of the Joint Investment Trust Law deals with an open fund becoming a closed fund. As part of Amendment 21, it is proposed to prohibit turning an open fund
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into a closed fund. At the same time, since a tracking fund is an instrument designed to achieve results that are as similar as possible to the rate of change in the tracked asset, it is similar in this to the new instrument that it will be possible to offer pursuant to the amendment – an ETF tracking the same tracked asset. Therefore, it is proposed to set an exception to the rule in Section 102, and to empower the Minister of Finance to set through regulations conditions under which a tracking fund may become an ETF.
The proposed regulations therefore deal with the required terms for turning a tracking fund into an ETF. Inter alia, the fund manager must ensure that the tracking fund, which is planned to become an ETF, does not include units that are not listed in the name of the stock exchange member. If the tracking fund is a debt fund, then the fund manager shall have to make the necessary tax adjustments, and more.
The regulations were published for public comment in November 2013.
3. Coordination and Consultation for Civil Legal Proceedings
The ISA is party to a number of civil proceedings. In general, it is the Attorney General's Office that represents the ISA in court, with a significant part of the preparatory work before sending a case to the care of the Attorney General's Office carried out by the ISA's staff, in cooperation with the Attorney General's Office.
(a) Civil legal proceedings involving the ISA in the last year and/or still pending in court
1) Originating Motion 3655-07-11 Hermetic Trusts (1975) Ltd. v. MBM Acquisition Inc. et al.
This is an originating motion dealing with the interpretation of Section 52n1 of the Securities Law – the status of debt certificates held by a controlling shareholder in a company, after it had sold its shares in the company to a third party. The ISA was included in this proceeding, and filed a position with regard to the dispute between the parties and to the interpretation of this section of the law, being the agency charged with regulating the capital market and protecting the interest of debt certificate holders. In essence, the ISA's position was that the applicability of the section to the debt certificates purchased by a controlling shareholder does not end when that controlling shareholder sells control following the corporation's difficulties. The court rejected the originating motion in the beginning of the reporting year and did not accept the ISA's position, and therefore an appeal was filed with the Supreme Court.
In the reporting year, the parties to the appeal and the ISA filed with the Supreme Court documents on their part, and a discussion was held in the Supreme Court, in which the panel expressed its opinion that in the case under the proceeding, the date of the bond's purchase predated the date of the amendment to the law, which added the section the interpretation of which was brought before the court, and therefore, lacking retroactive application, there is no justification for the proceeding. With the panel's recommendation, the appellant withdraw the appeal for the foregoing reasons, and the appeal was erased.
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2) Civil Case 48067-01-11 Alan Spas Ltd. v. Bezeq Ltd. and the ISA
This is a proceeding started before the reporting year, dealing with an application for distribution of a dividend by Bezeq, by force of Section 303 of the Companies Law, while reducing capital. The ISA was a party to the court discussions, and even responded in some of the cases at the request of the District Court of Tel Aviv. In essence, the ISA's position was that when the Company's board of directors decides on the distribution of a dividend that should be divided in installments over a period, without meeting the profit test, then the board must exercise its discretion in all matters related to the Company's compliancy with the ability to repay, pursuant to the Companies Law, before each and every distribution, and cannot suffice with such examination prior to the first decision on the distribution in installments. The court approved the requested distribution, and added material rulings with respect to the manner and way of distributing. In the reporting year, the applicants continued the proceeding with respect to another installment of the distribution, in which the ISA was required to give its response to different applications made by the parties.
3) IEL Israel Equity v. Tadbik Ltd. et al.
This is an originating motion, dealing with a dispute between shareholders and disqualification of the vote of minority shareholders in the general assembly, arguing that they have "negative personal interest" in the voting results. The ISA reported to the discussions, and its position, in essence, was that there is no justification to allow the Company's management to disqualify votes by minority shareholders claiming that they have "negative personal interest." The least, according to the ISA, is that shareholders claiming fault in the considerations of these minority shareholders must approach the competent court for suitable relief. The court granted the application for temporary relief, in which it was requested to prevent the convening of the general meeting until a decision is made on the issue of disqualification of the minority shareholders' (the applicants') votes. Later on, requests to appeal were filed with the Supreme Court by the respondents (the Company and the controlling shareholders), including applications for temporary relief, in which the Supreme Court was asked to rule that the Company's CEO must be paid salary at the rate he received prior to dispute starting between the parties, or at another rate as ruled by the court. The ISA filed its position with the Supreme Court. The case is still pending decision.
At the beginning of the reporting year, the Supreme Court reached a decision on the matter of temporary relief, and ruled a certain payment to the Company's CEO. Later on, in the reporting year, the District Court of Tel Aviv erased the proceeding at the request of the parties, and thereby ended it.
4) Originating Motion 34811-06-12 Queenco Leisure International Ltd. v. Vasanta Investments et al.
This is an originating motion, dealing with a dispute on the duty of private companies to produce financial data and/or financial statements in order to comply with their disclosure duties, if they are a reporting corporation. The ISA filed a position in the
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proceeding, in which it opined, inter alia, that the court must grant the application and order the respondents and/or any of them (the private companies) to transfer to the applicants their financial statements (quarterly and annual) duly, with them prepared in one of the formats permitted by law. The ISA further opined that the court must order the respondents to transfer to the applicants any financial datum and/or other material information referring to their businesses and to the business operations and/or to the businesses and business operations of entities indirectly held by them, which is required for the purpose of the applicants' compliance with the duties of disclosure imposed on them by law. As of the end of the reporting year, the proceeding is pending decision and the direct parties to the proceeding are trying to negotiate as part of off-court proceedings.
5) Civil Case 37577-06-12 Moshe Shahak v. Best Invest Investment Portfolio Management Ltd.
This is a lawsuit dealing with claims against Best Invest Investment Portfolio Management and Mr. Yehezkel Klapka. In this proceeding, the ISA filed with the court, after it was requested by the court to express its position, its position on the matter of the applicability of Sections 13 and 52(42) of the Securities Law, with respect to review of documents mentioned in the application for disclosure of documents filed by the plaintiffs in the case.
6) Derivative Action 35114-03-12 Ashash Yehuda et al. v. Yosef Atia et al.
In an application for the disclosure of documents, filed as part of an application for approval of a derivative action, Atia Group Ltd. made the claim that it is unable to transfer to the other party documents, as these are not in its "possession," since they were seized by the ISA as part of an investigation conducted on its affairs. The court requested the ISA's position with respect to this claim. The ISA expressed its position that under the circumstances of this specific case, there is no prevention from authorized representatives on behalf of the company arriving at the ISA's offices and photocopying the documents seized by the ISA and held in its possession.
(b) Proceedings on the matter of civil fines and financial sanctions pursuant to the Joint Investment Law, the Advice Law, the Prohibition of Money Laundering Law and the Securities Law
1) Administrative Appeal 6999/12 Beit Shemes Motors v. the Israel Securities Authority
This is an administrative petition against the decision of the ISA's Fines and Sanctions Committee, which imposed on the appellant company a financial sanction pursuant to Sections 52(16) and 52(18) of the Securities Law, due to the violation of the appellant's disclosure duties pursuant to Section 36 of the Companies Law and Regulation 34(b) of the Securities Regulations (Periodic and Immediate Reports) with respect to the appointment of its outside directors. The court granted the petition in Administrative Petition 30045-02-12, and therefore an appeal was filed by the ISA with the Supreme Court. The main points of the ISA's arguments in the appeal were that the previous court
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was wrong in its decision, in determining that the Company has no duty of reporting on the appointment of the external director; in its minimalist interpretation of the expression "did not report" so as to not include incorrect or misleading reporting; as well as in the manner in which it implemented principles of interpretation from criminal law to the case under discussion.
In the reporting year, the discussion was litigated in an appeal before a Supreme Court panel. The panel accepted the ISA's position in the appeal filed by it, and ruled that the company has a reporting duty, referring to the extensive disclosure duties of a reporting corporation in similar cases. However, with the ISA's agreement, the Supreme Court approved the ISA's waiver of the company's financial sanction money.
2) Administrative Petition 4203-10-13 Spectronics Ltd. v. the Chairman of the ISA
This is an administrative petition against the ISA's decision to impose on the petitioning company a financial sanction at the amount of NIS 135,622, pursuant to Section 52(18) of the Securities Law, due to the violation of Sections 95 and 121 of the Companies Law of 1999, as the controlling shareholder served as the Chairman and the CEO in the company, without the double appointment being approved pursuant to the appointment proceeding set in Section 121(c) of the Companies Law41. As of the end of the reporting year, the District Court of Tel Aviv – Economic Department accepted the petition.
(c) Legal proceedings in which the ISA expressed its position
In the reporting year, the ISA expressed its opinion before the court in legal proceedings which it believed to have principle or special importance. Sometimes these positions were filed by the Attorney General of Israel or his representative, but the ISA played a material part in forming them. For further details on these positions, see the chapter on the Corporation Department in the section discussing "Plenum and staff positions on legal matters."
(d) Class actions and derivative actions to which the ISA was added, or in which the ISA expressed its position 1) Civil Appeal 11/3242 Excellence Nesuah Investment House Ltd. v. Menachem Fert et al.
This is an appeal on a decision in which an application for approval of a class action was granted (Tel Aviv 1792-09). The applicants in the application for approval argue that Excellence violated Section 17(b)(3) of the Advice Law, when it charged from the class members higher commissions than those it was allowed to collected by law, without receiving the customer's approval to receive its refund for the commissions, and of the
41As well as the violation of Section 36 of the Law and Regulation 34(a) of the Securities Regulations (Periodic and Immediate Reports) of 1970, in that it did not report on time on the termination of the double appointment of the controlling shareholder in the company as the chairman and the CEO; however, the ISA considers both violations to be one violation.
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rate of the refund. Excellence appealed this decision before the Supreme Court, which decided to also call for the discussion on the appeal a lawyer on behalf of the ISA. In the Supreme Court discussion in November 2011, the parties agreed to the court's proposal that they approach a mediator. After mediation proceedings failed, the case was returned to the Supreme Court that on May 13, 2013 decided to reject the request to appeal, and returned the case to the district court for further litigation on the class action. On December 9, 2013, the district court ruled in the class action to the benefit of the class action plaintiff, and ruled that the defendant must return to customers the sums it received from them, which were returned to it by the stock exchange member as a commission refund, this after the court again ruled that Excellence violated Section 17(b)(3) of the Advice Law, and that there are grounds for cause of unjust enrichment, in a way justifying the return of the commission refunds illegally collected.
2) Class Action 09-05-14144 Harel PIA Mutual Funds Ltd et al. v. Landmark Group Ltd.
This is an application for approval of a class action, mainly dealing with a prospectus published by Landmark Group Ltd. in 2007, and claims of many misleading details included therein. In March 2012, the ISA filed a position with the court, that dealt with several key issues: (a) the applicability of the protections set in Section 33(1) and Section 33(1a) of the Securities Law for underwriters for an issue; (b) the importance of disclosure on material indications of the value of assets, for the purpose of making educated investment decisions; (c) the possibility of filing and managing class actions by a fund manager, for violations made, in its opinion, by a corporations in which the fund's money was invested. In the reporting year, the evidence stage and the summary stage were completed in this file. In December 2012, the court granted the request for approval with respect to the primary cause of claim, this after it had determined that the applicants complied with the burden imposed on them in the request for approval phase, of proving there is a misleading detail in the prospectus published by Landmark Group Ltd with respect to a certain transaction with an American construction company. It is noted that the court mentioned in its decision the ISA's position, and even adopted extensive parts of it.
In the reporting year, the respondents filed a request to appeal this decision with the Supreme Court, and the applicants responded to these requests. After mediation proceedings failed, the proceedings were renewed in the Supreme Court, and in September 2013 the ISA filed with the Supreme Court a response to the request to appeal, in which it made arguments similar to those that the ISA made before the district court. In October 2013 the Supreme Court decided to suspend proceedings in the district court until further notice.
3) Civil Case (Jerusalem) 3118/09 Sabo v. Discount Investments and Koor
This is a class action on the matter of the issue of rights, in which it is argued that the issue was discriminatory. A settlement was reached between the parties, with the settlement agreement sent, inter alia, to the ISA. The settlement agreement determined, in essence, that the action shall be approved by the court as a class action
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against all respondents and for all causes and claims mentioned in the request for approval and the other documents in the proceeding, and that a verdict shall be given against Respondent 1, Discount Investments Ltd., ordering it to transfer a donation at the amount of NIS 18 million to the benefit of the public as a whole. The Attorney General of Israel filed with the court a position objecting to the approval of the proposed settlement. His arguments were, inter alia, that the settlement does not compensate the group members in any way, but contributes to the public as a whole, and that the settlement is financed by one of the respondents, while the other respondents – against whom most of the claims in the request for approval were made – do not contribute anything to the settlements. The parties responded to the position of the Attorney General and objected to it. In the reporting year, the parties filed with the court a revised settlement, in a version that was acceptable to the Attorney General of Israel, and therefore he did not see it right to object to its approval and withdrew his objection. In June 2013, the district court approved the revised settlement.
4) Derivative Action 52117-02-12 Bash v. Rasuli
At the heart of this derivative action is the argument that the employment agreement of Shlomo Eisenberg in Isras was not approved pursuant to the Companies Law. In October 2012, the parties formulated a settlement, which was filed for the approval of the court. In essence, the settlement determines that Eisenberg will return to the company an amount of NIS 395 thousand. Shortly after the settlement was filed, two shareholders in Isras filed urgent applications to join the proceeding, and made different claims against the settlement. The primary claim was that the compromise agreement had to receive, in addition to the approval of the court, the approval of Isras's general meeting, pursuant to Section 275(a)(3) of the Companies Law. In January 2013, the ISA filed with the court a position on its behalf that argued that given that the provisions of Section 202 of the Companies Law are fully implemented, there is no duty under normal circumstances for the settlement to also be approved pursuant to the procedure required by Section 275 of the Companies Law. In January 2013, the court ruled that indeed, as a rule, the approval of a settlement by a court in a derivative action cannot be stipulated on the preceding approval of the general meeting.
5) Class Action 4425-01-10 Hefetz v. Maxal
This is a class action dealing with an application for an appraisal remedy pursuant to Section 338 of the Companies Law. The plaintiffs argue that the value of the shares offered in the purchase offer was not fair value. In this case, two requests for approval were filed, in which the plaintiffs requested to represent those whose shares were purchased in the purchase offer. The two requests were unified. The requests were supported with an expert opinion with respect to the value of Pama Investment and Asset Company Ltd. In February 2013, a settlement was filed for the court's approval, in which compensation was given to the group members. The Attorney General's representative took at the court a position that included the following arguments: first it was argued that it must be clarified that the amount which not demanded by the
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shareholders shall be used as donation, as determined by the court; secondly, changes must be made in the compensation distribution mechanism; thirdly, the compensation and commission must be paid only after completion of the distribution of money. In April 2013, a revised settlement was filed, which integrated the comments of the Attorney General's representative, and it was sent for reevaluation. In July 2013, the Attorney General's representative filed with the court a position that included technical notes with respect to the compensation distribution mechanism. In August 2013, after receiving the comments of the Attorney General's representative, the court decided to approve the second revised settlement.
6) Derivative Action 41461-11-12 Sommer v. Sunny Electronics Ltd.
This is a request for approval of a derivative action, at the heart of which is the claim that a dividend distribution approved by the board of directors of the Skylax Company did not meet the conditions of Section 302(a) of the Companies Law, with respect to the test of the ability to repay. In the reporting year, the parties to this case reached a settlement, the principle points of which are: erasing the request for approval and the action, no distribution of a dividend by the company until it converts a certain amount of the bonds in circulation and in addition the applicant and his representative shall be entitled to the amount of NIS 340 thousand plus VAT. In March 2013, the ISA filed with the court an objection to the settlement pending approval. The ISA argued that the settlement is not detailed, that the objection proceeding is not yet exhausted, that it seems that the settlement does not benefit the company, and that the compensation and commission must be examined in light of the fact that the settlement does not benefit the company. In light of the ISA's objection, the plaintiffs retracted the settlement, and the legal proceeding is ongoing.
7) Civil Case 1185/05 Gilman v. Dor Chemicals Ltd.
The main point of the action deals with claims of misleading the investing public with respect to the company's real state in the years 2002 to 2004. The plaintiffs claim that the company made presentations according to which it is a successful company making vase profit, and gave misleading positive indications, while concealing material details on its real state. The response of the respondents to the request for approval has not yet been filed with the court. In September 2011, the parties to this proceeding reached a settlement, and filed it for the court's approval. In October 2011, the court transferred the settlement for examination by an inspector. In March 2013, the Attorney General's representative filed its position on the settlement, which referred to several key issues. It was first argued that there is a difference between the group as defined in the request for approval and the group in the settlement, and that this different also dramatically affects the rate of damages. In addition it was argued, that publication in a newspaper is not a sufficient way of informing the group members of the settlement, and that information from stock exchange members should be used for the purpose of informing the damaged parties. In addition it was argued, on the matter of the commission, that it must be paid only at the conclusion of the proceeding of distributing the compensation.
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The parties replied to the position of the attorney general's representative, and as of the end of the reporting year, the proceeding is still pending in the court.
8) Class Action 18040-11-12 Hanas v. Teva Pharmaceutical Industries Ltd.
This action deals with the claim that Teva must disclose the remuneration of its senior executives and directors on an individual basis as part of the periodic reports that it must file annually. The applicants argued that Teva is in violation of this duty starting with the 2000 periodic report, and that Teva reports in consolidation on the overall compensation of its senior executives and the total compensation of its directors. In June 2013, the parties filed a request for approval of a settlement, which included an obligation on Teva's part to publish the remuneration of senior officeholders on an individual basis starting with the 2013 annual statements. In August 2013, the General Attorney's representative filed its position with respect to the settlement. This position argued that Israeli companies listed for trade as part of the dual registration arrangement do not report the salaries of their senior officeholders on an individual basis, since this arrangement gave such companies, deliberately, an exemption from reporting duties pursuant to Israeli law, and that the reporting duties of such companies are meant to be identical to those imposed on Israeli companies traded only in those foreign stock exchanges. The Attorney General's representative argued that the proposed settlement may create uncertainty with respect to this fundamental approach; however, the Attorney General's representative did not object to the settlement for several reasons: the settlement expressed only partial granting of the claimed remedies; the claim also referred to additional components (with respect to directors' pay presented before the general assembly); the cause was entailed a question of interpretation of US law; Amendment 20 to the Companies Law, that went into effect around the time of the settlement, also required that Israeli companies listed for trade abroad (whether or not listed for trade in the dual registration arrangements) present the CEO's salary for the general meeting's approval; the settlement does not determine binding rules with respect to the duties of disclosure and reporting of all dual companies listed for traded on the Tel Aviv Stock Exchange. In September 2013, the court approved the settlement. The court determined that the settlement is proper, fair and reasonable taking into consideration the interest of group members, and that it is the efficient and fair way of ending the dispute. The court based its ruling on the reasoning that even without ruling on the interpretative question at the basis of the dispute, Teva's obligation in the settlement to publish the remuneration of senior officeholders on an individual basis starting with the 2013 financial statements is an obligation with clear importance, and that therefore the settlement is to the benefit of Teva's shareholders.
9) Civil Case 18433-05-09 The Estate of the Late Cohen v. Danya Cebus Ltd.
This is a class action, in which the cause of claim is alleged damages caused to the group members due to the non-publication of information on the costs and losses expected in the Highway 431 project, and publication of false quarterly and periodic reports with respect to this project. The plaintiff argued that the Company did not publish in due time
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an immediate report with respect to the losses expected from the project, and also published misleading details in its financial statements. In April 2013, the parties filed a request for approval of a settlement, according to which each of the members of the group, which was agreed as part of the settlement, will be entitled for compensation of NIS 7.85 per each share. In addition, the parties requested that the court avoid appointing an inspector. In October 2013, the Attorney General published his position with respect to several issues, mainly that the settlement, unlike the request for approval, deals with only one cause of claim, and constitutes a court action towards all group members, and therefore some group members will not be compensated, and that it is necessary to appoint an expert to examine the settlement. The parties responded to the Attorney General's position, and in a discussion held in December 2013 it was agreed that the parties will file a request for approval of a revised settlement. As of the end of the reporting year, the revised settlement has not yet been filed.
10) Civil Case 2091/03 Hershkovitch v. Ramat Avivim
This is a class action dealing with an application for an assessment remedy pursuant to Section 338 of the Companies Law. The plaintiffs claim that the value of the shares offered as part of the purchase offer was not fair value. In June 2007, the request for approval was granted. An appeal on this decision was filed with the Supreme Court, which was unified with additional appeals (the Kital affair). The appeal was rejected in 2012, and in June 2013 – after the proceedings at the district court were renewed – the parties filed with the court a settlement for approval. Under the settlement, the compensation amount shall be NIS 135 per share, with the remaining amounts not distributed donated to a body decided by the court. In addition the parties requested that no inspector be appointed. The Attorney General's representative filed a short position in October 2013, in which he proposed implementing the notification and distribution mechanisms determined in the abovementioned Hefetz case, in light of the success of this approach. In addition, he argued that an inspector should be appointed as required by the Class Action Law. In October 2013 a discussion on the matter was held, and as of the end of the reporting year, the court's decision has not yet been given.
11) Derivative Action 32007-08-11 Efrat v. Ben Shaul
This is a request for approval of a derivative action filed in 2011 with respect to Ilex Medical Ltd. The derivative plaintiff argues that the employment agreement of the shareholder, in the role of the chairman of the board of directors and the company's CEO is improper in several aspects, the main one being the fact that the agreement was not approved by the general meeting as required.
In December 2012, the claim was approved as a derivative action against the controlling shareholder alone. The decision determined that the employment agreement had to be approved pursuant to Section 275 of the Companies Law, and that the result of non- approval is that the agreement is null and void. It was determined that the applicants complied with the burden imposed on any person desiring to file a derivative action, and
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adequately proved that the company has alleged cause of claim against the controlling shareholder.
In November 2013, the parties filed a request for approval of a settlement. Under the proposed settlement, the controlling shareholder shall return certain sums to the company and in this way will "waive" his salary for a period following the expiration of his employment agreement. The ISA filed a position that argued, inter alia, that the proposed settlement is problematic, since in it the controlling shareholder "waives" salary which was undisputedly approved illegally, and that he knew in advance he is not entitled to. As of the end of the reporting year, no decision has yet been given on the request for approval of the settlement.
(e) Civil proceedings against the ISA
Below are the details of civil proceedings filed against the ISA on matters of supervision or on matters related to its operation as an administrative authority:
1) Civil Case 08/1689 Mulkandov v. Parush, Terry and the Israel Securities Authority
This is a monetary claim against the ISA, against the person who was the chairman of the ISA on the date relevant to the claim, and against the person who was on the date relative to the claim the head of the Mutual Fund Supervision Department (at present a part of the Investment Department). The claim argues damages caused to the plaintiff due to the cancelation of an agreement between a fund manager and the plaintiff and resulting loss of income. The plaintiff argued that this happened due to actions taken by the ISA. In the reporting year, a verdict was given in this case, determining that the ISA and its representatives acted within the ISA's powers and pursuant to the provisions of law, and that therefore they are right in the defense arguments made in the proceeding. Therefore, the court rejected the claim. The plaintiff appealed to the Supreme Court, and the case is still pending as of the reporting year.
2) Civil Case 11-12-27603 Abramovitch David et al. v. the Israel Securities Authority and the Israel Police
3) Civil Case 06/1470, 06/1634, 11-10-13989 Havitz Vladimir et al. v. Rusneftgazinvest (Israel) Ltd et al.
4) Administrative Petition 61352-06-13 Havitz Vladimir et al. v. Israel Police et al.
Two monetary claims filed against the Israel Police and the ISA in a fraud affair perpetrated by Gregory Lerner, as well as a petition under the Freedom of Information Law on the same matter. The claims were filed by approximately 560 citizens, and argued that as part of this fraud approximately 2,500 people lost an amount of approximately NIS 120 million, and that Mr. Lerner received this amount as part of a public offering of securities without a prospectus, in violation of the Securities Law. The plaintiffs argue that the ISA knew that this was a violation of the Securities Law, but did not prevent the process, which lead to the damages caused to the plaintiffs, and that therefore it was negligent. Due to the similarity between the two claims, the court
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decided that it shall hear them together. In February 2012, the Israel Police and the ISA filed a joint statement of defense, in which they rejected the claims made against them in the unified claim. In the reporting year, a statement of defense was filed in the additional claim. In addition, in the reporting year, a petition was filed pursuant to the Freedom of Information Law with regard to documents disclosed in the document disclosure affidavits on behalf of the Israel Police and the ISA. The parties reached a litigation agreement under which this petition will be erased, and all matters of disclosure of documents and questionnaires will be litigated in a concentrated manner. As of the end of the reporting year, these matters are not yet decided, and the proceeding is in preliminary stages (questionnaire and document disclosure stage).
5) Civil Case 45566-05-13 Meir Zeituni v. Best Investment Ltd. et al.
This is an investors' claim filed, inter alia, against the ISA, dealing with allegations of fraud, violation of the duty of trust and negligent conduct on the part, as the plaintiff alleged, of the person managing their investment portfolio, Best Invest Investment Portfolio Management and its owner. The plaintiff's argument against the ISA was that the ISA was negligent in supervising the operation of Best invest Investment Portfolio Management Ltd. and its owner. In the reporting year, the plaintiffs requested to cancel the claim against the ISA without an expenses order, and thereby the proceeding has ended.
6) Administrative Petition 26085-09-13 Guideline Information and Communication Ltd v. the Israel Securities Authority et al.
This is an administrative petition filed with the administrative court in Jerusalem against the decision of the ISA's tender committee dated July 29, 2013, in which the bid of A Online Capital (OAC) Ltd. was declared the winner of public tender no. 3/13 for the provision of software licenses to a stock exchange real time data system and for the provision of support and maintenance services for the system. The petitioner argued that the Tender Committee should have disqualified A Online's bid due to a fault in it, and therefore the petitioner requested from the court the following remedies: cancelation of the Tender Committee's decision on A Online winning the tender and declaration of the petitioner as the tender winner or alternatively to order the ISA to hold a new tender. On November 20, 2013, a discussion was held on the petition in the court, during which the judge stated that it is impossible to declare the petitioner the winner of the tender, since there is a fault in its bid. At the request of the petitioners, until the giving of a ruling an interlocutory decree was given preventing the ISA from realizing its engagement with the tender winner, subject to the petitioner's deposit of a bank guarantee at the amount of NIS 300 thousand. The guarantee was deposited as was required. The ruling on the petition has not yet been given.
4. Financing class actions and derivative actions
One of the goals of the ISA is to remove barriers in the field of private enforcement and promoting the filing of proper private proceedings. The ISA desires to implement this goal by providing tools and creating a comfortable "work environment" for investors desiring to file
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appropriate class actions and derivative actions. This, in light of the current state where the field of private securities laws enforcement in Israel is not yet developed, and is of relatively limited scope.
One of the significant tools at the ISA's disposal for this purpose is participation in financing class actions in the field of securities and derivative actions. Pursuant to Section 209 of the Companies Law, the ISA may incur the expenses of class action proceedings, if it is convinced that the class action is of public interest, and that there is a reasonable likelihood that the court will approve it as a class action. In addition, pursuant to Section 205a of the Companies Law, the ISA is entitled to incur the expenses of derivative action proceedings if it is convinced that the claim is of public interest, and that there is a reasonable likelihood that the court will approve it as a derivative action. It is noted that this is a relatively new power, granted to the ISA only as part of Amendment 16e of the Companies Law. The ISA uses its power to finance class actions and derivative actions regularly. The proceedings in which the ISA assists in financing shall be detailed below.
In the last three years, since the commencement of the activities of the Economic Department in the district court, and following several significant decisions in the field of class actions and derivative actions (in the field of securities, companies laws and in general) a positive change in trends is distinguishable in private enforcement of securities laws and companies laws.
Class actions and derivative actions deal with in the reporting year
(a) Class actions and derivative actions the ISA assisted financing which ended in the reporting year:
In the reporting year, one class action which the ISA decided in the past to support in financing has ended:
Class action against FMS Enterprises Migun et al. (Civil Case 2103/06, Class Action 1033/08); see the 2012 Report, pp. 107 – 108. In this action, a settlement was reached, under which the group members were compensated at the amount of approx. NIS 9,800,000.
(b) In the reporting year, two derivative actions which the ISA decided to support in financing in the past have ended:
1) Derivative action against Melisron Ltd. et al. (Derivative Action 20460-08-12); see the 2012 Report, pp. 108 – 109. In this claim a settlement was approved, under which an amount of approximately NIS 5 million was returned to Melisron Ltd.; 2) Derivative action against Delek Israel Fuel Corporation Ltd. et al. (Derivative Action 9330- 10-12); for details on this claim, see below. In this claim a settlement was approved, under which an amount of approximately NIS 4 million was returned to Delek Israel Fuel Corporation Ltd. (c) Pending class actions and derivative actions which the ISA decided to assist in financing:
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In the reporting year, the ISA decided to finance 5 class actions and derivative actions. As of the end of the reporting year, and together with claims that the ISA decided to finance in previous years, 13 claims are financed, as foregoing.
The proceedings detailed below are proceedings with regard to which financing decisions were made in principle. After making a financing decision in principle (or when making such decision), the ISA makes a specific financing decision as to financing different components with respect to each and every proceeding.
1) Class Action against Elscint Ltd. et al.
This is a claim dealing with an allegation of deprivation of minority shareholders in Elscint Ltd. (hereinafter: the "Company"), caused by the controlling shareholders in the Company and officeholders appointed on their behalf in a coordinated move, in which they emptied the Company's accounts.
Following various preliminary proceedings and litigation on many preliminary arguments, the litigation on the request for approval of the class action started in the second half of 2007, and in January 2009 the court's ruling on the matter was given, rejecting the request for approval of class action.
In 2009, an appeal on this decision was filed with the Supreme Court. In May 2012, the Supreme Court accepted the appeal, approved the request for approval of the class action and returned the case to the district court for it to be litigated as a class action (Civil Case 1318/99, Civil Appeal 2718/09).
2) Class Action against Boulus Tourism and Hotels Ltd. et al.
This action, filed in 2002, mainly dealt with allegations of misleading details being included in the company's prospectus, misleading details being included in reports, no adequate disclosure in annual financial statements of the company, and violation of the duties and obligations of the trustee for the company's bondholders, towards the bondholders.
In March 2011, the court granted the request for approval in part against some of the defendants (the person who signed the prospectus and the controlling shareholder in the issuer) due to the cause of a misleading detail in a prospectus, with regard to the purpose of the issue's consideration.
The plaintiff filed an appeal on those parts in the request for approval that were rejected. The proceeding is pending in the Supreme Court (Civil Case 1934/02, Civil Appeal 3103/11).
3) Class action against Dor Chemicals et al.
For details on this proceeding, see this chapter above, under the section dealing with "Class actions and derivative actions to which the ISA was added, or in which the ISA expressed its position," Subsection (7).
4) Class action against TRD Ltd. et al.
This action deals mainly with misleading the investing public with respect to the company's operation in the field of financial investments and its exposure to risky speculative financial
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instruments; this, while at the time of its first issue in the Tel Aviv Stock Exchange, the company stated in its prospectus that it deals with medical instrumentation in the field of dentistry. The parties filed all statements of claim in the case as well as expert opinions. The court appointed an expert on its behalf.
In December 2010, a discussion was held, in which the expert on behalf of the court was questioned. In 2010, additional discussions on evidence were held, and the date for completing the evidence was postponed until after the completion of the testimony of some of the respondents as part of the criminal proceeding conducted against them. As of the reporting year, the criminal proceeding has not yet been ended (Civil Case 1420/07).
5) Class action against Landmark Group Ltd. et al.
Landmark is an Israeli company whose securities were traded on the Tel Aviv Stock Exchange. The additional defendants are the controlling shareholders in Landmark, directors in Landmark and the underwriters of the issue performed by Landmark. The class action plaintiffs are Harel Fund Management Ltd. (hereinafter: "Harel") and Mr. Asher Sapir.
This action mainly deals with a prospectus published by the company in 2007. The plaintiffs argue that the prospectus included many misleading details, inter alia with respect to two of Landmark's land properties in the United States, as well as with respect to a building transaction on those lands (which was not realized at the end of the day). The plaintiffs make additional claims in the action with respect to misleading details included in the prospectus. The class action plaintiffs argue that on the basis of these misleading details, an amount of approximately NIS 170 million was raised from the public. The class action plaintiffs argue that had the correct facts been presented, the securities would not have even issued to the public under a prospectus and traded on a stock exchange, or alternatively – they would have been purchased by group members at much lower prices than those under which they were issued to the public and bought in stock exchange trade afterwards. The respondents submitted responses to the requests for approval, and the class action plaintiffs filed a response to the responses. (Class Action 14144-05-09; Request to Appeal 995/13; Request to Appeal 625/13). For further details on the proceeding, see this chapter above, under the section dealing with "class actions and derivative actions to which the ISA was added, or in which the ISA expressed its position," Subsection (2).
6) Class action against Standard & Poor's Maalot Ltd. et al.
This is an action against Standard & Poor's Maalot Ltd. (hereinafter: "Maalot"), World Currencies Ltd. and several officeholders and controlling shareholders therein, and against Bank Leumi Trust Company Ltd. (hereinafter: the "Trustee"). This action mainly deals with asset-backed bonds offered to the public by Global Currencies pursuant to a February 2006 prospectus. The bonds were backed with notes, issued to Global Currencies by two foreign banks, with a significant part thereof backed by Lehman Brothers Bankhaus AG – a German bank that is a subsidiary of Lehman Holdings (hereinafter: "Lehman Germany"). The prospectus included a rating report of Maalot that rated the bond as AAA on a local scale. The rating remained unchanged until the collapse of Lehman Holdings in September 2008. Following this, the value of the bond dropped by 44%, the rating was lowered from AAA to D
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(Default), and the German commissioner of banks issued an order prohibiting Lehman Germany from making and/or receiving payments.
The action includes many different allegations against the defendants, inter alia, that the issuing company did not report to the public the identity of the backing banking, but only at a great delay; that Maalot undertook to hold constant supervision over the rating and to update it as necessary, and that therefore the rating it gave to the bonds in the prospectus (AAA) constitutes a misleading detail; and that the trustee did not take any action to guarantee the company's undertakings towards bondholders. The respondents filed responses to the request for approval, and the class action plaintiff filed a response to the responses.
In January 2011, the plaintiff filed a request to add an economic expert opinion and a legal expert opinion. In May 2011, the court decided to allow the plaintiff to file an economic expert opinion (which was already attached to the request filed in January 011), as well as to allow the respondents to file a counter opinion within 90 days. The counter opinion was filed in January 2012. In the reporting year, the evidence stage in this case has ended (Class Action 1383-09).
7) Class action against Standard & Poor's Maalot Ltd. et al.
This action was filed against Standard & Poor's Maalot Ltd. (hereinafter: "Maalot"), Keshet Bonds Ltd. (hereinafter: "Keshet"), its directors and shareholders, and the trustee for the bondholders (hereinafter: the "Trustee").
The action deals with structured bonds issued by Keshet and traded on the Tel Aviv Stock Exchange. With the capital Keshet raised, it bought from Lehman Brothers Bankhaus AG – a German bank that is a subsidiary of Lehman Holdings (hereinafter: "Lehman Germany") – promissory notes that served as the bonds' backing assets. The receipts from these promissory notes served as the only source of financing for complying with the obligation towards the bondholders. The global Lehman Brothers (hereinafter: "Lehman") guaranteed the obligations of Lehman Germany. To the prospectus, Maalot's opinion was attached, in which the bonds were temporarily rated AAA. The bond rating remained high until the collapse of the Lehman Group in September 2008.
On September 15, 2008, Lehman filed for bankruptcy. On that day, an order was given to Lehman Germany to cease from transferring payments to Keshet. As a result, the bonds' rate dropped at once from 75 agorot per unit to 40 agorot per unit. Since then, trade of these bonds was not renewed. On September 17, 2008, Maalot lowered the bonds' rating to the lowest possible rating (D).
The plaintiffs filed a claim for the damages that they alleged were caused to all bondholders. The plaintiffs argue that from late 2007 to September 2008, gradual material events occurred, related to the primary risk, which marked the deterioration of the Lehman Group, and that Keshet, Maalot and the Trustee were required to perform – but abstained from – different actions, and to publish different reports, and that therefore they violated their
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disclosure duties and committed against the bondholders wrongs of negligence, fraud, violation of a legislated duty and more.
In October 2011, the plaintiffs filed a request to file an economic expert opinion on their behalf. The court granted this request, and in March 2012, the plaintiffs filed an economic expert opinion on their behalf. In the reporting year, the evidence stage in this case has ended (Civil Case 1611/09, Civil Case 1697/09).
8) Class action against Michael Hirschberg
This is a request for approval of a class action filed in November 2011 against the controlling shareholder in Malrag Engineering and Construction Ltd. (hereinafter: "Malrag"), directors and officeholders in Malrag, and against Malrag's auditing accountant. The request was filed by one of Malrag's bondholders.
The representative plaintiff argued that Malrag published in its three financial statements for 2009 misleading details on the cash and cash equivalent item in its reports, a fact that caused damages to the buyers and holders of bonds in that period. In December 2012, Malrag published reports correcting the misleading items presented in its statements. Following publication of the reports correcting the misleading items, the rates of Malrag's bonds decreased sharply by 30% - 45%.
Following the events that formed the basis for the reports correcting the misleading details, the ISA imposed a financial sanction on Malrag at the amount of NIS 488 thousand. The sanction was imposed after the ISA determined that Malrag failed to present a material detail in the financial statements.
In April 2012, the class action plaintiff corrected the request for approval. In the reporting year, the parties completed the filing of statements of arguments on their behalf, and as of the end of the reporting year, the evidence stage has not yet started in the request for approval (Class Action 49602-11-11).
9) Class action against David Cohen et al.
This is a request for approval filed against Mr. David Cohen, Rona Arlitzki (Cohen) (hereinafter, jointly: "Cohen"), Hannah Tadmor, Gidon Tadmor (hereinafter, jointly: "Tadmor"), the Delek Group Ltd. (hereinafter: "Delek") and Cohen Development and Industrial Structures Ltd. (hereinafter: "Cohen Development").
The request for approval was filed by Hatzlacha, the Consumer Movement for a Fair Economic Society (hereinafter: the "Plaintiff"), the goal of which is to promote civil enforcement in Israel and to encourage efficient regulation in the economic and social field.
The plaintiff argued that the purchase of Cohen's and Tadmor's shares by Delek in November 2011 should have been carried out by way of a special tender offer. In not conducting the purchase in this way, Cohen and Tadmor assumed the control premium that also belonged to shareholders from the public, and the respondents infringed the right of public shareholders to object to the purchase of control by Delek, or to participate in the sale. The plaintiff argued that the duty of performing a special tender offer derives from the fact that
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for years, Cohen and Tadmor held Cohen Development shares separately, and this was also how this was reported to the public. Therefore, until the date of the purchase of Cohen's and Tadmor's shares by Delek, no one held more than 45% of the shares of Cohen Development, and pursuant to Section 328 of the Companies Law, Delek had to perform a special tender offer when it first crossed this threshold.
Alternatively, even if the argument regarding the duty of conducting a special tender offer is rejected, and it is determined that Cohen and Tadmor held jointly the company's shares for year, the plaintiff claims that this is a severe violation of the reporting duty, since until shortly before the sale of shares to Delek, it was not reported to the public that Cohen and Tadmor hold Cohen Development shares jointly.
The remedies for which the plaintiff petitions are the remedy of making the shares dormant as long as these are held by Delek (this remedy is requested for the first cause of claim), in addition to compensation for the control premium illegally taken from them. In the reporting year, responses to the request for approval were filed, and the evidence stage of the request for approval was also completed (Class Action 2484-09-12).
10) Derivative action against Delek Israel Fuel Corporation et al.
A request for approval of a class action filed against Delek Israel Fuel Corporation Ltd., Or-Li Energy Resources Ltd., Avi Lalevski, all directors serving in Delek's board on the dates relevant to the events described in the request for approval, officeholders in the Delek Group and Mr. Yitzhak Tshuva.
At the heart of the claim is the question of the validity of the agreement for the operation of a gas station, signed between the company and the brother-in-law of the controlling shareholder in the company. In essence, the plaintiff argues that since 2005 the agreement is not in effect, and therefore its consideration is paid illegally, while causing damage to the company. He argues that the agreement constitutes an exceptional transaction, which required the approval of the audit committee, the board of directors and the general meeting with the majorities set by law. The primary remedy claimed is the return to the company of the amounts allegedly illegally paid.
In November 2013, a settlement was approved between the parties, under which Or-Li Energy Resources returned to Delek Israel Fuel Corporation Ltd. an amount of approximately NIS 4 million. The ISA did not express its opinion with respect to this settlement (Derivative Action 9330-10-12).
11) Derivative action against Pangaea Real Estate Ltd. et al.
This is a request to approve a derivative action, filed on the matter of Pangaea Real Estate Ltd. The request for approval includes allegations against Barak Rosen and Assaf Tuchmeier and against B.V.B Madaf 15 Ltd. owned by them.
At the basis of the action is the claim that controlling shareholders in Pangaea violated their duty of trust towards it. In essence, the plaintiff argues that the controlling shareholders mislead the members of the board of directors with respect to the details of a certain
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transaction and its profitability in order to seize the transaction themselves. The plaintiff further claims that the controlling shareholders were in conflict of interest and acted against the company's interest and for their own personal interest while preventing profit from the company. The primary remedy claimed is compensation by the company at the amount of profits expected from the performance of the transaction or, alternatively, transfer of the rights in the transaction to the company.
In October 2013, the district court granted the request for approval, and the action was approved as a derivative action. In December 2013, the company filed a request to hold a renewed discussion on the request for approval, pursuant to the procedure set in Section 41(e)(2) of the Courts Law. As of the end of the reporting year, a response to this request has not yet been filed (Derivative Action 20136-09-12).
12) Class action against Pinros Holdings Ltd. et al.
A request for approval of a class action filed against Pinros Holdings Ltd., Mordechai and Uri Winkler and all directors serving in Pinros's board on the dates relevant to the events detailed in the request for approval.
The class action plaintiff argues that the controlling shareholders and the directors deprived the rights of minority shareholders in the Company, in that they did not do enough to prevent the company's shares from entering the stock exchange's conservation list. Moreover, the class action plaintiff argues that in the relevant period, the controlling shareholders performed actions which may have worsened the conservation problem. The company's shares' move the conservation list harms the shares in two ways: (a) it harms the negotiability of shares, since trade in them is not held as part of regular trading; (b) it leads to a concern that if the shares are not brought back to trade in the primary list within two years, they will be erased from trading completely.
In March 2013, the request for approval was approved, and the action was accepted as a class action. As of the date of the end of the reporting year, a decision is yet to be made on the class action itself (Class Action 7477-10-11).
13) Derivative action against Nochi Dankner et al.
This is a request for approval of a derivative action, filed on the matter of Discount Investments Ltd. against Nochi Dankner, Gideon Lahav, Eliyahu Cohen, Avi Fischer, Niv Achitov, Yitzhak Manor, Zvi Livnat, Haim Gavrielli, Zehava Dankner, Dori Manor, Shaul Ben Zeev, Rafi Bisker, Mark Shimel and Yair Orgeler.
The action is based on the claim that the decision of the board of Discount Investments Ltd., of purchasing control in the Maariv Newspaper, was an economically unreasonable decision, devoid of any business or economic logic, was not in the company's best interest, did not serve the company's goals, and that it was clear that it would cause the company very significant damages. The plaintiffs argue that the company's directors violated their duty of care towards the company on all matters related to making this decision, as well as with regard to the decisions on further investments in Maariv. The primary remedy is return of the investment money, at the sum of approximately NIS 370 million.
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As of the end of the reporting year, the evidence phase in the request for approval has ended, but a decision has not yet been given on the request for approval (Derivative Action 10466-09-12).
14) Class Action against Kol Holdings Ltd, et al.
This is a request for approval of a class action filed against Kol Holdings Ltd., Hedros 2012 Ltd., A.G.B. Cheborshka, Patrick Darhi, Hot Communication Systems Ltd., Stella Handler, Israel Chechik, Amos Sapir, Rali Shavit, Abraham Burstein, Jeremy Bonin, Dexter Joey, Yinon Engel, the Fishman Family Assets Ltd., the Fishman Family Assets Management Ltd. and Yedioth Communications Ltd.
The action is based on the claim that the consideration that shareholders received from the public as part of the merger of Hot, which lead to its deletion from stock exchange trading, was lower than the fair value of their shares, and that some of the shareholders from the public (the Fishman Group and Yedioth Communications) received excessive consideration for their shares.
The plaintiffs argue that the controlling shareholder, the Fishman Group, Yedioth Communications and the members of the Hot board of directors violated various duties towards the shareholders, towards and as part of the merger deal. The main remedy claimed is compensation of the public shareholders at the rate of the damages caused to them from having their shares sold for an unfair price, or alternatively distribution of the excess consideration given to the Fishman Group and Yedioth among all public shareholders. As of the reporting year, the evidence stage in the request for approval has not yet started (Class Action 37908-11-12, 48435-11-12).
5. Tenders and contractual engagements
The ISA, as a statutory corporation, is subject to the Tender Duty Law of 1992 and to the regulations enacted under it. Pursuant to the abovementioned duty, the ISA published 11 tenders in 2013, the same number as in 2012, in diverse fields and issues, such as IT systems, internal audit services, actuary services, lingual editing services, periodic medical survey tests etc. Following these tenders, the ISA engaged in agreements with the tender winners.
The Legal Counsel Department guides all ISA tender and engagement processes, and the legal consultant's representative serves as the legal consultant of the ISA's Tender Committee.
6. Public inquiries
In the reporting year, the ISA dealt with approximately 1,100 public inquiries, as compared with approximately 1,000 in 2012. The inquiries are filed by various factors, including: individuals operating in the capital market, both as investors and as portfolio managers or investment consultants; attorneys representing individuals or reporting corporations operating in the capital market; individuals who were harmed or who desire to report irregularities or problems in the capital market in general, or in one of its branches; external factors, such as governmental and other entities that direct various factors to the ISA;
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various media factors, such as reporters; students, research institutes and various organizations requesting information, research and data on the capital market.
The issues on which public inquiries are submitted are numerous and diverse, and include horizontal issues related to the ISA's operations, to the operations of reporting corporations and to the operations of the stock exchange and its members; issues related to the conduct of investment consultants and portfolio managers; requests for inspection of suspicions in the issue of stock exchange trading; horizontal issues on the matter of the operation of mutual funds and ETFs; requests for information on the ISA's operation or on the operation of any entity supervised by it in the capital market. Others include requests for information on the capital market from official factors or private individuals. Such requests are mostly dealt with pursuant to the Freedom of Information Law of 1998.
The past year, like the ones preceding it, was characterized by many inquiries dealing with debt settlements made by reporting corporations and their implications on capital market investors, as well as many inquiries related to stock exchange trading and the conduct of the capital market as a whole.
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5.7 International Affairs Department
A. General
1. The Department's purview The International Affairs Department implements the ISA's strategy for incorporating the Israeli capital market into globalization processes in general and, in particular, for cooperating with entities engaged in supervision and enforcement in the area of securities worldwide. The Department is charged with handling all international facets of the ISA’s work, including serving as a liaison with foreign supervisory bodies, international organizations and securities authorities, including signing memoranda of understanding for cooperation with those authorities and entities.
One of the main goals of the ISA's multi-year strategy, as part of its Roadmap Plan, is market development. Promoting the status of Israel's capital market around the world is a highly significant goal for the ISA, and is the responsibility of the International Affairs Department.
The Department pursues this goal in two main ways: First, by harmonizing the Israeli securities law with exiting legislation in developed countries, while adjusting it – as far as possible – to the local regulatory infrastructure. International financial activity requires unifying regulatory requirements in areas under the ISA's purview. Organizations such as the International Securities Authorities Organization – IOSCO (hereinafter – IOSCO) strive to create uniform international policies and rules, to be adopted by its member entities. Second, by incorporating the ISA into cooperation processes forged between supervision and enforcement entities in the field of securities worldwide. In this context, the ISA cooperated extensively with foreign authorities, which are party to the multi-lateral cooperation agreement for information exchange and enforcement pursuant to the IOSCO Agreement. This agreement allows for exchange of non-public information between authorities, as well as mutual assistance in implementing enforcement activities. As part of the agreement, the ISA sent, during the reporting year, 21 requests for assistance and transfer of information and assistance in judicial inquiries. In addition, it received similar requests from foreign regulators.
2. Main Activities in 2013 a. As part of a structural change conducted in the Department, areas of responsibility and specialization were defined. Thus, the Department's employees became responsible for either of the three following areas: investments, enforcement and corporations. b. The International Affairs Department hosted in Israel two meetings of the IOSCO committees: In June 2013, meetings of the Enforcement Committee (C4) and the Screening Group were held at the Hilton Hotel in Tel Aviv. 33 representatives from 25 countries visited Israel for three days, discussing cooperation pursuant to the IOSCO Agreement, reviewing the criteria for accepting new members to the Organization,
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extending assistance powers under the agreement and other matters pertaining to the enforcement of securities. In November, the committee regarding credit rating agencies met in the ISA's offices in Jerusalem. c. During the reporting year, memoranda of understanding were signed with European authorities regarding the Alternative Investment Fund Managers Directive – AIFMD. The memoranda of understading deal with consulting, cooperation and information exchange regarding supervision over fund managers and funds persuant to the Directive. After signing the memoranda of understanding, the Israel Securities Authority joined efforts to promote global coordination between foreign investment funds and supervision over them, led by the European Securities and Markets Authority (ESMA).
3. Main activities planned for 2014 a. In 2011, the European Securities and Markets Authority (ESMA) recognized Israeli regulation regarding the content and format of a prospectus in accordance with the Securities Law. As a result, the Department has been actively pursuing cooperation with regulators in the European Union and bi-lateral recognition agreements. In 2014, the ISA will continue to pursue this matter with the British Financial Conduct Authority (FCA), seeking an agreement which would recognize Israeli regulation regarding prospectuses, thus facilitating access to the British capital market for Israeli issuers. b. In 2014, the ISA will emphasize international cooperation, inter alia, examining whether it should pursue a legislative amendment which extends the possibilities for cooperating with foreign authorities and conducting judicial inquiries. c. Participation in inter-departmental projects: the International Affairs Department emphasized participation in inter-departmental projects at the ISA as part of the ISA's ongoing activity. The Department's representatives will continue serving as members of inter-departmental teams, covering international aspects, which – in most cases – serve as the basis for legislative amendments or regulation implemented by the ISA.
B. T he Department's activities
1. Participation in international forums
(e) Activity under the IOSCO The International Securities Authorities Organization, IOSCO, is the supreme international forum for international cooperation amongst securities regulators. It has approximately 200 members from 100 countries worldwide. The organization establishes uniform international policies and principles. The IOSCO’s principles have gained international recognition as the leading criteria for financial analyses and assessments by global financial institutions, such as the International Monetary Fund, as well as the basis for financial legislation. The organization sets the agenda amongst its members – primarily financial regulators and stock exchanges. The IOSCO has decided on an organizational change, whereby two former committees (the Technical Committee and Executive Committee) will merge into the IOSCO Board, which will
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serve as the organization's directing committee. Between 2012 and 2014, a temporary transitional board will manage the IOSCO, until the permanent board is established in 2014.
During the reporting year, the Department participated in the following events and moves detailed below, as part of IOSCO: The IOSCO Annual Conference – This conference is considered one of the most significant and prestigious events in the global economic regulatory community. This year, the conference was held in Luxemburg. Discussions focused, inter alia, on the following issues: the organization's membership structure, accepting new members, voting rights, forum membership, cooperation between countries, interpretation of the IOSCO Agreement and its intended expansion, as well as accounting standards and cooperation with the International Accounting Standards Board (IASB) and International Financial Report Standards (IFRS) Foundation. The ISA Chairman's senior advisor and a member of the International Affairs Department represented the ISA. During the conference, work meetings were held with corresponding organizations from around the world.
Meetings of the IOSCO MMOU Screening Group – Since joining this forum as a member in 2007, the ISA takes an active part in the screening process for entities wishing to join the IOSCO agreement. The forum actively discusses the legal infrastructure of candidates in light of the strict cooperation principles outlined by the IOSCO. This year, the committee began dealing with the important issue of expanding the powers under the IOSCO agreement, filing an initial proposition for the expansion of the agreements. Discussions on the issue are expected to continue in 2014 as well. The ISA is a member of one of the work teams dealing with this issue, taking part in developing the ideas for using enforcement powers beyond those outlined in the Agreement.
Committee 4 (C4) dealing with enforcement and information exchange issues under the IOSCO Agreement – the Department participated in a number of projects within the work group, such as proposed amendments to the IOSCO Agreement, and providing interpretation of various enforcement and information sharing issues. This year, the committee dealt with projects such as credible deterrence and powers to assist in criminal investigations. The ISA takes part in the Committee's discussions.
The Enforcement Committee and Screening Group – In June, the ISA hosted a meeting of these two committees. The ISA's criminal enforcement powers were presented in the meeting. These meetings convene three times a year. Committee 5 (C5), which deals with investment management – the ISA, through its Investment Department, is active in this committee, which discusses key issues in the global arena pertaining to investment management, including collective investment schemes (CIS) and hedge funds.
Committee 6 (C6), which deals with credit rating agencies – the International Affairs Department participates in the regulation effort of credit rating agencies active in Israel. For this purpose, and in order to capture the current developments in this area worldwide, the Department serves as a member of this Committee and regularly participates in its meetings.
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The ISA hosted one of the Committee's meetings in its Jerusalem offices in November 2013 (the Committee holds three meetings per year).
The European Regional Committee – Representatives of the ISA participated in discussions and meetings held by this Committee. The Committee discussed, inter alia, emerging risks in European markets, as well as an issue raised by the ISA: protecting investors and financial stability. The Assessment Committee – The Committee deals with developing and updating international standards regarding securities, developed by the IOSCO. Currently, these standards include over 38 principles which form the basis for adequate securities regulation. In addition, the Committee conducts assessments of securities authorities from various countries, which are members of the IOSCO.
The ISA participated in a work group examining the standards and methodology developed by the organization regarding systemic risks (Systemic Risk Review Team). In this context, the ISA participated in drafting a questionnaire distributed among members of the Organization regarding dealing with systemic risk, paticipating in the processing and analysis of the information gathered, and in drafting a report of the findings on the issue.
Standing Committee on Risk and Research (SCRR) – this committee was established by the IOSCO in 2010, as part of the Organization's efforts to realize one of its most important goals – supervision and control of systemic risks. The Committee created a number of working teams, which focus on specific relevant areas. The ISA takes part in a work team which deals with identifying methodologies for researching systemic risk (from a capital market point of view). IFRS -related activity – The ISA takes part, through its Investment Department, in a work team dealing with accounting, auditing and disclosure (Committee 1), which discusses the most important issues in this area in the international arena.
(b) Activity in the OECD As part of its activity within the OECD, the Department took an active part in the discussions of the Corporate Governance Committee. This year, the Committee discussed Israel's progress in terms of implementing the committee's recommendations, which were not yet implemented at the time Israel was accepted as a member of the organization. Representatives of the Israel Securities Authority, along with representatives of the Ministry of Justice, represented Israel in the Committee's meetings.
The recommendations discussed dealt with the following two areas: 1. Reinforcing supervision over independent auditors, including establishing an independent supervisory entity. The ISA's representatives presented the progress made regarding tightening the supervision over independent auditors, including establishing an independent supervisory body in Israel; 2. Increased independence for board of directors of government companies and reinforcing the independence of the Companies Authority. This issue was discussed in a
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separate meeting, as part of a working group on the subject of privatization and government companies, with the participation of representatives from the Government Companies Authority.
In addition, votes were held to appoint the Committee's management. The Committee's management takes part in planning and setting agendas for meetings and determining the Committee's work plans, thus serving as a forum for general discussions on issues pertaining to the Committee's work. The ISA was elected to remain in the forum, which includes approximately ten representatives out of approximately sixty committee members from 34 countries.
The inter-ministerial streering team, which was established as part of the process of joining the organization, continues to function and is developing a work plan for coordinating Israel's activity with the Organization. The ISA, through the International Affairs Department, is a member of the steering team and takes an active part in its meetings. In addition, the Department assists in issues regarding work on the Convention on Combatting Bribery of Foreign Public Officials initiated by the OECD. Work in this area is led by the Ministry of Justice. (c) Cooperation on information exchange The Department attaches great significance to incorporating the ISA into cooperation procedures between authorities regulating and supervising securities as an essential means to achieve the ISA's enforcement objectives. Investigations conducted by the ISA are increasingly in need of information and actions outside Israel. For this reason, being a party to the IOSCO MoU constitutes a significant part of the ISA's enforcement activity. Presently, approximately one hundred authorities are party to the IOSCO MoU, such as the US, Canada, the UK, France, Germany, Japan, China, Brazil, India, and Australia. The Department cooperates with foreign authorities party to the IOSCO MoU on an ongoing basis, through cooperation and information exchange and taking enforcement actions in accordance with the Agreement.
Main points and parties of the IOSCO MoU 1. Mutual assistance and exchange of information between authorities shall be for the purpose of enforcement and supervision of the laws of the requesting authority. Assistance is to include the gathering, seizing and transfer of information and documents to foreign authorities, as well as in investigating alleged violators of the securities laws of the foreign country.
2. Cooperation between authorities is subject to the local laws applicable to each Authority.
3. Assistance shall be provided, inter alia, in investigations and enforcement of laws pertaining to the following issues:
a. Inside information, market manipulation, false reporting;
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b. Listing, issuing, offer or sale of securities and related reporting requirements; c. Market intermediaries, including licensed or registered investment advisors, joint investment brokers, dealers and transfer agents; d. Markets, stock exchanges, clearing houses, and settlement entities.
4. The agreement bears no expiration date, but each Authority may terminate it at any time by submitting a 30-day notice.
Requests for assistance and judicial inquiries between the ISA and foreign securities authorities The Department was in charge of handling incoming requests for assistance from foreign authorities as well as the ISA’s requests from foreign authorities. Requests for the transfer of information and assistance in judicial inquiries were made by direct contact between authorities, and – in lack of an agreement – via the International Department at the State Attorney’s Office, under the Legal Assistance between States Law of 1998. As part of handling requests for assistance, the Department organized, in cooperation with the Investigations Department, judicial inquiries abroad. In 2013, the ISA sent foreign authorities a record 21 requests for assistance, requesting information and assistance in judicial inquiries pursuant to the agreements. Two of the requests were handled through the Ministry of Justice. In addition, the ISA handled 10 such requests from foreign regulators.
2. Bi-lateral recognition
In 2011, the European Securities and Markets Authority (ESMA) decided to recognize Israeli regulation regarding the content and format of a prospectus in accordance with the Securities Law. As a result, the Department has been actively pursuing cooperation with regulators in the European Union and bi-lateral recogniation agreements. Following legislative amendments in the European Union regarding regulation of prospectuses, the ISA is cooperating with the European Securities and Markets Authority regarding the adoption of a decision which would be in line with the updated regulation. This process will include examining the Israeli regulation and adapting it to the European regulation. As a complementary step, the Israel Securities Authority is cooperating with the ESMA to promote bi-lateral recognition of the current reporting requirements which apply to public companies. This procedure will also include reviewing the current regulation of this area in Israel. As part of the cooperation, and following the ESMA's decision as aforesaid, the ISA signed an amended bi-lateral agreement with the French Autorité des marchés financiers (AMF), following their original agreement from 2008. In addition, the ISA continued to pursue procedures with the British Financial Conduct Authority (FCA), seeking to promote an agreement which would recognize Israeli regulation regarding prospectuses, thus facilitating access to the British capital market for Israeli issuers. In addition, the ISA strives to further bi-lateral recognition agreements addressing prospectus filing and ongoing reporting – as well as additional cooperation – outside
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Europe. In general, the ISA believes that engaging in such bi-lateral agreements with foreign regulators will grant Israeli companies access to new markets and additional foreign investors. Following the growing trend of Israeli companies listing on the Hong Kong Stock Exchange, the Department contacted the Hong Kong Stock Exchange and Hong Kong Securities Authority in order to examine the feasibility of a bi-lateral recognition agreement. In this context, it is important to note that Hong Kong authorities do not usually engage with foreign authorities, but rather directly with the foreign companies themselves. As of this date, the Hong Kong Securities Authority has yet to provide its position on this issue.
3. Signing cooperation agreements
Signing MoUs with European authorities regarding the AIFMD
In July 2013, the Israel Securities Authority signed memoranda of understanding (MoUs) with several securities authorities in Europe, regarding consulting, cooperation and information exchange about supervision of fund managers and funds in accordance with the Alternative Investment Fund Managers Directive (AIFMD). These include securities authorities from: the UK, France, Spain, Italy, Luxemburg, Ireland, Sweden and the Netherlands (for a full list of signed agreements, please see the ISA website. Having signed these memoranda of understanding, the Israel Securities Authority joined international efforts to promote global supervision over foreign investment funds, led by the ESMA. This move strengthens the Israel Securities Authority's ties with the European securities authorities, and places it in line with other foreign authorities, which have signed similar memoranda of understanding with European authorities, including the US Securities and Exchange Commission (SEC) and Canadian Securities Administrators.
4. Study delegations
As part of ISA’s effort to achieve harmonization with securities legislation in developed countries and in order to update on financial trends, the Department coordinated several instuctional trips abroad during the reporting year: A study delegation regarding trading control and dealing with market manipulation – a meeting was coordinated with the Dutch securities authority as well as a visit to the Euronext stock exchange during the month of October 2013. During the meetings, the parties discussed the role of the trading control unit, ongoing work and manner of supervision; suspected manipulations and how to deal with them; reporting requirements to the ISA regarding irregular trading; manipulation and "code of conduct"; financial sanctions and administrative inquiries. The meeting at the Euronext stock exchange dealth with trading control and trading irregularities. The Head of the Trading Control Unit, the Legal Counsel of the Investigations, Intelligence and Trading Control Department, and the Head of the Enforcement Unit in the International Affairs Department participated in the visit and meetings.
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A study delegation regarding audits – a study tour at the SEC in order to study the issue of audits in supervised entities in the US, which was held at the same time as an international regulators' conference initiated by the SEC on this issue. The head of the Audit and Review Unit at the Investment Department, the Deputy Legal Counsel and Head of the Investment Unit at the Israel Securities Authority's International Affairs Department participated in the tour and conference. They also held meetings with various people dealing with audits at the SEC.
5. Strengthening ties with foreign authorities and other entities Hosting the Chairman of the Palestine Capital Market Authority (CMA) – the Chairman of the Palestine Capital Market Authority arrived in Israel for a work meeting, and met with the Chairman of the Israel Securities Authority, in an effort to increase cooperation between the authorities and learn more about each other's regulation models. Hosting the Chairman of the Commission on Securities Markets of the Kyrgyz Republic – the Chairman of the Commission on Securities Markets of the Kyrgyz Republic met, following his request, with the Chairman of the Israel Securities Authority, in an effort to learn about the ISA's activity, strengthen its ties with the ISA and create a platform for cooperation. Hosting the Chairman of the Securities Commission of Brazil (CVM) – the Chairman of the Securities Commission of Brazil visited Israel, meeting the Chairman of the Israel Securities Authority and the Head of the International Affiars Department during his stay. Hosting a delegation from the Isle of Jersey – A delegation from Jersey, headed by the Minister of Economy and Development, arrived in Israel and met with the Chairman of the Israel Securities Authority and the Head of the International Affiars Department. In addition to the Minister, senior officers from the Ministry of Economy and Development, as well as the CEO of Jersey's Financial Services Commission also participated in the meeting.
Cooperation with the SEC – the ISA maintains ongoing ties with the SEC on various issues, including dual listed companies.
6. The International Monetary Fund (IMF) During December 2013, a team from the International Monetary Fund (IMF) visited Israel as part of Article IV – pursuant to the IMF's request – discussing various issues, including the status of the implementation of the IMF's recommendations included in the FSAP (Financial Sector Assessment Program), which was published in April 2012. In addition, a review of the Israeli capital market was held.
7. Cooperation with various departments regarding high frequency trading and algorithmic trading The Department played an active role in an inter-departmental work team of the ISA, which dealt with high frequency trading and algorithmic trading. As part of this activity, the team held meetings with major players in this area both in Israel and abroad. The Department
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prepared an extensive review on the issue, which is included in the interim report filed by the Committee for Increasing Trading Competition and Liquidity on the Stock Exchange.
8. Cooperation with other departments on market development projects The Department cooperates with the Corporate Finance Department on a market development project. The team is assessing, inter alia, the possibility of issuing bonds for financing national infrastructure projects on the Stock Exchange, especially Public Private Partnerships (PPPs). In this manner, the public at large will be able to enjoy the returns and profits embodied in such high budget projects. In addition, financing models in Europe and North America were examined, and an effort was made to adjust them to a finance model in line with the Israeli market. In addition, the Department was asked to join a team assessing the issue of municipal bonds and feasibility of municipal funding through the Stock Exchange. The funding of municipalities through the issue of municipal bonds has been tried in 2005-2006, with four municipalities issuing bonds in the total amount of NIS 500 million, but the public was not directly involved in these bond issues, with only institutionals and banks allowed to participate. This instrument was not used since the middle of the previous decade, and the team is currently evaluating the feasibility of making the instrument accessible to wider use, inter alia through rendering it accessible to the public at large through the Stock Exchange.
9. International trade agreements The ISA is cooperating with the Ministry of Economy, Capital Market Division and Bank of Israel on drafting agreements as part of the Trade In Services Agreement (TISA). This agreement has about 50 signatory nations, including the US and European Union countries. The initiative is led in Israel by the Ministry of Economy.
10. Regulation of the proxy advisor field During 2013, the ISA's staff worked towards preparing an extensive regulation infrastructure for the field of proxy advisors, who participate in public companies' general meetings, regarding their manner of voting. Due to the importance of the issue, and in order to involve supervised entities in the regulation procedure, as well as experts in the area, the Head of the International Affairs Department moderated a multi-participant roundtable discussion, which dealt with issues regarding the extent to which institutionals are active in upholding corporate governance and the roles and activity of proxy advisors in the capital market. In March 2013, a best practice draft was published for proxy advisor companies regarding voting in general meetings. After receiving the public's comments on the best practice exposure draft and holding meetings with various entities, an updated draft of the best practice document was published, as well as a draft for new regulations regarding participation of fund managers in unit holder meetings and a draft circular for fund managers and trustees, which outlines the ISA staff's position regarding fund managers engaging a professional entitity in order to obtain recommendations regarding voting. The
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ISA drafted these documents while making a comparative assessment of foreign laws in this area, including the laws of the US, France, and European countries.
11. Activity as part of the Committee for Implementing the Prohibition on Investing in Corporations Dealing with Iran Law The purpose of the Prohibition on Investing in Corporations Dealing with Iran Law of 2008 is to prevent investments by Israeli financial institutions in corporations that have material business relations which contribute economically – whether directly or indirectly – to Iran.
An inter-ministerial implementation committee was formed under the Law, charged with drawing a list of corporations having material business dealings with Iran. In accordance with the Law, a financial institution shall not invest in a corporation included in the list published by the committee. The Israel Securities Authority, through the International Affairs Department, is a member of the implementation committee, involved din developing the said list.
12. Participation in teams and inter-ministerial committees
1. The Department is a member of the Committee for Promoting Investments in Public Companies Active in Research and Development. For more information, please see the chapter dealing with the Corporate Finance Department's activity, inter alia, the section dealing with "Projects handled in 2013".
2. In November 2013, the Head of the Department joined an inter-ministerial team for promoting economic relations with China. The team includes representatives from the Ministry of Finance, the National Economic Council at the Prime Minister's Bureau, etc.
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5.8 The Information Technology Department
A. General
1. Purview of the Information Technology Department
The roles of the Department include development and maintenance of the ISA’s data systems and computing and communications infrastructures, so as to enable the ISA’s management and staff to perform their duties according to the approved annual work plans. The Department takes part in setting forth the ISA’s computing strategy and implements it. In some cases the Department acts according to requests by other departments, while in others – following its acquaintance with the department's needs – it initiates projects intended to respond to these needs, providing them with IT solutions. The Department is responsible for developing and maintaining the following IT systems: the computerized archive system; electronic mail; task appointment, calendars and contact management; the ISA website; the investigations management system (AGATHA), used by the enforcement departments; the electronic reporting system (MAGNA), used by all reporting entities, the general public and the ISA staff; the operational system, which includes most of the information on various matters handled by the ISA – data on corporations, mutual funds, investment advisors and portfolio managers, trading data, supervision over trading, data used for economic research and accounting data; BI (Business Intelligence) system for identifying trading irregularities; YAEL secure email system; human resources system; accounting system; search system; organizational portal; and additional dedicated systems. The ISA also deals with infrastructure and infrastructure software: purchase and maintenance of PCs and relevant shelf software, purchase and maintenance of servers; internal communications network and external communications lines, including lines connecting to the internet service provider and a line connecting the Jersualem and Tel Aviv offices, which allows the two sites to fully share information; information security of all systems, telephone communications, telephone lines and switchboards, maintenance and servicing of printers, delivery and installation of expandable equipment of all kinds. The Department includes seven employees and some of its activities are carried out through outsourcing.
2. Main Activities in 2013
(a) Electronic Reporting – MAGNA; (b) Operational system; (c) The ISA's website; (d) Integrated voting system; (e) Organizational portal;
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(f) Internal search system; (g) Building a new computer room in Jerusalem. 1. Main activities planned for 2014 (a) Ele ctronic Reporting – MAGNA; (b) Operational system; (c) Supervision system over trading platforms; (d) Integrated voting system; (e) Investigation management system; (f) Business Intelligence (BI) system.
B. The Department's activities
1. Electronic Reporting – MAGNA
The electronic reporting project is a web-based information system for the collection and distribution of the entire range of reports required of entities subject to ISA's supervision: corporations, mutual funds, investment advice firms, portfolio management firms, investment marketing firms and underwriters. The system is designed so as to harness electronic communications technology and the internet to service the investing public and entities supervised by the ISA. The system handles all types of reports, including: prospectuses, annual financial statements, interim financial statements, immediate reports, reports on changes in the holdings of principal shareholders, reports on private allocations, purchase offer reports and reports on conflicts of interest in corporations. The system also handles prospectuses, immediate reports and monthly reports of mutual funds, forms for portfolio management companies, etc. The system also handles prospectuses, immediate reports and monthly reports of mutual funds, forms for portfolio management companies, etc. The system's objectives are as follows: to provide the public with immediate access to public information; equal distribution of information; increase efficiency of supervision over the reliability of information; and to provide new analysis tools. Between the date on which the system first became fully operational (in November 2003) and the end of 2012, thousands of authorized signatories have signed up to use the system, 905,445 different reports were handled, including 96,645 in the reporting year alone. These reports reached ISA staffers automatically, through the reporting website. Public reports were automatically distributed through the distribution website, as well as to the Stock Exchange and commercial information distributors. Thousands of users surf the system’s website (www.magna.isa.gov.il) daily, accessing the various reports of the aforesaid entities as well as processed data reports. The system is among the most advanced of its kind worldwide, and is based on the most updated and advanced technologies in existence today. It provides technological solutions
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to such complex issues as unequivocal identification of report filers and information security and has won a number of prestigious IT excellence awards.
For the eighth year running, the system played a significant role in the ISA's winning the Accessible Governmental Agency Award, in a competition conducted by the Finance Ministry among all Government ministries and public sector entities in the field of public service IT systems. During the reporting year, a significant number of improvements have been implemented, such as: development and implementation of new versions and adjusting reporting forms to current legislative changes; development of a module which enables reporting for additional entities; improvement of reporting mechanisms, as well as technological upgrades. In addition, the MAGNA system underwent changes and improvements, which were pretested prior to full implementaton. The external supplier was also tested for compliance with the SLA (service level agreement). In 2013, eight versions – which featured 271 system changes – were implemented and tested. The following is a table summarizing the MAGNA's activity for 2013:
Table 24: Data summary for 2013 No. of
reports Total no. of reports submitted through MAGNA – annual 96,645 Total reporting volume for 2013 38.6 GB Total no. of public MAGNA reports – annual 75,087 Total no. of non-public MAGNA reports – annual 21,558 Total no. of MAGNA reports – annual – corporations reporting in Israel 63,625 Total no. of MAGNA reports – annual – dual listed corporations 3,085 Total no. of MAGNA reports – annual – mutual funds managers 23,024 Total no. of MAGNA reports – annual – underwriting firms 275 Total no. of MAGNA reports – annual – investment advice firms 236 Total no. of MAGNA reports – annual – investment portfolio management 3,872 firms Total no. of MAGNA reports – annual – investment marketers 700 Total no. MAGNA reports – annual – fund trustees 340 Total no. MAGNA reports – annual – purchase offers 87 Total no. MAGNA reports – annual – banks as employers of investment 556 advisors Total no. MAGNA reports – annual – ETN managers 845 Total no. of active forms on the MAGNA 484 Total no. of active forms on the MAGNA – corporations reporting in Israel 147
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Total no. of active forms on the MAGNA – dual listed corporations 27 Total no. of active forms on the MAGNA – fund managing firms 106 Total no. of active forms on the MAGNA – fund trustees 17 Total no. of active forms on the MAGNA – investment advice firms 29 Total no. of active forms on the MAGNA – portfolio management firms 35 Total no. of active forms on the MAGNA – banks as employers of investment 17 advisors Total no. of active forms on the MAGNA – underwriting firms 25 Total no. of active forms on the MAGNA – purchase offers 11 Total no. of active forms on the MAGNA – investment marketers 29 Total no. of active forms on the MAGNA – ETN managers 41 Total no. of active signatories on the MAGNA (valid) 2,225
Main activities in the reporting year (a) Infrastructure upgrades Due to technological progress and new software and hardware products on the market, the Department started to develop the MAGNA system’s third generation. In 2013, the Department upgraded the reporting website, which was redesigned and upgraded with updated technology. In addition, the Department completed the forms site as well as sites on the secondary site (DR). In addition, ongoing urgent infrastructure upgrades were performed – such as support for Microsoft’s Windows 8 and new browsers (IE10). In addition, the Department began developing a new conversion tool to PDF for MAGNA forms. The conversion tool was installed in PCs of reporting entities authorized to report on the MAGNA, and is now used in an ongoing manner.
(b) Trading platforms and exchange-traded notes (ETNs) Due to legislative changes, the Department defined and characterized, within the MAGNA system, dozens of new reporting forms for trading platforms and exchange traded notes (ETNs). It created new entities, performed the necessary changes in the reporting, distribution, interface and forms sites. Some of the forms which pertain to ETNs also went into effect.
(c) The MAGNA system administration Another MAGNA-related field is system administration and handling of reporting entities and persons authorized to report, including those applying for authorized person status. This year, the ISA processed 2,342 forms authorizing or canceling authorized signatories and certificate extension applications; 43 new entities were registered, and 126 detail update forms were processed. During the year, 44 entities changed their names, and 172 entities updated their details on MAGNA. In addition, the ISA sent hundreds of inquiries to corporations due to discrepancies between reported data (such as incorrect ID numbers),
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and hundreds of additional inquiries to companies for failure to meet the statutory requirements for the minimum number of authorized corporate signatories. Furthermore, the ISA processed 26 cases of corporations which either ceased operations or were no longer able to qualify as reporting entities, improved its database concerning principal shareholders and replied to inquiries and questions submitted by reporting entities.
2. Document archiving and automated office The system allows for the archiving of all types of internal and external documents, including documents received electronically, whether by fax or in paper form (the latter type is scanned into the system). The system enables to locate and retrieve any document, by type, according to specified criteria or free text.
The system is one of the most essential tools at the ISA, and is also used by the MAGNA for archiving and retrieving reports, some of which are distributed to the public as well (see Section 1 above). It also includes the AMIGO System, which electronically archives media clips. In addition, the system includes standard automated office functions, such as: internal and external e-mail, task management, appointment calendars, contact management and workflow. The system, which includes numerous proprietary features, is based on Lotus Notes Domino.
Main activities in the reporting year:
(a) Adjusting existing interfaces In 2013, the Department adjusted existing interfaces to IT systems updated throughout the year, including the MAGNA distribution site, TEHILA payment system, the human resources system, the search system and the organizational portal. (b) New applications In 2013, three new applications were developed for the digitized archive environment. The first one is a system which allows for sending secure emails from the ISA to the entities supervised by the YAEL system (please see Section 12 below). The application allows for sending emails, signatures, documentation and receiving delivery approvals. The second application developed this year is a mechanism which allows for sending and receiving emails from and to the ISA through a secondary site (DR). The application allows to continue using the archive and email system even in cases where the ISA's central site is down. A third application the Department began developing this year is a tool which allows for management and administration of those authorized to access the voting system (please see Section 12 below). (c) Ongoing maintenance During the reporting year, the Department upgraded the servers and software in end stations, installed new servers for synchronizing mobile telephones, installed new archives for the non-public database, and built a mechanism for monitoring email boxes and calendars.
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3. Operational system During the reporting year, the Department continued to develop and maintain the central computer system, which includes most of the information handled by the ISA: data on companies, mutual funds, investment advisors and portfolio managers, trading data, as well as data used by all ISA employees. In 2013, hundreds of requests for system changes and improvements were carried out, covering a broad range of issues.
Main activities in the reporting year (a) Field of investment advisors, investment advice companies, marketing and portfolio management The Department built a database for reports by investment advice companies, marketing and portfolio management. The database mainly includes annual financial statement data of companies regarding the organizational structure, officeholders, equity capital and insurance, as well as information from other reports. In addition, the Department built a new mechanism for calculating fees for individuals and companies, producing payment vouchers, payment process changes, producing reports of debts and proceeds, producing letters and notices to debtors, as well as multi-payment processing for banks and large companies. (b) Systems for supervising new entities Due to the advanced legislative procedures for ETNs, the Department built an infrastructure for supervising ETNs: it developed software for inputting company reports, built a database and report forms, and developed plans for locating and presenting changes in ETN characteristics. In addition, it carried out initial characterization of a new system for supervising a new type of entity: trading platforms. The activity in both fields will continue throughout 2014. (c) Ongoing activities During the reporting year, the Department carried out the following activities, on an ongoing basis, in relation to the infrastructure in two main areas: installing hardware and software in preparation for converting the project into web form, to be carried out in 2014, as well as implementing interfaces for the transfer of data between the ISA and an external system for the purpose of managing and conducting tests, exemptions and appeals for investment advisor candidates, investment marketer candidates or portfolio manager candidates.
4. The ISA website
During the year, the ISA website (www.isa.gov.il) was regularly updated with new content: information about the ISA; information on new legislation and regulations; news and publications; updated lists of supervised entities; as well as FAQs handled throughout the year. During the year, the Department uploaded and updated approximately 1,600 content pages and files on the website.
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Main activities in the reporting year: This year, the Department characterized and developed a new website – for the supervised entities and the public at large – in line with the ISA's updated needs. The website was developed using the most up-to-date technologies, and is designed so as to suit the ISA's needs for the next few years. Special attention was placed on the website's design and its usability in terms of quick and efficient retrieval of its entire content. The Department completed the project at the end of 2013, and launched the new website during the first quarter of 2014, after completing the conversion of the content from the older website to the new one.
5. Central Information System (CIS) – AMIGO The CIS is a computerized information and knowledge management system with the following capabilities: locating information from various sources; collecting the information and importing it into the system automatically, and/or manually; searching data objects collected from the various sources; knowledge production; archiving information in the ISA archive; managing and distributing the raw and/or processed information to ISA employees via the ISA’s email system. During the year, approximately 97,246 information items were planted into the ISA archive, bringing the total number of items planted into the system throughout its existence to 1,697,957.
6. Computing for the Investigations Department a. Forensic computing The Investigations Department's advanced forensic computing system was built approximately four years ago, and has fully proven itself . The improvement and streamlining of the Investigations Department's activities are apparent in almost every case which includes a large amount of information and documents. The system includes a server and significant storage space, along with sophisticated search and retrieval software, which allows users to copy and search vast quantities of electronic information. This year, the Information Technology Department upgraded the system, expanding its storage capacity in order to accomodate the growth in information volume obtained during investigations. b. Vault At the Investigations Department's request, the Information Technology Department acquired a “vault” for the secure transfer of documents and information between the ISA and banks. This "vault" is to be used both for future receipt of incoming checking account files and for the receipt of securities account files which are presently transferred using CDs. This year, the use of the system has significantly increased: it was used not only between the Investigations Department and the banks – other interfaces, for other needs and entities, were created.
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c. Entity -relationship system At the Investigations Department's request, and with the cooperation of its staff, the Information Technology Department took part in characterizing and indentifying the needs, and in preparing, an RFP for an entity-relationship system. The system will serve the Investigations Department staff in managing investigations and intelligence processes, including entity-relationship management and search of internal and external databases accessible through the internet. The new tender was published in 2013, but no winner was selected.
7. Forms and payments system
The forms for the ISA, which are developed and maintained by the TEHILA system, serve various sectors of the public for submitting inquiries and payments to the ISA on various issues. In 2013, approximately 20,000 forms were submitted and payments totaled approximately NIS 7.2 million. The system transfers all forms filled by users and payments to the ISA’s internal information systems over the internet, in real time. The data is available to users (through the use of a personal code) on the ISA website, where users can receive accurate and reliable information regarding the updated status of their inquiries. During the reporting year, the Department developed new forms, and existing forms were upgraded to an advanced technology, which enables, inter alia, presenting relevant information for users while filling a form. This is done according to data entered by users and by activating the interface while using the ISA's data in real time. In addition, the Department updated some of the ISA's other interfaces with the Capital Market Division at the Ministry of Finance. Such interfaces allow for, inter alia, the transfer of relevant information for retirement advisors and marketers, who are tested by the ISA as a service provided to the Capital Market Division at the Ministry of Finance.
8. BI irregular trading system The system was launched in 2009 and includes trading data and data related to trading on the Tel Aviv Stock Exchange. The system is based on the most advanced concepts and technologies available today in the field of BI (Business Intelligence). The purpose of the system is to automatically confirm or refute irregularities, as far as possible, thus enabling the ISA’s employees to handle events which clearly constitute unexplained irregularities. a. New software versions
During the reporting year, the Department continued developing new versions of the system, which included, inter alia, the following issues: Adding a transaction number to the basic data obtained from the Stock Exchange – allowing for new capabilities in terms of data consolidation and new data input; adding algorithms to identify irregularities in various areas; incorporating in the system additional data in the fields of ETNs and advisors in banks; as well as capabilities for inputing, processing, producing reports and making logical analysis of these data.
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b. Infrastructure activities Due to the fact that this was the only system in the ISA without an emergency DR site, an additional system was built in a secondary site during the reporting year, where the software and information were reproduced. The secondary site will serve as an operational site for the ISA during its regular activity, as well as an alternative backup site in case the main site is down. In addition, the Department upgraded the main site, while extending the database's capacity due to the significant increase in information volume.
9. Knowledge management – search tools
The information and knowledge residing in the ISA and used by its employees are derived from internal information systems, external sources, and the employees themselves. In order to improve information locating capabilities, especially documents which are stored on various systems, the Department built a search system which locates documents on the ISA's databases, as well as on information sites accessed by the ISA.
During the reporting year, the Department completed the installation, training and assimilation phases of the system, which is now fully active for all information databases.
10. Knowledge management – organizational portal As part of the ISA’s knowledge management project, the Department initiated the establishment of an organizational portal, which provides users with a convenient, simple visual tool for collecting necessary information from all ISA IT systems. There were two separate and joint purposes for launching the portal: To reinforce the management, sharing and free flow of organizational information for the professional content environment of the Israel Securities Authority; to create a uniform desktop for senior ISA officials that would provide them with immediate and convenient access to information and tools at their disposal. During the reporting year, the Department developed the system, ran it and completed all assimilation and training phases.
11. Human resources system At the request of the Secretary General, and in cooperation with the administration staff, the Information Technology Department participated in the Human Resources System project. During the reporting year, the Department focused on developing interfaces between this system and other IT systems at the ISA in order to provide the Human Resources Unit with a full work process. An example for that is employee onboarding, in which the Human Resource system automatically transfers information to new systems in order to define email and a full work environment on various IT systems at the ISA.
12. Integrated voting system During the reporting year, the ISA decided to create a system which would enable voters to vote online in shareholders' meetings reported on the MAGNA. For this purpose, the Department created a voting website, which would enable any security holder – following a
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secure identification process – to vote online in meetings (as reported on the MAGNA meeting convening forms) of companies whose securities he/she/it holds.
As part of the voting system, the ISA has launched a secure email system (the YAEL system) from the ISA to the companies and their authorized parties. As part of this activity, each authorized party has access (using a token issued by an authorizing entity) to a specific site in which it can retrieve its correspondence with the ISA. Shortly before the vote, the voting system transfers to the company – through the YAEL system – the results of the online shareholders' meeting (this is done so that the company can determine whether there is a quorum for conducting the meeting). At the end of the process, the online meeting data, voting process log and results of the online meeting votes are transferred to the ISA archive, as are other data. In addition to the technical implementation of the project, a legislative process is underway. The latter is to support the various processes, timing and activity of the system. The two courses of action are needed in order to activate the system. During the reporting year, the YAEL system was finalized, as were the legislative amendments required for its activation. The Department conducted a pilot experiment with approximately 50 volunteer companies, following which the final required changes were implemented. The system was launched on the last quarter of 2013. In order to build the voting system, many characterizaton meetings were held with various playes in the capital market who will be using the system (banks, non bank Stock Exchange members, institutionals of various types, and other companies who hold general meetings), so as to ensure that the system is in line with their expectations and needs. The system's development was also completed during the reporting year, as were its acceptance test. The system will be activated after all the required legislative changes are implemented.
13. Infrastructure – servers, communications, and information security During the reporting year, extensive improvements were made to the ISA's IT infrastructure. The most important issues handled were the following: a. Upgrading of server infrastructure and storage equipment in both ISA sites, to more advanced and innovative equipment, with higher storage capacity and quicker performance, which enables – inter alia – mutual backup of the various ISA sites. in 2013, the email software storage system was upgraded in both of the ISA's sites to a higher capacity configuration. b. Upgrading of the communications networks on both ISA sites (Jerusalem and Tel Aviv) with advanced, high capacity components (G10). c. Upgradin g of various information security tools protecting the ISA against break-ins, attacks of various kinds and viruses – in 2013, the ISA's firewall system was upgraded, becoming fully redundant, and reinforced with a Data Loss Prevention (DLP) system. In addition, the Department included, for the first time, a web solution into the the surfing system.
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d. Switchboard upgrading: This year, the ISA's outdated switchboards were replaced in both sites by new, IP-based switchboards, which provide users with various advantages: durability and redundancy, "follow up" in both sites, quick transfer of lines between various offices, establishing a "lead number", etc. e. Ongoing maintenance of all systems, updating of procedures and service level control for internal and external users. f. Continued updating of all outdated PCs, printers and operating systems. g. Enhanced support for remote connection by ISA employees. Currently, the Department supports a large number of employees who are eligible to log in remotely after working hours, through various kinds of smart devices (such as Android-based devices, iPads and iPhones). h. Such activities – mainly in the area of infrastructure and information security upgrades – will continue in 2014 as well.
14. Building a new computer room in Jerusalem Due to the lack of room in the Jerusalem site, and inability to expand, the ISA decided to move its computer room to a new location, significantly larger than the current computer room. During the reporting year, the Department supported the building of the new state- of-the-art computer room and defined all necessary infrastructure: server cabinets and communication equipment; power systems and air conditioning; UPS systems and emergency generators; fire detection and extinguishing system; command and control systems for unusual events; security and defense systems, etc. The Department completed the new computer center in the first quarter of 2013, and transfered the equipment and systems to their new location following a thorough planning process.
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5.9 The Administrative Enforcement Department
A. General
1. Purview of the Administrative Enforcement Department
Administrative Enforcement
At the beginning of 2011, the Administrative Enforcement Law became effective. The Law includes a new administrative enforcement mechanism, which exists along with the existing criminal enforcement mechanism included in the Securities Law. Under the Law, an Enforcement Committee, which includes six members, was established. The committee consists of panels of three members each. Two members, who are ISA employees, serve as panel chairmen. According to the ISA chairman's policy, the chairmen of both panels – who are retired district court judges – were not nominated from among current ISA employees. Their only role at the ISA is to serve as chairmen of the administrative enforcement panels. The other four members of the committee were nominated, pursuant to the Law, by the Minister of Justice, and include two lawyers and two capital market and finance professionals. According to the Securities Law, administrative enforcement proceedings against violators are opened following a decision by the ISA chairman. Thus, the ISA established an Administrative Enforcement Department, which develops administrative claims for the ISA, following the findings of administrative probes forwarded by the Investigations, Intelligence and Trading Control Department. The Administrative Enforcement Department then handles the case for the ISA, before the Administrative Enforcement panels. The procedures submitted to the Committee's approval include enforcement procedures due to administrative violations of the Securities Law, the Investment Advice Law and the Joint Investment Law. In addition, the Committee discusses suspension and revocation of individual licenses due to a license holder's unreliable conduct, under the Investment Advice Law. In addition, pursuant to the Administrative Enforcement Law, the Chairman of the ISA is authorized, following approval by a panel of the Administrative Committee, to strike an enforcement arrangement with a suspect in lieu of a criminal investigation, administrative probe or administrative procedure before the Administrative Enforcement Committee. The Administrative Enforcement Department formulates the enforcement arrangements, representing the Chairman of the ISA in the negotiations with the violating parties as well as the panel of the Administrative Enforcement Committee in the enforcement arrangement approval process. 2013 was the second year in which the administrative enforcement mechanism was implemented.
Financial sanctions
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The Israel Securities Authority is authorized to impose financial sanctions for violations of securities laws as well as violations under Chapter 4D of the Companies Law, regarding requirements which pertain to corporate governance. For this purpose, the ISA's plenum authorized the establishment of an internal committee, which includes the Chairman of the Israel Securities Authority and two members of the plenum (hereinafter – the "Simple Financial Sanction Procedure"). In addition to being authorized to reduce financial sanction amounts in accordance with the causes and percentages prescribed by the Securities Regulations (Reduction of Financial Sanction Amounts) of 2011. The financial sanctions are collected by the ISA and forwarded to the governement. As of 2013, the Administrative Enforcement Department is also responsible for managing the simple financial sanction procedures, which were previously handled by the ISA's supervisory departments. In addition, the Department is responsible for managing financial sanction procedures under the Prohibition on Money Laundering Law, which determines that the Chairman of the Israel Securities Authority is responsible for supervising and enforcing the Law regarding non-banking members of the Stock Exchange, as well as portfolio managers. Legal proceedings in which the ISA was involved regarding administrative proceedings
The Administrative Enforcement Department was involved in responding to administrative petition procedures submitted to the Tel Aviv District Court's economic department against decisions made by Administrative Enforcement Department' in administrative enforcement procedures as well as against the ISA in simple financial sanction imposition procedures. In this context, the Department cooperates with the Tel Aviv District Attorney's Office in preparing various responses and documents necessary for the procedure.
2. Main Activities in 2013 a. Handling administrative cases – During 2013, the Administrative Enforcement Department handled 8 new administrative cases, five of which were followed by administrative proceedings: in three cases, administrative claims, dealing with various violations, were submitted to the administrative proceedings panels, and in two cases – a committee panel was asked to approve an enforcement arrangement; one case was closed, and two cases are still pending. In addition, two additional claims were submitted in two cases which reached the Department at the end of the previous year. The Administrative Enforcement Department submitted a total of 7 administrative cases to the Administrative Enforcement Committee. b. Internal enforcement plans – In April 2013, the Administrative Enforcement Department updated its FAQs on internal enforcement regarding supervisors over internal enforcement in banking corporations. c. Preparation regarding financial sanctions – During 2013, the Department prepared for assuming responsibility for simple financial sanctions in lieu of the supervisory departments – the Corporate Finance Department and the Investment Deparment. For
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this purpose, a new financial sanction imposition model was developed, and the transition was made gradually. d. Imposing financial sanctions – During 2013, financial sanctions were imposed in 33 cases on supervised entities under the Securities Law and Companies Law. An additional case is still pending decision. In two cases, financial sanctions were imposed on licensed companies under the Advice Law. e. Administrative petitions – During 2013, the Department was involved in one administrative petition against a decision by the Administrative Committee Panel, in an administrative petition against the ISA's decision to impose a simple financial sanction as well as in an appeal filed by the ISA regarding such an administrative petition.
3. Main activities planned for 2014 a. The Administrative Enforcement Department is expected to handle about 10 cases, either by way of filing administrative pleadings and conducting full proceedings or by way of enforcement arrangements, as relevant. b. The Department will manage all the phases of the financial sanction imposition procedure. c. In 2014, the Department will continue handling pending administrative petitions as well as additional administrative petitions, if filed. B. The Department's activities
1. Administrative Enforcement
Table 25: Distribution of administrative cases opened in 2013
Type of violation No. of cases
Missing / misleading reports 3
Misleading detail in shelf offering, negligent use of inside information and 1 misleading the ISA Securities fraud (self dealing transactions) 1
Negligent use of inside information 2
During its first year, the Administrative Enforcement Committee published its decisions in two administrative cases which were fully handled by the Department and published decisions in five administrative enforcement arrangements.
Summar y of the decisions of the Administrative Enforcement Committee panels a. Administrative Case 13/1 the Israel Securities Authority v. Africa Israel Industries Ltd. (hereinafter – Africa Industries), Abraham Novogrotsky, Abraham Motola and Alon Harpaz;
On November 18, 2013, the decision of the Administrative Enforcement Committee panel was published in Administrative Case 13/1 the Israel Securities Authority v. Africa
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Industries et al, given on August 27, 2013, in which the panel decided that Africa Industries and its CEO, Abraham Novogrotsky, committed the following violations of securities laws: use of inside information and including a misleading detail in a purchase offering. It also maintained that Africa Industries, Novogrotsky, Motola and Alon Harpaz violated the provision of the Securities Law and Regulation by misleading the ISA. According to the facts of the case, a significant deal was struck between Negev Ceramics (hereinafter – Negev) and a Canadian distributor, Olympia Tiles International, on May 24, 2012. In addition, on January 15, 2012, Africa Industries, the controlling shareholder in Negev, submitted an offer to purchase Negev shares in order to transform it from a public company to a privately held company. According to the claim, advanced negotiations were held at the same time regarding the abovementioned deal between Negev and Olympia, and information regarding the deal was material, requiring Africa Industries to include it in its purchase offering. In addition, submitting the purchase offer to the pubic while witholding this information constitutes use of inside information by Africa Industries. These violations were attributed in the administrative claim to Africa Industries and its CEO, Abraham Novogrotsky. In addition, Negev's CEO, Avi Motola, was charged with including a misleading detail in a purchase offer. A second affair included in the administrative claim involved misleading the Israel Securities Authority. As part of a correspondence between Africa Industries and the Israel Securities Authority regarding an immediate report on the transaction, Africa Industries sent the ISA two letters, to which two letters were attached – one from Negev's CEO and one from Olympia's CEO – which included misleading details regarding the beginning of the negotiations and their duration. In this violation, Novogrotsky, Motola, VP of Africa Industries Alon Harpaz, and Africa Industries were indicted. The Panel of the Enforcement Committee maintained that at the time when Africa Industries published the purchase offer for Negev's shares, Negev and Olympia held negotiations for a material transaction between them. As a result, and although the negotiations ended only a few months after the purchase offer, Africa Industries and its CEO should have included a disclosure regarding the negotations as part of the purchase offer. In addition, the panel ruled that this positive information could have changed the pricing of the shares in the purchase offer, raising their price. In its decision, the panel attributed the violation of use of inside information and the violation of including a misleading detail in the purchase offer to Africa Industries and its CEO, Novogrotsky, and the violation of misleading the ISA – to Africa Industries, Novogrotsky, Motola and Alon Harpaz. The enforcement measures imposed on the respondents were financial sanctions: a total of NIS 5 million on Africa Industries; a total of NIS 400,000 on Novogrotsky; a total of NIS 150,000 on Motola; and a total of NIS 75,000 on Harpaz. The panel called the ISA to enforce stricter measures against officeholders of publically traded corporations – both in terms of the sanction amounts and the restriction on officeholder term of office
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in supervised entities. According to the panel, the ISA should adopt the court's strict punishment measures in its latest verdicts in criminal cases involving securities violations, mutatis mutandis. On September 10, 2013, the respondents in this case petitioned the Administrative Committee panel to postpone the publication of the decision and enforcement measures until the petition they were planning to file with the district court had been discussed in full. On September 30, the Administrative Enforcement Panel refused the motion on the grounds that it cannot decide on both parts of the motion until the respondents' petition has been submitted to it, and without any evidence for their claims. On October 17, 2013, the respondents submitted to the Economic Department of the Tel Aviv District Court an administrative petition against the decision of the panel pursuant to Section 52(61) of the Securities Law, with a motion to postpone the publication of the decision until the petition had been decided, and to refrain from publishing the petition. The petitioners claimed they have not committed the administrative violations, and are refuting the factual determination of the Administrative Committee Panel as well as its decisions and legal conclusions. Alternatively, the petitioners claim that the enforcement measures imposed on them by the panel were too harsh. The proceeding is still pending as of the end of the reporting year. As of the publication of this report, the procedure is taking place in court. On November 18, 2013, the court decided to refuse the petitioners' request to postpone the publication regarding the decision and to refrain from publicizing the petition. Following this decision, the decision of the panel was publicized. The court ruled that when a panel of the Administrative Enforcement Committee gives its decision, the latter is to be publicized – the ISA should publish the decision by the end of the period provided by law and the violator is required to issue an immediate report on the matter.
Administrative Case 13/2 the Israel Securities Authority v. Eitan Bar Zeev On February 3, 2014, the ISA published a decision handed down by the Administrative Enforcement Committee panel on December 3, 2013 in Administrative Case 13/2 the Israel Securities Authority v. Eitan Bar Zeev, The panel ruled that Mr. Bar Zeev, CEO of Big Shopping Centers Ltd. (hereinafter – the Company), committed an administrative violation of negligent use of inside information, pursuant to sub-section (9) of Part C of the Seventh Amendment to the Securities Law. According to the facts of the case, Mr. Bar Zeev purchased company stocks for his own account about ten days prior to the publication of the company's quarterly financial statements, while he was familiar with the contents of the financial statements' draft. In doing so, he reduced the size of a loan he was due to receive from the company several weeks later, as part of a private allocation made for him under his employment agreement. He thus avoided losing NIS 100,000.
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The Administrative Committee Panel ruled in its decision that the information included in the financial statements naturally constitutes inside information, i.e. – information which may induce a change in the price of a stock, thus influencing decisions taken by a reasonable investors. This holds true even if there has been no change or surprise in the financial statements' figures as compared with the figures of the previous financial statements. The panel also ruled that revaluation profits contained in the financial statements of Big – which deals with income generating properties – constitute, in and of themselves, inside information, since they include a subjective component which the public is incapable of discerning in advance.
The panel ruled that Mr. Bar Zeev acted negligently when he consulted, as if matter of factly, the company's internal legal counsel as well as employees at the finance department. This was a spontaneous consultation, which took place without prior preparation or an in-depth assessment, in which Mr. Bar Zeev did not receive a clear opinion from the internal legal counsel on whether he was in possession of inside information. He did, however, receive an email in which the company's external legal counsel warned him to refrain from conducting transactions close to the date on which the financial statements were due for publication, for fear of making use of inside information. The panel ruled that there was no doubt that a reasonable "insider" should be aware of the problematic nature of purchasing company stock a short while prior to the publication of financial statements, especially in the circumstances of this case, where the warning provided by the external legal counsel should have raised a red flag. The means used by Mr. Bar Zeev were insufficient and unreasonable. The panel ruled that the fact that Mr. Bar Zeev suspected he was in possession of inside information but failed to clarify the matter in depth and in a serious manner – whether by additional consultation with the external legal counsel or by receiving a written and well-reasoned legal opinion on the matter – but rather opted for a swift, informal consultation with his employees, points to negligence on his part. The panel imposed on Mr. Bar Zeev a financial sanction enforcement measure totalling NIS 100,000, as well as a conditional financial sanction of an additional NIS 100,000. In imposing these measures, the panel took into account the fact that Mr. Bar Zeev was able to prove he acted in good faith, and did not act at that point in time following his knowledge of the inside information, but rather in order to maximize his profits from the right awarded him as part of his employment contract and the expected private offering, but rather purchased the stocks at their low price at the time of making the purchase. However, in acting so, he acted negligently. The panel refused Mr. Bar Zeev's motion to refrain from publicizing the decision in his case, so as to avoid compromising his reputation, citing the District Court's decision regarding Africa Israel (see above, in this chapter), according to which the rule is to that decisions in administrative proceedings are to be published, and non-publication will
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only be allowed in highly exceptional circumstances. The panel ruled that Mr. Bar Zeev was unable to establish such circumstances.
2. Enforcement arrangements (a) Administrative Case 12/4 – enforcement arrangement between the Chairman of the Israel Securities Authority and Liron Assa: On February 2013, a panel of the Administrative Enforcement Committee approved an enforcement arrangement between the Chairman of the Israel Securities Authority and Liron Assa (hereinafter – the Respondent), who holds an investment portfolio management license. The arrangement was signed on November 12, 2012. Administrative pleadings were filed against the respondent in this case. An enforcement arrangement was signed in lieu of continuing the administrative enforcement proceeding in full. As part of the arrangement, the respondent admitted the facts and violations mentioned in the pleadings, agreeing to enforcement measures as part of the following arrangement. The enforcement arrangement attributes to the respondent administrative violations pursuant to the Advice Law. The respondent committed 8 violations of sub-section (15) of the 4th Amendment to the Advice Law – violation of the trust duty towards 8 of his clients, 11 violations of sub-section (26) of the Fourth Amendment to the Advice Law towards 14 clients – failed to issue clients a quarterly report as required; violations of sub-section (10) of the Fourth Amendment to the Advice Law – committed an act prohibited for a license holder, in violation of Section 4(a) of the Advice Law. As part of the arrangement, the panel imposed on the respondent two enforcement measures: permanent license revocation and prohibition on serving as an officeholder in a supervised entity for a period of five years. These enforcement measures require – pursuant to Section 52(56) and 52(57) of the Securities Law – the court's approval for the panel's decision. Nevertheless, no financial sanction was imposed on the respondent due to his dire economic situation, taking into account that any sanction imposed on him will compromise his ability to repay his debts to his creditors, most of whom are ex- clients of his. According to the facts of the case, during the period in which the violations were committed (from the beginning of 2008 to the first half of 2010), the respondent managed – as part of Momentum Capital Markets Ltd., a portfolio management company in which he is a controlling shareholder – investment portfolios of numerous clients, based on an investment portfolio management agreement and authorization provided to Momentum by its clients. The respondent sent eight of his clients misleading reports regarding the composition and value of their portfolios, in an effort to conceal from them losses incurred as a result of unsuccessful transactions in the investment portfolios managed by him and in order to prevent them from discontinuing their engagement with his company. He thus gave precedence to his own interests over those of his clients. In addition, the respondent violated the reporting requirement by which he was bound as an investment management license holder, having failed to send 11 of
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his clients quarterly reports regarding the state of their investments as required by law or sent them misleading reports. Under the arrangement, the respondent committed acts prohibited for license holders by trading for Momentum's own account in 45 different cases, in violation of Section 4(b) of the Securities Law. A panel of the Administrative Enforcement Committee approved the enforcement decision, ruling that there was indeed no doubt that the respondent severely violated his clients' trust, although it was never argued that he funneled their money into his own pocket, he compromised his clients' ability to make an informed decision as to whether to continue their engagement with him. The respondent compromised the interests underlying the Advice Law, including protecting clients' funds managed by financial intermediaries and upholding the public's trust in these intermediaries' activities. Due to the nature of the violations and their severity, the damage incurred by clients, as well as in light of the advanced stages of the proceeding and the respondent's admission during the administrative probe, the panel believed that the ISA was right in demanding a full admission of the facts and violations in this case. On April 4, 2013 the Tel Aviv District Court – Economic Department – approved the enforcement measures imposed under the arrangement pursuant to sections 52(56) and 52(57) of the Securities Law, and pursuant to his authority under Section 52(62) of the Securities Law (TA 7675-03-13) (b) Administrative Case 6/12 – enforcement arrangement between the Chairman of the Israel Securities Authority and Yehezkiel Kalpaka, Best Investment Investment Portfolio Management Ltd.:
On May 30, 2013, a panel of the Administrative Enforcement Committee approved the enforcement arrangement between the Chairman of the Israel Securities Authority and Best Investment Investment Portfolio Management Ltd. and Yehezkiel Kalpaka, an investment portfolio management license holder (hereinafter, together – the respondents). The arrangement was signed on April 25, 2013. Administrative pleadings were filed against the respondents in this case. An enforcement arrangement was signed in lieu of continuing the administrative enforcement proceeding in full. As part of the arrangement, the respondents partially admitted the facts and violations contained in the pleadings filed in this case. The enforcement arrangement attributes to the respondents the commitment of administrative violations under the Advice Law – 28 violations of sub-section (26) of the Fourth Amendment to the Advice Law towards 14 clients – failure to issue a quarterly report to a client on time for two consecutive quarters; and 14 violations of Section (15) of the Fourth Amendment to the Advice Law – violation of trust duties towards 14 clients. Under the enforcement arrangement, the respondents admitted only the reporting violations.
This administrative enforcement proceeding followed a preliminary proceeding of license revocation due to unreliable conduct, which the Israel Securities Authority
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conducted against Best Invest prior to submitting the administrative claim. As part of this proceeding, the ISA revoked the company's license on May 21, 2012.
Under the arrangement, enforcement measures were imposed on Kalpaka – a permanent revocation of his portfolio management license and prohibition on serving as an officesholder in a supervised entity for a period of three and a half years. These enforcement measures require – pursuant to Section 52(56) and 52(57) of the Securities Law – the court's approval of the panel's decision. Due to the respondents' dire financial situation – since Kalpaka was in bankruptcy and the company had ceased operating, its license was revoked and he served as guarantor for its debts – no financial sanctions were imposed on them. According to the facts of the enforcement arrangement, the respondents failed to issue quarterly reports to 14 of their clients whose investment portfolio they were managing, regarding the state of their investment portfolio, for the second and third quarters of 2011, as required by law. In addition, contrary to the understanding between the respondents and their clients – under their written and oral agreements – the latter were to withdraw funds only from profits created after the expiry, rather than from their initial investment amount in the investment portfolio (hereinafter – the Principal Amount), Kalpaka instructed the clients, in telephone conversations he held with them each month, to withdraw funds, although their portfolios had already accumulated losses at the time. Kalpaka did so by false representation to the clients, who were led to believe they were withdrawing funds out of profits accumulated in their portfolios, while, in fact, they were withdrawing funds out of the principal amount, which was dwindling. The respondents admitted the facts in part. Based on these deeds, the ISA found that the respondents violated the duty of trust towards their clients, giving precendence to their own interests over those of their 14 clients when concealing in their representations to the clients the losses they had incurred due to unsuccessful transactions, leading them to believe that the principal was intact despite the withdrawal of funds. Thus, they denied them the possibility of discontinuing their engagement with the respondents due to the losses they had incurred. A panel of the Administrative Enforcement Committee approved the enforcement arrangement, ruling that although the respondents did not admit to violating their clients' trust under the arrangement – due to the facts to which they admitted under the arrangement, and based on significant evidence presented in the case – the ISA's argument regarding the represenations to the 14 clients was reasonable. The panel ruled that the respondents' conduct prevented their clients from discontinuing their engagement with them. The respondents had thus ignored their clients' interests, giving precendence to their own interests over those of their clients. Regarding the reporting violations, the panel mentioned the significance of upholding the provisions of the law, which require a portfolio manager to provide his clients with a detailed report. Accor ding to the panel, punishment measures of license revocation and prohibition on serving as an officesholder are significant measures. The panel deemed it adequate that
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the enforcement measures imposed on a violator who has inflicted financial damage on his fellow man should also include a financial sanction as a deterrent, excluding cases were this measure is pointless, as is the case here. On October 3, 2013 the Tel Aviv District Court – Economic Department – approved the enforcement measures imposed under the arrangement pursuant to sections 52(56) and 52(57) of the Securities Law, and pursuant to his authority under Section 52(62) of the Securities Law (TA 4294-06-13) (c) Administrative Case 12/8 – enforcement arrangement between the Chairman of the Israel Securities Authority and Asher Vitner: On June 26, 2013, a panel of the Administrative Enforcement Committee approved the enforcement arrangement between the Chairman of the Israel Securities Authority and Asher Vitner, which was signed on May 27, 2013. In this case an administrative claim was filed against Vitner for committing manipulation violations pursuant to Section 54(a1)(2) of the Securities Law. The enforcement arrangement was signed in lieu of continuing the administrative enforcement proceeding in full. As part of the arrangement, Vitner admitted the facts and violations contained in the administrative claim filed in this case, and agreed that a financial sanction be imposed on him. As part of the enforcement arrangement, a financial sanction of NIS 250,000 was imposed on Vitner, to be paid in 16 installments. Asher Vitner is an investor in securities and a day trader. According to the enforcement arrangement, Vitner carried out 602 self-dealing transactions totalling NIS 3.8 million, which influenced the price of the stocks and options of D. Medical Industries Ltd. The period in which the violations were committed was between March 1, 2011 and June 19, 2012. In these transactions, Vitner sold and bought, simultaneously, using bank accounts under his control and sole management. His actions and pattern of conduct during this period, Vitner strove to stabilize the price of the stocks and options, thus preventing their decrease. In some of these cases, his actions resulted in a price increase. In addition, he influenced trading volumes. In this manner, Vitner influenced the prices of D. Medical's stocks and options. A panel of the Administrative Enforcement Committee approved the enforcement arrangement, accepting the ISA's position that the number and extent of the violations in this case in relation to former administrative cases dealing with this violation mandate financial sanctions significantly higher than those imposed on the committee panel in the previous two cases (Administrative Case 2/12 Dahan and Administrative Case 3/12 Hazut). Regarding the enforcement measures, the Committee ruled that the agreed amount under the enforcement arrangement was reasonable, and that it cannot be argued that the ISA was unusually lenient towards the respondent, although it was reasonable to expect that the financial sanctions for the violations to which the respondent admitted, under the circumstances of the case, would have been higher.
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The panel also ruled that this case was the last to be opened during the first year of the Enforcement Committee's activity. During this period, the ISA's punishment policy was cautious. Now that this period has ended, the Committee should consider using the full extent of the enforcement – and deterrence – provided by law. (d) Administrative Case 5/13 – enforcement arrangement between the Chairman of the Israel Securities Authority and the Israel Electric Company Ltd.: On November 28, 2013, an Administrative Enforcement Committee panel approved the enforcement arrangement between the Chairman of the Israel Securities Authority and the Israel Electric Company Ltd. (hereinafter – the IEC or the Company), which was signed on September 30, 2013. Under the arrangement, the Company admitted to agreed facts which document the events which give rise – according to the ISA – to the violation contained in the arrangement. The Company did not admit that these deeds constitute negligent deeds and that in committing them, the Company committed a violation, but agreed that a financial sanction would be imposed on it, as well as a conditional financial sanction, and – in addition, it would take steps in order to prevent the violations from recurring.
In this case, the Company was the one to disclose the violation to the Israel Securities Authority and the public, taking extensive immediate steps to remedy the problem and prevent the violation from recurring, including the appointment – immediately following the event – of an external auditor, who prepared a thorough audit report on the violation and offered recommendations as to how to remedy it. For this reason, and since this seems to have been a systemic failure, and due to the willingness to provide a swift and deterring solution in this case, no inquiry proceedings or probes have been taken against the Company. Based on the report of the external auditor and its findings, an enforcement arrangement was signed, which includes significant enforcement measures. As part of the enforcement arrangement, a financial sanction of NIS 5 million was imposed on the Company, which constitutes the maximum amount imposable for said violation, as well as a conditional sanction of NIS 5 million, which would be paid if the Company were to commit a violation under the same section within a period of three years from the date on which the arrangement was approved. In addition to paying the said financial sanction, the Company committed to take steps aimed at preventing the violation from recurring, including finalizing the development and adoption of an extensive internal enforcement plan within a period of nine months from the date on which the arrangement was approved, a commitment to efficiently implement the enforcement plan and appointment of an external supervisor, who would ensure that the internal enforcement plan be completed and implemented efficiently within two years from the date on which the arrangement was approved, submitting to the ISA quarterly reports containing his findings. The proceeding deals with a cashflow gap of NIS 1.82 billion between the amount which appears in the cashflow projection attached to the Company's financial statement for
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the second quarter and the amount which should have appeared in it, as a result of an increase in fuel expenditures as well as an increase in expenditures in the supplier line item until the end of 2012, which were not included in the cashflow projection. The IEC appointed an external audit team to examine the extent of the gap in the cashflow and the reasons for it. It was decided that the report would be published in December 2012. The ISA found that according to the findings of the external auditor's report the Company acted negligently in terms of upholding its disclosure requirement under the Securities Law, in relation to the cashflow projection. According to the ISA, based on the facts arising from the external auditor's report, negligent mistakes totalling approximately NIS 1 billion (including VAT) were found in the cashflow projections, mainly arising from flawed information transfer processes between the Company's various departments and the Company's internal communication practices, a lack of sufficient controls over the preparation of the cashflow projection report, as well as a lack of procedures related to feedback on the cashflow from the Company's divisions. In this context, the conduct of some of the Company's employees was deemed negligent. The ISA's position in the arrangement was that the IEC included erroneous and misleading details in its cashflow projection, while it should have known this could have misled reasonable investors. A panel of the Administrative Enforcement Committee approved the enforcement arrangement and accepted the ISA's position that in this case, reaching an arrangement in the current format was preferable – even if the Company had not admitted to committing the violation – to conducting an administrative probe and a full procedure, including all the resources mandated by such a procedure. The panel was of the opinion that the evidence on which the ISA relied in reaching an arrangement with the IEC seemed robust and unequivocal. According to the panel, the leniency reflected in the Company being allowed to refrain from admitting the violation (while admitting most of the facts) was justified in this case, especially in light of the public interest, as well as the ISA's interest to encourage reporting corporations to report violations to the ISA on their own account and do whatever was in their power to correct faults and find means of preventing ommissions from recurring. Regarding the enforcement measures, the panel ruled that despite the alleviating considerations in light of the Company's conduct in revealing the violation, the ISA was right in imposing significant enforcement measures on the Company due to the severity and materiality of the event. Acc ording to the panel, the enforcement measures imposed on the Company as part of the arrangement were justified. (e) Administrative Case 6/13 – enforcement arrangement between the Chairman of the Israel Securities Authority and Yoav Lifshitz: On December 29, 2013, a panel of the Administrative Enforcement Committee approved an amended enforcement arrangement between the Chairman of the Israel Securities Authority and Yoav Lifshitz, signed on December 5, 2013.
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As part of the arrangement, Lifshitz admitted the facts and admitted the manipulation violations pursuant to Section 54(a1)(2) of the Securities Law. The enforcement arrangement was signed in lieu to instituting a full enforcement arrangement for committing these violations. As part of the enforcement arrangement, financial sanction enforcement measures of NIS 180,000 were imposed, to be paid by 20 equal installments, as well as a conditional financial sanction of the same amount. In addition, a financial sanction for preventing the violation from recurring was imposed on Lifshitz, where he committed to refrain from trading in securities on the Stock Exchange, using his own accounts or any other account for a period of 12 months from the date on which the agreement was signed. Yoav Lifshitz is a securities investor and day trader. The enforcement arrangement attributes to Lifshitz 447 self-dealing transactions in various securities, over a period of 390 trading days between March 1, 2011 and December 12, 2012, totalling NIS 7.9 million. In these transactions, Lifshitz bought and sold securities, simultaneously, using eight accounts – two were his own, while the remaining accounts belonged to acquaintances – in which he was authorized to act and was the only one giving orders. By acting in this manner, Lifshitz influenced the prices of securities during trading on the Stock Exchange, with most of his self-dealing trades raising the prices of the securities, while others lowered them. Since the respondent usually traded in low- volume securities, even individual transactions had significant influence over the securities' prices during a trading day and even on the securities' closing prices.
On September 30, 2013, an initial arrangement was made with the respondent, in which a financial sanction of NIS 125,000 was imposed on him, as well as a conditional financial sanction in the same amount, in addition to his commitment to refrain from trading as aforesaid (hereinafter – the Original Arrangement). The panel held a meeting with the parties, since it believed that the financial sanction in the original arrangement had been too low. Following a discussion, the parties reached an amended agreement, which included a higher financial sanction, as detailed above. A panel of the Administrative Enforcement Committee approved the amended enforcement arrangement, emphasizing the characteristics of the administrative manipulation violation, especially self-dealing transactions, which are artificial transactions cancelling each other, in which case a fraud is very difficult to refute. The panel mentioned that the Committee adopted the rulings of the court regarding the characteristics and purpose of the criminal manipulation violation in relation to the administrative violation, which is also intended to prevent harming the public's trust in the securities market and to ensure an efficient and fair capital market. According to the panel, since the respondent also managed accounts of others, in addition to his own accounts and his children's accounts, and made some of the self- dealing trades using those accounts, the respondent's deeds should be also examined in light of the duties imposed on those managing others' investment portfolios, even if he
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was not required to have a portfolio management license, pursuant to Section 3(a1) of the Advice Law, including the duties of trust and care.
The panel believed that the enforcement measures agreed upon as part of the enforcement arrangement are reasonable under the circumstances of the case, taking into account, as a main consideration, the respondent's grave medical condition, which – in this case – justifies ending the proceeding with an arrangement and imposing a lighter financial sanction as compared with the financial sanction imposed in Administratve Case 8/12 in the matter of Asher Vitner, which was similar. The panel also took into account additional alleviating circumstances, including the fact that the respondent was not a day trader or officeholder, his admission in the administrative probe and the remorse he expressed, including ceasing to trade in securities and closing his company. In addition, the panel attributed great significance to an additional sanction of trading restrictions, which the respondent took upon himself as part of the arrangement.
3. Financial sanctions In 2013, 35 financial sanctions were imposed: 33 financial sanctions pursuant to the Securities Law and/or Companies Law and two financial sanctions pursuant to the Advice Law.
Table 26: Financial sanctions imposed under the Securities Law or Companies Law Violator Sanction Section violated and violation description amount 1 F.M.S. Enterprises 387,500 Section 36 of the Securities Law and Regulations Migun Ltd. 10(b)(7) and 48(c)(7) of the Reporting Regulations – failure to provide adequate disclosure for details regarding market risk exposure and market risk management methods. 2 Boymelgreen 21,600 Section 36 of the Securities Law and Regulation 34(a) of the Reporting Regulations – failure to report expiry of external directors' term of office in the company on time. 3 RSL Electronics 8,550 Section 36 of the Securities Law and Regulation 34(a) of the Reporting Regulations – failure to report expiry of external director's term of office in the company. 4 Topspin / 8,460 Section 36 of the Securities Law and Regulation Knowledgetree 34(a) of the Reporting Regulations – delinquent Ventures filing of immediate report regarding expiry of an external director's term of office in the company.
5 Scailex 125,000 Section 36 of the Securities Law and Regulations 9d and 38e of the Reporting Regulations – delinquent disclosure regarding the corporation's liabilities by
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Table 26: Financial sanctions imposed under the Securities Law or Companies Law Violator Sanction Section violated and violation description amount repayment dates. 6 Eurotrade Real 7,500 Section 36 of the Securities Law and Regulation 7 Estate of the Reporting Regulations – delinquent filing of International periodical financial statements. 7 SDS 29,250 Section 36 of the Securities Law and Regulation 39 of the Reporting Regulations – delinquent filing of quarterly financial statements. 8 Star Night 19,500 Section 36 of the Securities Law and Regulation 39 Technologies of the Reporting Regulations – delinquent filing of quarterly financial statements. 9 Caprice Jewelry 87,600 Section 115(a) and 239(a) of the Companies Law and Section 36 of the Securities Law and Regulation 34(a) of the Reporting Regulations – two external directors not holding office for a period exceeding 90 days. 10 A. Libental 25,500 Section 115(a) and 239(a) of the Companies Law and Section 36 of the Securities Law and Regulation 34(a) of the Reporting Regulations – two external directors not holding office for a period exceeding 90 days. 11 Spectronics 137,520 Sections 95(a) and 121(c) of the Companies Law and Section 36 of the Securities Law and Regulations 34(b) and 36b(6) of the Regulations, respectively: 1. Approval the Company's chairman of the board serving at the same time as the Company's CEO, who is his relative; 2. Failure to report the expiry of the term of office of either the chairman of the board and/or CEO of the Company, who are relatives. 12 Chayon 14,850 Section 94(a) of the Companies Law – one external Computers director not holding office for a period exceeding 60 days. 13 Applicure 77,400 Section 36 of the Securities Law and Regulation 39 of the Reporting Regulation – delinquent filing of periodic reports and quarterly reports. 14 Eldav 66,000 Section 115(a) and 239(a) of the Companies Law and Section 36 of the Securities Law and Regulation 34(a) of the Reporting Regulations – two external directors not holding office for a period exceeding 90 days.
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Table 26: Financial sanctions imposed under the Securities Law or Companies Law Violator Sanction Section violated and violation description amount 15 ITGI 14,550 Section 119 of the Companies Law – no general manager in office for a period exceeding 90 days. 16 IPC Oil & Gas 32,850 Section 36 of the Securities Law and Regulation 39 of the Reporting Regulations – delinquent filing of quarterly financial statements. 17 Suny Electronics 7,500 Section 36 of the Securities Law and Regulation 39 of the Reporting Regulations – delinquent filing of quarterly financial statements. 18 TRD 55,530 Sections 114 and 115 of the Companies Law – the Company did not have an audit committee in place for a period exceeding 90 days. 19 Babylon 53,400 Sections 95(a) and 121(c) of the Companies Law and Section 36 of the Securities Law and Regulations 34(b) and 36b(6) of the Regulations, respectively: 1. Approval the Company's chairman of the board serving at the same time as the Company's CEO, who is his relative; 2. Failure to report the expiry of the term of office of either the chairman of the board and/or CEO of the Company, who are relatives. 20 Baram Industries 54,000 Section 36 of the Securities Law and Regulation 21 of the Reporting Regulation – missing detail in a report regarding officeholder remuneration. 21 B. Yair Building 135,600 Section 36 of the Securities Law and Regulations 22 Corporation and 37a(6) of the Regulations – failure to provide disclosure regarding transactions with controlling shareholders and their relatives. 22 Spacecom 50,000 Section 36 of the Securities Law and Regulations 9d and 38e of the Reporting Regulations – failure to disclose the corporation's liabilities by repayment dates. 23 Gold Bond 70,800 Section 36 of the Securities Law and Regulation 34(a) of the Reporting Regulations – failure to issue an immediate report regarding expiry of an external director's term of affice in the company on time. 24 Malrag 18,600 Section 36 and Regulation 37a2 thereof – failure to provide an update in an immediate report. 25 Issta 106,640 Section 36 of the Securities Law and Regulation 22 of the Reporting Regulations thereof.
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Table 26: Financial sanctions imposed under the Securities Law or Companies Law Violator Sanction Section violated and violation description amount 26 Nextcom 16,200 Section 94(a) of the Companies Law – no chairman of the board in place (for a period exceeding 60 days). 27 Poalim IBI 25,200 Section 94(a) of the Companies Law – no chairman of the board in place (for a period exceeding 60 days). 28 Barkan Winery 30,000 Section 239(a) of the Securities Law and Section 36 of the Securities Law and Regulation 34(a) of the Reporting Regulations thereof. 29 Lewinsky & Ofer 55,080 Section 95(a) – term of office of controlling Ltd. shareholders as chairmen of the board and joint CEOs in the company, without the approval required by the Companies Law. 30 The Israel Land 185,000 Section 36 of the Law and Regulation 49 thereof Development and 8b(a) of the Reporting Regulations – failure to Company – attach a highly material valuation. Energy Ltd. 31 SDS 38,160 Section 36 of the Law and Regulations 10(b)(1)(d) and 10(b)(14) and 48 of the Reporting Regulations – failure of the board of directors to provide grounds for the assertion that a working capital deficit does not indicate a liquidity problem. 32 Ortam Sahar 60,480 Section 36 of the Law and Regulations 22 and 37a(6) of the Reporting Regulations – failure to report transactions with a controlling shareholder on time. 33 Synergy 30,600 Section 36 of the Law and Regulation 36(a) of the Reporting Regulations – failure to report a material event on time: approval of the Israel Electric Company regarding continuation of engagement to supply power cables for a significant amount.
Table 27: Financial sanctions imposed under the Advice Law Sanction Violator Section violated and violation description amount Section 26(a) of the Advice Law and Regulation 9 of the Dividend Equity Capital Regulations and Insurance – the Company 1. Investments 20,000 failed to report to its clients in the periodic financial Ltd. statements of the first quarter of 2012 regarding fee and expense charges.
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Gold Asset Section 13(d) of the Law – the Company failed to 2. Management 37,500 conduct an annual needs update procedure. Ltd.
Financial sanctions pursuant to the Prohibition on Money Laundering Law: During the reporting period, a motion was filed with the Committee for Imposing Sanctions Pursuant to the Prohibition on Money Laundering Law to impose a financial sanction on a company with a portfolio management license due to violations under Section 7 of the Prohibition on Money Laundering Order (Identification, Reporting and Registration Requirements of Portfolio Management for the Prevention of Money Laundering and Financing of Terrorism) of 2010. The motion is still pending. Legal proceedings regarding financial sanctions pursuant to the Securities Law and the Companies Law and pursuant to the Joint Investments in Trust Law and Advice Law: Administrative Petition Appeal 6999/12 Chairman of the Israel Securities Authority v. Beit Shemesh Motors Holdings (1997) Ltd.. An appeal filed by the ISA following the District Court's decision to revoke a financial sanction imposed on the petitioner due to violation of a reporting requirement pursuant to Section 36 of the Securities Law and Regulation 34 of the Securities Regulations (Periodic and Immediate Reports) of 1970.40 The Supreme Court granted the appeal in terms of the legal assertions, with the ISA foregoing the sanction. In its verdict, the Court ruled that there was a requirement to report – within the bounds of fair disclosure – about an event which had actually taken place, even if it later turns out that it had no legal basis, and that Section 3 of Fifth Amendment to the Securities Law should not be construed as inapplicable to erroneous reporting. It also ruled that the interpretation cannot be narrowly constructed. The law should be broadly consructed, within the bounds of administrative law, which deals with the nature of the deeds and their consequences and is less strict than criminal law. District Appeal 4203-10-13 Spectronics Ltd. v. the Chairman of the Israel Securities Authority Administrative petition against the ISA's decision to impose on the petitioner a financial sanction of NIS 135,622, pursuant to Section 52(18) of the Securities Law, due to violation of Sections 95 and 121 of the Companies Law of 1999, in that the controlling shareholder served simultaneously as a chairman and CEO of company, without approval as required
40 Administrative Petition (Tel Aviv) 30045-02-12 Beit Shemesh Motors Holdings Ltd. vs. Chairman of the Israel Securities Authority.
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under the appointment procedure in Section 121(c) of the Companies Law. 41 As of the end of the reporting year, the Tel Aviv District Court – Economic Department – granted the petition.
41 In addition to violating Section 36 of the Law and Regulation 34(a) of the Securities Regulations (Periodic and Immediate Reports) of 1970, by failing to report on time that the controlling shareholder had ended his term of office as both chairman of the board and CEO. The ISA, however, deemed the two violations as one.
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5.10 Criminal Enforcement
C. General
1. Purview of the Securities Department at the District Attorney's Office The Securities Department is a department at the Tel Aviv District Attorney's Office (Taxation and Economics). The Securities Department was established for the purpose of focusing resources and professional capabilities on battling money laundering and white collar criminal activity and establish sanctions and behavior norms through relevant legislation. With the development of the capital market, the need for effective protection of the investing public became evident as did the significance of criminal enforcement in this field. The Department was established through cooperation between the Israel Securities Authority and the District Attorney's Office and, as aforesaid, the Department was incorporated into the Taxation and Economics Department. The Securities Department prosecutes white collar offenders who have committed large scale securities violations. The Department has been successfully handling the inherent difficulties in this field: extensive investigative material, multiple offenders in single cases as well as legal and evidential complexity and top notch legal representation of defendants and significant media interest. For more than a year, the Department has been handling most of its cases through the Tel Aviv District Court's Economic Department, which was established in order to address the special needs of effective enforcement and judicial expertise in securities and capital market issues.
2. Main Activities in 2013 a. Preparing and submitting indictments – conducting hearings and deciding whether to file charges or close cases; b. Managing cases in courts of the first instance until a verdict is reached; c. Submitting appeals and managing cases in courts of appeals; d. Training the team of lawyers – training interns and young lawyers in preparing indictments and litigation skills – including witness questioning in court, and training the staff on issues such as corporate liability and discretion in punishment; e. Preparing a tender for recruiting additional lawyers; f. Coordinating investigation needs in fraud cases – actual transactions with the Investigations Department as part of streamlining the investigation process.
3. Main activities planned for 2014 a. Continued streamlining of the procedures for preparing and submitting indictments – including conducting hearings and making decisions regarding cases – speeding the handling of cases from previous years and setting time tables for commitment to trial, so
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that the maximum time to have elapsed from receiving a case at the Disctrict Attorney's office to filing it will not exceed 12 months; b. Continued streamlining of pending cases and new cases in the courts; c. Managing cases in courts of appeals; d. Training the team of lawyers – training newly-arrived lawyers and training the Department staff regarding questioning of experts as well as in representation and presentation skills.
D. The Department's activities
1. Criminal indictments In 2013, following investigations performed by the ISA, five indictments were filed by the Tel Aviv District Attorney's Office (Taxation and Economics Department):42
(a) In August An indictment was filed in the Tel Aviv District Court against Ilan Ofir, the controlling shareholder of World Group Capital Ltd., on charges of fraudulently influencing the price of securities in violation of Section 54(a)(2) of the Penal Code; four counts in violation of Section 53(a)(4) – inclusion of a misleading detail in a report; two counts of obtaining by fraud with aggravating circumstances – in violation of Section 415 of the Penal Code; two counts of fraud and breach of trust in a corporation – in violation of Section 425 of the Penal Code. According to the indictment, the defendant concealed his personal interest in a number of transactions made by World Group and one of its subsidiaries, Nepco Star (also a publically traded company), during 2007. As part of these transactions, Nepco acquired a privately held company by the name of Gunther Wind Energy from Ofer Arbiv, a friend of the defendant. According to the facts of the indictment, Ofir concealed these facts from World Group's board of directors while it approved Arbiv's employment. The information was concealed in order to ensure that World Group will approve a number of transactions between the Company and Arbiv.
(b) In September An indictment was filed in the Tel Aviv District Court against Avi Baziz, who served as VP of Operations at Kamada. The indictment charges Baziz with the offense of use of inside information by an insider in violation of Section 52c of the Securities Law and the offense of failing to report changes in his holdings in violation of Section 53(a)(4) of the Law.
According to the indictment, Baziz – who was a senior officeholder and was in possession of inside information regarding a deal between Kamada and Baxter – purchased Kamada stocks for himself and sent an SMS to one of his friends, in which he recommended buying Kamada
42 The number of indictments does not necessarily correspond to the number of investigation cases on which the indictments were based. At times, the District Attorney includes a number of investigation cases in one indictment, or vice versa: it files a number of indictments as part of a single investigation case.
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stocks immediately. Baziz did not report changes in interested party holdings following his stock purchase.
(c) In October An indictment was filed in the Tel Aviv District Court against Jacky Ben Zaken, Eitan Eldar, Zvi Kolenbrenner, Manofim Finances for Israel (Mapal) Ltd., Arena Capital Trading Stage 2009 Ltd and Internetica Ltd.on charges of conspiring to commit a crime in violation of Section 499 of the Penal Code; fraudulently influencing fluctuations in the prices of securities in violation of Section 54(a)(2) of the Securities Law; obtaining by fraud with aggravating circumstances – in violation of Section 415 of the Penal Code; fraudulently inducing a person to purchase securities – in violation of Section 54(a)(1).
According to the indictment, Ben Zaken and Eldar conspired to fraudulently influence the price of Manofim's stock by way of purchasing the stock during trading on the Stock Exchange, with the aim of causing the stock to meet the conditions for entering the Tel Aviv 100 Index, on the determining date for the update of the index at the end of 2010. As part of the conspiracy, Eldar was in charge of purchasing Manofim stock on the Stock Exchange, while Ben Zaken was responsible for finding an investor who would purchase Manofirm's stock from Eldar during the activity period, thus providing Eldar with funds for his continued activity. Based on his agreement with Ben Zaken, Eldar conspired with his friend Kolenbrenner to jointly purchase Manofim stock on the Stock Exchange in order to raise the stock's price. Eldar and Kolenbrenner acted fraudulently, close to the determining date for including new stocks in the index, by purchasing Manofim stock during trading and by performing coordinated and self-dealing transactions between their accounts. Following the success of the fraudulent plan to raise the stock price and the announcement of Manofim's impending entry into the Tel Aviv 100 Index, Eldad and Kolenbrenner continued to trade in the stock for several more trading days until the stock would enter the Index, in order to further influence the price of the Manofim stock towards the determining date. Ben Zaken and Eldar are also charged with fraudulenty inducing a person to purchase securities. According to the indictment, Eldar and Ben Zaken agreed that Eldar would provide false information to a reporter with whom he had close ties, according to which Manofim was conducting significant negotiations for the sale of part of its controlling stake to a wealthy Jewish Canadian family. However, in effect, no such negotiations were taking place. Based on this false information, an article was published in a well known economic newspaper.
(d) In December An indictment was filed in the Tel Aviv District Court against Shimon Yamin and Etgarim Finance, Etgarim Pensionim and Forecast. The indictment attributes to the defendant and the defendant companies numerous counts of obtaining by fraud with aggravating circumstances in violation of Section 415 of the Penal Code; numerous counts of theft by agent in violation of Section 393 of the Penal Code; and offenses of receiving prohibited incentives in violation of Section 39(b)(4) of the Regulation of Investment Advice and Investment Portfolio Management Law of 1995.
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According to the indictment, Yamin – who served as the defendant companies' CEO – made prohibited use of accounts of Etgarim Finance clients in order to assist various entities in the capital market to sell stocks in return for fees. The stocks were bought for the clients' accounts, without Yamin's informing the clients of his conflict of interests in the transaction. Yamin is accused of utilizing the funds of Etgarim Finance clients, without their knowledge, in order to purchase, for himself, a controlling stake in Cinema Trusts Investments In Movies. The ownership of the general partner provided Yamin with a series of benefits, including the ability to pay himself a monthly salary.
(e) In December An indictment was filed in the Tel Aviv District Court against Eyal Levy, along with an announcement regarding a settlement agreement in his case. The indictment attributes to the defendant offenses by managers in a body corporate in violation of Section 424(2) of the Penal Code. According to the indictment, the defendant was CFO of Sapan in 2004-2005, and was involved in inappropriate accounting practices in the company's books in relation to its revenues as well as in including false details in reports. In his actions, the defendant acted against the generally accepted accounting rules, and knowingly acted in a manner compromising the proper management of the company's business.
(f) Towards the end of the reporting year An indictment was filed in the Tel Aviv District Court against Tobi Pfeffer, a nostro trader at IBI Stock Exchange Services. The indictment attributes to the defendant offenses of theft by an officeholder in violation of Section 392 of the Penal Code; fraudulently influencing the prices of a security in violation of Section 54(a)(2); and breach of trust in a corporation –in violation of Section 425 of the Penal Code. In 2008-2010, Pfeffer used two accounts which he controlled – IBI's nostro account and his brother-in-law's account – trading in securities between them, while he was at both ends of the transactions and the only decision maker. Pfeffer's actions were designed to create risk- free profits for his brother-in-law, using the nostro account for this purpose.
2. Criminal cases closed during the reporting year
During the reporting year, the Securities Department closed 7 investigation files, 4 of which were conditionally closed, as follows:
(a) Amiram Grinvald, Optical Imaging Ltd. In June and August, an agreement was signed with with Amiram Grinvald and Optical Imaging Ltd. for a conditional suspension of proceedings against them. Grinvald was suspected of Securities Law offenses in relation to a request filed by Optical Imaging to obtain an approval to publish a prospectus in 2010, in which the company claimed, inter alia, that it has obtained the FDA's approval for its flagship product. The parties reached an agreement, whereby the FDA's approval was forged without the suspects' knowledge, and was presented to them as an authentic approval. However, the parties also agreed that as part of the discussions for the approval of the prospectus
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between the Israel Securities Authority and the Company, the suspects did not inform the ISA of all the (unsuccessful) attempts made by the company's officeholders to obtain information regarding the approval and the request for approval. Under the agreement, the District Attorney did not file an indictment in this case. Grinvald agreed to pay a sum of NIS 80,000, in addition to agreeing to refrain from serving as an officeholder in a supervised entity for a period of one year from the date on which the agreement was signed. The Company agreed to pay a sum of NIS 50,000.
(b) Roy Vermus In July, an agreement was signed with Roy Vermus for a conditional suspension of proceedings against him. Vermus was suspected of offenses under the Securities Law and Penal Code in relation to the nostro account of Psagot Securities Ltd. during the period in which he served as the Company's CEO. Vermus was party to a discussion, in which activities in Psagot's nostro account were described by the manager of the brokerage department, who was responsible for the company's nostro account. The latter said some things, which gave rise to a suspicion that inappropriate activity had been carried out in the nostro account.
The District Attorney was of the opinion that – taking into account the content of the conversation, and Vermus's position and role at Psagot – Vermus should have examined whether there was inappropriate activity in the nostro account. In failing to do so, he impaired the proper conduct of the business which he headed – an offense in violation of Section 424(2) of the the Penal Code. In October 2010, Vermus was dismissed from his position as CEO of Psagot, as part of measures taken by Psagot in response to an investigation the ISA conducted against it. Since then, and as long as no decision has been reached in this case, Vermus is prohibited from serving as an officeholder in the capital market. Under the agreement, the District Attorney did not file an indictment in this case. Vermus has agreed to pay a sum of NIS 500,000. After paying the amount, Vermus will be allowed to once again serve as an officeholder in a supervised entity.
(c) Niv Elbaz In August, an agreement was signed with Niv Elbaz for a conditional closing of the case against him. Elbaz was suspected of offenses pursuant to the Penal Code: three accounts of impersonating a public servant in violation of Section 283(2) of the Penal Code. As part of the agreement, Elbaz admitted that in the framework of an investigation in which he carried out as a private investigator, he impersonated an investigator of the Israel Securities Authority in front of three different people, demanding that they provide him with information related to the investigation. As part of the agreement, the District Attorney did not press charges in Elbaz's case. Elbaz paid a fine of NIS 7,000 and signed a commitment to refrain from committing offenses for a period of 12 months.
(d) Ron Hashmonay
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In October, an agreement was signed with Ron Hashmonay for a conditional closing of the case against him. Hashmonay was suspected of offenses pursuant to the Securities Law, of providing a misleading report about an approval of an irregular transaction between World Group Capital (58) Ltd., in which he served as Chairman of the Board, and DCI USA Inc. The parties agreed that the approval of the transaction between the companies by the board of directors was done without the latter being informed of Ilan Ofir's (the defendant) personal interest in the deal. During this period, Mr. Yonatan Rigbi, who is married to Ofir's mother, served as DCI's CFO. World Group ordered, through the suspect and other persons, a legal opinion regarding the need for a special approval for the deal as a transaction with an interested party. The person who prepared the opinion was not informed of the family ties between Ofir and DCI's CFO. According to the opinion, World Group issued an immediate report regarding the loan and option transaction as well as in its periodic report for 2008, in which it noted that the transaction was not submitted for approval as an interested party transaction. Under the agreement, the District Attorney did not file an indictment in this case. Hashmonay has agreed to pay a sum of NIS 200,000.
3. Criminal cases pending in the courts As of the end of the year, a number of cases were pending decision in court, as follows: a. 23 criminal cases were pending in trial court, including 18 indictments filed in previous years. b. Five appeals are pending decision in the first appeals instance at the district court and supreme court.
4. Criminal verdicts in trial court During the year, 11 verdicts were handed down in trial court: 43 (a) Amir Bronfeld – Criminal Case 64056-12-12 In February, the Tel Aviv District Court (Economic Department) (Hon. Judge K. Kabub) sentenced Amir Bronfeld – according to their admission, as part of a plea bargain – on 22 counts of fraud in violation of Section 54(a)(2) of the Securities Law; one count of obtaining by fraud – in violation of Section 415 of the Penal Code; one count of fraud and breach of trust in a corporation – in violation of Section 425 of the Penal Code.
The defendant served, from 2006 to 2010, as head of public offerings in the First International Bank of Israel and Co. – Underwriting and Investments Ltd., and was well versed in capital market trading. According to the indictment, the defendant performed coordinated transactions between his personal account and the company's underwriting
43 The number of verdicts handed down in court does not necessarily correspond to the number of indictements filed, since indictments with more than one defendant sometimes result in separate verdicts, and vice versa -- separate indictments are sometimes consolidated into a single case.
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account, abusing his position in the company and his access to the accounts, as well as the company's faith in him to create a false representation as if he were acting in the underwriting account in line with the interests of the underwriting company. The defendant was sentenced to ten months in prison, a fine of NIS 150,000 substitutable for one year in prison, and a suspended sentence of one year for a period of three years, on the condition that the defendant not commit any of the offenses he has been convicted of. (b) Arye Givoni, David Habi, Tal Yegerman, Rafael Peled, Mashav Refrigeration Ltd. and Feuchtunger Investments – Criminal Case 40213-05 In April the District Court (Economic Department) (Hon. Judge K. Kabub) convicted defendants Arye Givoni, David Habi, Tal Yegerman, Rafael Peled, Mashav Refrigeration Ltd., and Feuchtunger Investments, who were convicted of numerous counts in a case known as the Peled Givony Case. The indictment attributed to Givony, Habi and Yegerman numerous offenses, including theft by an officeholder, for withdrawing funds from the accounts of the publically traded companies and transferring them into their own accounts. Arie Givoni was convicted of 29 counts of theft by an officeholder under Section 392 of the Penal Code; 32 counts of offenses by managers and employees in a corporation under Section 424 of the Penal Code; 33 counts of fraud and breach of trust in a corporation under Section 425 of Penal Code; and seven counts of reporting in violation of Section 53(a)(4) of the Securities Law. The defendant was sentenced to 24 months in prison, a suspended sentence of 18 months for a period of three years, on the condition that the defendant not commit any of the offenses he has been convicted of, and a fine of NIS 20,000 substitutable for two months in prison. David Habi was convicted of 29 counts of theft by an officer under Section 392 of the Penal Code; 31 counts of offenses by managers and employees in a corporation under Section 424 of the Penal Code; 31 counts of fraud and breach of trust in a corporation under Section 425 of the Penal Code; and five counts of reporting in violation of Section 53(a)(4) of the Securities Law. The defendant was sentenced to 24 months in prison, a suspended sentence of 18 months for a period of three years, on the condition that the defendant not commit any of the offenses he has been convicted of, and a fine of NIS 20,000 substitutable for two months in prison. Tal Yegerman was convicted of 30 counts of theft by an officer under Section 392 of the Penal Code; 32 counts of offenses by managers and employees in a corporation under Section 424 of the Penal Code; 34 counts of fraud and breach of trust in a corporation under Section 425 of the Penal Code; five counts of reporting under Section 53(a)(4) of the Securities Law; two counts of forging a document with intent to obtain any thing with aggravating circumstances under Section 418 of the Penal Code; and one count of obtaining by fraud in violation of Section 415 of the Penal Code. The defendant was sentenced to four years in prison, a suspended sentence of 18 months for a period of three years, on the condition that the defendant not commit any of the offenses he has been convicted of, and a fine of NIS 20,000 substitutable for two months in prison.
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Rafi Peled was convicted of three counts of offenses by managers and employees in a corporation under Section 424 of the Penal Code; and five counts of reporting under Section 53(a)(4) of the Securities Law. The defendant was sentenced to six months to be served as community service, a suspended sentence of 18 months for a period of three years, on the condition that the defendant not commit any of the offenses he has been convicted of, and a fine of NIS 100,000 substitutable for four months in prison. Companies Mashav Refrigeration Industries Ltd. and Feuchtunger Investments Ltd. were each convicted of a reporting violation under section 53(a)(4) of the Securities Law, and sentenced to a fine of NIS 10,000.
(c) Guy Higashi – Criminal Case 44510-12-12 In June, the District Court (Hon. Judge K. Kabub) sentenced Guy Higashi, after having convicted him – according to his admission, as part of a plea bargain – on charges of securities fraud pursuant to Section 54(a)(2) of the Securities Law.
Accordin g to the indictment, between December 2010 and May 2011, the defendant traded on the Stock Exchange in dozens of different securities of publically traded companies, in which he made hundreds of coordinated transactions and self dealing transactions between his accounts and his family members' accounts, which were under his control. The court sentenced the defendant as follows: six months to be served as community service, a suspended sentence of six months for a period of two years, on the condition that the defendant not commit the offense he has been convicted of, and a fine of NIS 35,000 substitutable for six months in prison. (d) Yaniv Tuvim and Nir Sharon – Criminal Case 9883-07-10 In July, the Tel Aviv District Court (Hon. Judge O. Mudrick) sentenced Yaniv Tuvim and Nir Sharon after having convicted them – according to their admission, as part of a plea bargain – on charges of securities fraud under Section 54(a)(2) of the Securities Law.
The defendants were convicted of making 74 coordinated transactions over six trading days, earning a profit of NIS 90,000. The court sentenced the defendant as follows: Yaniv Tuvim was sentenced to six months to be served as community service, a suspended sentence of nine months for a period of three years, on the condition that the defendant not commit an offense under the Securities Law, and a fine of NIS 15,000. Nir Sharon was sentenced to six months to be served as community service, a suspended sentence of nine months for a period of three years, on the condition that the defendant not commit an offense under the Securities Law, and a fine of NIS 10,000. (e) Noam Tepper – Criminal Case 5760-09 In July, the Tel Aviv District Court (Hon. Judge D. Shirizly) convicted Noam Tepper, owner of an investor relations and public relations firm – on 40 counts of use of inside information by an insider, offenses under Section 52c of the Securities Law. The court ruled that Tepper used his access to inside information in four companies to which he provided investor relations and public relations services, using the inside information
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which came to his knowledge as a result of his ties with these companies in five different cases. Based on the inside information he obtained, Tepper made approximately 40 transactions valued at NIS 500,000, making a profit of over NIS 60,000. The court ruled that although Tepper was not an employee of any of the companies, he is deemed an insider due to his ties with them and his access to inside information in those companies. The court also ruled that Tepper abused the companies' trust in him, making use of information entrusted to him in order to gain an unfair advantage over other market investors. Noam Tepper was sentenced to ten months in prison, a suspended sentence of 18 months for a period of three years, on the condition that the defendant not commit an offense under the Securities Law, and a fine of NIS 300,000 substitutable for 18 months in prison. (f) Yishai Porat – Criminal Case 4392/06 In July, the District Court (Hon. Judge Y. Pradelsky) convicted the defendant Yishai Porat – according to his admission, as part of a plea bargain – of committing an offense by a manager under Section 424 of the Penal Code and four counts of reporting offenses under Section 53(c)(8).
The defendant served as CFO of Noga Electronics Ltd. and the Noga Group, and was convicted of including misleading details in Noga's financial statements in 2001 and 2002 and of failing to report private unlawful withdrawals of funds from the company's account by the controlling shareholders, to their own private accounts. The defendant was sentenced, in accordance with the plea bargain, to 45 days in prison, to be served as community service; a suspended sentence of five months for a period of three years, on the condition that the defendant not commit the offense he had been convicted of or any misdemeanor under the Securities Law; and a fine of NIS 150,000 substitutable for 18 months in prison. (g) Yitzhak Goldenberg – Criminal Case 4392/06 In July, the District Court (Hon. Judge Y. Pradelsky) convicted Yitzhak Goldenberg – according to his admission, as part of a plea bargain – of theft by a manager, in violation of section 392 of the Penal Code; obtaining by fraud under aggravating circumstances, in violation of section 415 of the Penal Code; fraud and a breach of trust in a corporation, in violation of section 425 of the Penal Code; inclusion of false data in corporate documents, in violation of section 423 of the Penal Code; and misleading reporting, in violation of Section 53(a)(4) of the Securities Law. Goldenberg was a controlling shareholder in Noga Electronics Ltd. and the Noga Group, and served as Noga Group's Chairman of the Board and as CEO of Noga Technology Investments Ltd. He was convicted of theft from the Noga Group, of stealing millions of shekels from the company in 2001 and 2002, making false represenations to the company's finance department employees and CPAs regarding funds he had unlawfully withdrawn, and inclusion of misleading details and false reporting in financial statements in relation to the unlawful withdrawal of funds.
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Argumentation as to punishment was postponed to February 2014 for the purpose of obtaining a probation review.
(h) Amnon Barzilay – Criminal Case 51394-12-10 In September, the District Court – Economic Department (Hon. Judge K. Kabub) sentenced Amnon Barzilay – according to his admission, as part of a plea bargain – after he was convicted of the following offenses: obtaining by fraud under aggravating circumstances in violation of Section 415 of the Penal Code; fraud and breach of trust in a corporation in violation of Section 425 of the Penal Code; including a misleading detail in a prospectus in violation of Section 53(a)(2) of the Securities Law; including a misleading detail in a report for the purpose of misleading a reasonable investor in violation of Section 53(a)(4) of the Securities Law. The court ruled that the defendant, who served as an officeholder in the Japanauto Group initiated a deal between Japanauto and Trademobile, while concealing his personal interest in the transaction. The Court sentenced the defendant as follows: six months in prison, to be served as community service, and a fine of NIS 1.8 million, substitutable for two years in prison. In addition, the defendant was prohibited from serving as member of the board in public companies or private companies which have issued bonds to the public until December 31, 2014. (i) Dan Cohen – Criminal Case 4004/09 In September, the District Court – Economic Department (Hon. Judge K. Kabub) sentenced Dan Cohen after convicting him – according to his admission, as part of a plea bargain. Dan Cohen was convicted of receiving bribes in violation of Section 290 of the Penal Code; fraud and breach of trust in a corporation in violation of Section 425 of the Penal Code; and disruption of proceedings in violation of Section 244 of the Penal Code. The Court ruled that while Cohen served as a member of the board in the Israel Electric Company in 1996-2002, he created a conflict of interest between his duties as a member of the board and the interests of the Company Rogozin and its controlling shareholder, with whom he had business ties. In addition, Cohen accepted a bribe totalling euro 1 million in 2002, in return for assisting Siemens in winning a tender of the Israel Electric Company valued at hundreds of millions of euros.
The court sentenced the defendant as follows: six years in prison; a suspended sentence of two years for a period of three years, on the condition that the defendant not commit any offense under Chapter I of the Penal Code for a period of three years from the date of his release from prison; a fine of NIS 6 million and additional forfeiture of NIS 4 million. (j) Shalom Cooperman – Criminal Case 4515/08 In October, the Magistrate Court sentenced Shalom Cooperman after having convicted him of theft by agent in violation of Sections 383(a)(2) and 393(2) of the Penal Code; 11 counts of obtaining by fraud under aggravating circumstances in violation of Section 415 of the Penal
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Code; instigation in an investigation in violation Section 245(b) of the Penal Code; six counts of issuing checks without cover in violation of Section 432 of the Penal Code.
Between 2000 and 2006, the defendant took funds from various clients, after having presented himself as a capital market investment manager, falsely promising them monthly interest. Cooperman concealed from his clients that he was in debt – both personally and business-wise, and convinced them to give him the funds personally, rather than as part of a managed investment portfolio. Cooperman took over NIS 5 million from the complainants and used the funds for his personal needs. The Court sentenced the defendant to 57 months in prison; a suspended sentence of 18 months for a period of three years, on the condition that the defendant not commit any fraud or theft offense, a fine of NIS 85,000 substitutable for four months in prison, a commitment to refrain from committing fraud or theft offenses, and a deposit of NIS 215,000, as well as compensation totalling NIS 1,346,000 to be paid to the complainants. The defendant appealed the verdict and sentence, and the State will appeal sentence leniency. (k) Golan Madar, Eli Haelyon, subsiairies of the Ofer Group – Ofer Investments Ltd. and Ofer Development and Investment Ltd. – Avi Levy and Melisron Ltd. – Criminal Case 23842-11-11 In November, the District Court – Economic Department (Hon. Judge K. Kabub) acquitted Avi Levy and Melisron Ltd. on benefit of doubt on all counts, convicting Golan Mardar, Eli Haelyon and subsiairies of the Ofer Group – Ofer Investments Ltd. and Ofer Development and Investment Ltd. on offenses of securities fraud in violation of Section 54(a)(1) and 54a(2) of the Penal Code; reporting with intent to mislead in violation of Section 53(a)(4) ; and including a misleading detail in a prospectus in violation of Section 53(a)(2) of the Securities Law. The violations were committed in relation to expanding a series of bonds of Melisron Ltd. in 2009. The Court ruled that Madar, who served as CFO and represented the Ofer Group, fraudulently influenced bond prices (Series D) in the four days that preceded the expansion of the series at the Tel Aviv Stock Exchange. In committing these acts, Madar fraudulently induced investors to make transactions in Melisron's Series D bonds. Madar committed the fraud by giving orders to Haelyon, who served as a trader at Poalim Sahar. Haelyon was asked to carry out massive purchases of Melisron's Series D bonds on the Stock Exchange, for the purpose of increasing their price or preventing the decrease of their price in the days preceding the expansion of the series. For this purpose, Madar transferred to Haelyon NIS 30 million from the Ofer Group accounts. In the four trading days in which Madar acted as representative of the Ofer Group, the latter's purchases accounted for 70% of the cumulative volume of trades in the Series D bonds, accounting for between 62% and 97% of the total volume of purchases of Series D bonds during these days. As a result of these activities, the price of Series D bonds increased during the four trading days which preceded the offering.
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The Court reiterated the ruling of the Supreme Court, whereby manipulations can also be made through actual trades on the Stock Exchange, which appear to be legitimate. In addition, the Court ruled that for the purpose of proving the offense, if the defendants act for various purposes, it is sufficient to prove that, in addition to a legitimate purpose, there was also the purpose of influencing the bonds' price. There is, however, a need to prove that the purpose of this influence is also reflected in the actual trading activity – actions which promote the purpose of influencing prices.
The defendants in this case have yet to be sentenced. (l) Michael Pulitzer – Criminal Case 48916-11-10 In December, the Tel Aviv Magistrate Court (Hon. Judge M. Barak-Nevo) sentenced Michael Pulitzer after convicting him – according to his admission, as part of a plea bargain – of committing the offense of fraud and breach of trust in a corporation in violation of Section 425 of the Penal Code and the offense of including false data in a corporation's documents in violation of Section 423 of the Penal Code. Pulitzer, who served as deputy CEO at Migdal Stock Exchange Services Ltd. and was responsible for bonds trading, opened a trading account under the name of his brother in law, which he managed on his own. The account contained no funds and was not secured. Pulitzer concealed from his superiors at Migdal the fact that he was managing the account, and used the latter for his own gain. He pocketed most of the profits, which reached approximately NIS 300,000. The Court sentenced the defendant to six months in prison; a fine of NIS 400,000; and a suspended sentence of six months for a period of three years, on the condition that the defendant not commit any of the offenses of which he was conviced.
5. Verdicts in criminal appeals (a) During the year, the District Court handed down two verdicts in criminal appeals: 1. Avshalom Weinrev – Criminal Appeal 15981-07-12 In February, the Tel Aviv District Court, serving as a court of criminal appeals, rejected the appeal filed by defendant Avshalom Weinrev regarding his conviction. The defendant was convicted – in accordance with his admission – of use of inside information in violation of Section 52d of the Law.
The lower court determined that hurting an individual's employment prospects does not confer upon him a vested right for a proceeding to be completed without conviction. In this case, the alleviating circumstances regarding punishment do not apply to the conviction. The Court sentenced the defendant to 140 hours of community service and suspended his investment marketing license for a period of two years. The appeals court accepted the position of the lower court, upholding its verdict.
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sther Finkelstein – Criminal Appeal 13662-11-12 and Criminal Appeal 47818-11-12 In February, the Tel Aviv District Court, serving as a court of criminal appeals, accepted the appeal filed by the State regarding the sentence handed down by the Magistrate Court in the matter Esther Finkelstein, following her conviction – in accordance with his admission, as part of a plea bargain – on 37 counts of inside information by an insider, in violation of Section 52c of the Securities Law.
The lower court sentenced the defendant to six month in prison, to be served as community service, a suspended sentence of 16 months for a period of three years, on the condition that the defendant not commit any misdemeanor pursuant to the Securities Law, and a fine of NIS 220,000. The Appeals Court gave weight to the extensive investment and the increase in the price of the stocks in which the defendant invested, and increased the fine to NIS 450,000, substitutatble for 30 months in prison. (b) During the year, the Supreme Court handed down three verdicts in criminal appeals:
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1. Alon Sharon – Criminal Appeal 7023-12 In January, the appeal filed by Alon Sharon was heard in the Supreme Court. The lower court convicted the defendant – in accordance with his admission, as part of a plea bargain – of offenses of theft by agent in violation of Section 393 of the Penal Code and of fraudulently influencing the price of securities in violation of Section 54(a)(2) of the Securities Law. The lower court determined that Gueta and Sharon abused the trust placed in Gueta as a senior employee of the bank, entrusting him with one of the bank's sizable accounts. In order to carry out their theft from the bank, the defendants abused trading on the stock exchange for their own gain, manipulating and acting fraudulently in respect to four different bonds.
The Court of Appeals reduced the defendant's prison sentence from 18 to 14 months, on the grounds that the defendant's acts had no dramatic effect on the price of securities, and that his actions did not constitute abuse of his position in the bank. The remaining components of the sentence – a fine of NIS 20,000 and a suspended sentence of 18 months – were upheld by the Court.
2. Tamam Integrated Recycling Industries Ltd. – Criminal Appeal 4453-12 In April, the Supreme Court – after hearing the appelate's arguments in an appeal filed by TAMAM Integrated Recycling Industries Ltd. regarding the fine imposed on the company by the District Court – dismissed the appeal. TAMAM was convicted in April 2012 – in accordance with its admission, along with the company's CEO and two of his finance department employees, as part of a plea bargain – of reporting offenses in violation of Section 53(a)(4), having included misleading details in TAMAM's financial statements in 2003-2005, creating a false reprensentation in respect to the company's position, so that the financial statement did not reflect its financial position. The Company was sentenced to a fine of NIS 500,000 (Criminal Case 56619-12-11, Tel Aviv District Court, Economic Department).
The Company filed an appeal with the Supreme Court, claiming the fine was excessive. After hearing the parties in the appeal, the Supreme Court recommended that the Company withdraw its appeal. The appeal was stricken, and the fine was upheld.
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3. Eyal Eden, Nahum Gartner, Efraim Kadetz – Criminal Appeal 6020-12, Criminal Appeal 6070-12, Criminal Appeal 7447-12 In April, the defendants' (Kadetz, Eden and Gartner) appeal and the State's appeal in the Elspec Engineering case was heard by the court. The lower court convicted Defendants 2 and 6 (Eden and Gartner) – in accordance with their admission – on various counts of use of inside information. Eyal Eden, Head of Engineering at Elspec Engineering Ltd., was convicted of use of inside information and of conveying inside information to his relatives, offenses under Sections 52c and 52d of the Securities Law. Nahum Gartner, Head of Procurement at Elspec, was convicted of use of inside information in violation of Section 52c of the Securities Law, after having purchased Elspec shares while in possession of inside information as a result of his position in the Company. In addition, the lower court convicted Elspec's VP, Efraim Kadetz, of use of inside information by way of purchasing stocks while in possession of inside information in violation of Section 52c of the Securities Law, and acquitted Kadetz of conveying the information to another person under Section 52d of Securities Law.
The court sentenced the defendants as follows: Defendant No. 2, Eyal Eden – six months in prison to be served as community service, a suspended sentence of two years and a fine of NIS 150,000. Defendant No. 6, Nahum Gartner – three months in prison to be served as community service. Defendant No. 1, Efraim Kadetz – ten months in prison and a fine of NIS 25,000, substitutable for eight months in prison, and a suspended sentence of eight months for a period of three years, on the condition that the defendant not commit any offense of which he was convicted. The Court of Appeals upheld the sentence, dismissing the State's appeal to aggravate the sentence and the defendants' appeal to reduce the sentence.
Table 28: Distribution of investigation cases forwarded to the District Attorney's Office in 2013, by type of violation* Type of violation No. of cases Securities fraud 5 Inside information 1 Total 6 * according to main violation
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Table 29: Distribution of indictments filed in 2013, by type of offense
Violation No. of indictments
Securities fraud 3 Penal code violation 1 Inside information 1 Officeholder offenses 1 44 Total 5 * according to main violation
Table 30: Cases at the District Attorney's office, as of the end of 2013, pending decision whether to prosecute, by year forwarded45 Year No. of cases
2009 2 2010 1 2011 0 2012 4 2013 6 Total 13
Table 31: Cases at the District Attorney's office, as of the end of 2013, pending decision whether to prosecute, by type of offense 46
Violation No. of cases Securities Fraud 7 Misleading detail / reports 2 Insider information 1 Panel 3 Total 13
44 Two investigation files were combined into a single case, 45 As of the beginning of 2014, a decision was reached regarding two cases and negotiations towards settlement are being held. 46 As of the beginning of 2014, negotiations towards settlement are being held.
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6. The ISA's budget for 2013 and breakdown of the ISA's expenditures in 2013, according to budget line items
2013 Budget Implementation Report (in NIS thousands)
Line Line item Approved Updated 2013 budget item No. budget for budget for implementation 2013 2012 General : Total expenses: 178,730 178,730 168,851
Salaries: Total 95,940 94,440 90,860
[ 224 ] [ 224 ] [ 224 ]
1001 Salaries of ISA employees 77,950 73,450 71,438 1002 Provision for pensions & severance 10,640 11,640 11,255 1003 Overtime 5,200 5,200 4,506 1004 Temporary workers 500 500 146 [ 32 ] [ 32 ] [ 32 ]
1005 Legal interns and students 2,630 2,630 2,570 1006 Chairman's salary 820 820 788 1008 Expenses of ISA employees 200 200 157 RELATED EXPENSES: Total 9,520 9,520 7,982
Training & continuing education 2001 1,250 1,250 996 program 2002 Vehicle maintenance 2,140 2,140 2,092 2003 Car rentals 100 100 20 Travel & living expenses in Israel, 2004 5,930 5,930 4,815 moving expenses 2005 Loan fund 100 100 59 MAINTENANCE Total 21,330 22,741 22,475
3001 Organizational expenses 1,300 1,300 1,235 3002 Office supplies 730 730 643 3003 Building maintenance & repairs 18,000 19,411 19,411 3004 Mail & telephone 1,050 1,050 996
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Line Line item Approved Updated 2013 budget item No. budget for budget for implementation 2013 2012 3005 Equipment, machinery & furniture 250 250 189 PROFESSIONAL ACTIVITY: Total 11,480 12,980 11,747
Licensing of investment advisors & 4002 2,900 2,400 2,377 portfolio 4004 Legal expenses 750 900 795 4005 Professional library 450 450 437 4007 IFRS (shared) 1,200 1,200 1,131 Auditing of corporations, mutual 4008 2,800 3,300 3,035 funds & advisors 4010 Investor education 400 580 502 4011 Advisor services to the ISA 750 2,250 2,127 4012 Seminars 400 220 114 4015 Academic research fund 700 550 323 4016 Foreign relations 420 420 400 4017 Internal auditing 230 230 113 4018 Preparation of financial statements 480 480 392 IT: Total 13,300 11,509 10,910
5003 Computer maintenance 11,500 9,900 9,854 5004 Purchase of digitized information 1,800 1,609 1,056 DEVELOPMENT BUDGET: Total 22,600 24,881 24,877
6001 IT (hardware & software) 17,600 18,851 18,851 6003 Buildings renovation 5,000 6,030 6,027 RESERVES: Total 4,560 2,659 -
7005 Salary reserves 2,600 2,600 - 7006 Inflation reserves 830 - - 7010 General reserves 1,130 59 - Revenues: Total (estimate) * (132,300) (132,300) (146,512) 9001 Prospectus fees (35,300) (35,300) (59,066) 9002 Annual fees (71,000) (71,000) (69,284) 9003 Net financing income (12,500) (12,500) (7,170) 9004 Investment advisor licensing fees (13,500) (13,500) (10,992) * In accordance with the decision of the Knesset Finance Committee, a temporary order was issued, according to which the ISA is to reduce the annual fees payable by corporations and individuals supervised by the ISA over the next five years, as follows: 40% per year for the first two years, 30% for the next two years and 20% for the fifth year. Thus, in 2013, there was a 30% reduction in fees payable by reporting entities (including dual listed companies), fund managers and the Stock
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Exchange. And a 40% reduction in fees payable by license holders, underwriters and information distributors. 7. The ISA's Budget for 2014
Approved Budget for 2014 (in NIS thousands) Line item Line item Approved No. budget for 2014 General : Total expenses: 185,490 Salaries: Total 99.700 [228] 1001 Salaries of ISA employees 75,950 1002 Provision for pensions & severance 11,900 1003 Overtime 5,200 1004 Temporary workers 500 [34] 1005 Legal interns and students 3,050 1006 Chairman's salary 840 1008 Expenses of ISA employees 260 RELATED EXPENSES: Total 9,350 Training & continuing education 2001 program 1,250 2002 Vehicle maintenance 2,250 2003 Car rentals 100 Travel & living expenses in Israel, 2004 moving expenses 5,650 2005 Loan fund 100 MAINTENANCE Total 23,850 3001 Organizational expenses 1,350 3002 Office supplies 760 3003 Building maintenance & repairs 20,300 3004 Mail & telephone 1,190 3005 Equipment, machinery & furniture 250 PROFESSIONAL ACTIVITY: Total 13,380
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Line item Line item Approved No. budget for 2014 Licensing of investment advisors & 4002 portfolio 2,200 4004 Legal expenses 1,110 4005 Professional library 450 4007 IFRS (shared) 1,350 4008 Audits and enforcement * 2,900 4010 Investor education 400 4011 Advisor services to the ISA 750 4012 Seminars 320 4015 Academic research fund 500 4016 Foreign relations 550 4017 Internal auditing 300 4018 Preparation of financial statements 500 Expenses for District Attorney's 4019 Office 2,050 IT: Total 14,550 5003 Computer maintenance 12,600 5004 Purchase of digitized information 1,950 DEVELOPMENT BUDGET: Total 20,100 6001 IT (hardware & software) 16,600 6003 Buildings renovation 3,500 RESERVES: Total 4,560
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Line item Line item Approved No. budget for 2014 7005 Salary reserves 2,600 7006 Inflation reserves 830 7010 General reserves 1,130 Revenues: Total (estimate) ** (134,750) 9001 Prospectus fees (45,000) 9002 Annual fees (69,150) 9003 Net financing income (7,500) 9004 Investment advisor licensing fees (13,100)
* Name of line item in 2013: Auditing of corporations, mutual funds & advisors. * In accordance with the decision of the Knesset Finance Committee, a temporary order was issued, according to which the ISA is to reduce the annual fees payable by corporations and individuals supervised by the ISA over the next five years, as follows: 40% per year for the first two years, 30% for the next two years and 20% for the fifth year. In 2014, there will be a 30% reduction in fees payable by reporting entities (including dual listed companies), fund managers and the Stock Exchange.
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8. Publications issued by the ISA during the reporting year
The information about the ISA's activity, including the following publications, is available to the public on the ISA's website, at the following address: http://www.isa.gov.il/Pages/default.aspx
The following is a lit of publications issued by the ISA during the reporting year:
Report on the Activities of the Israel Securities Authority for 2012 Final recommendations of the Committee for the Promotion of Investments in Public Companies Active in R&D; Interim Report of the Committee to Improve Trade Efficiency and Liquidity on the Stock Exchange; Interim Report of the Committee to Promote Investment in Public Companies Engaged in R&D.
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9. The locations and dates in which it is possible to view the written administrative provisions under which the ISA operates
As aforesaid, the information about the ISA's activity, including the following publications, is available to the public on the ISA's website, at the following address: http://www.isa.gov.il/Pages/default.aspx
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10. The ISA's databases, in accordance with the Protection of Privacy Law of 1981
Name of database Description and purposes of the database 1 Activity of portfolio Information regarding clients of portfolio managers managers and non-banking and clients of non-banking members of the Stock members of the Stock Exchange for the purpose of supervision and Exchange enforcement, in accordance with the ISA's authority over portfolio managers and non-banking members of the Stock Exchange. 2 BI Data relating to trading on the Stock Exchange for the purpose of supervision for ensuring fair and proper trading. 3 Databases of the Documentation of investigations and intelligence data Investigations, Intelligence allowing the ISA to investigate suspected violations of and Trading Control the law. Department 4 Corporations and Information regarding officeholders appointed by authorized signatories supervised entities to report through the MAGNA – (digital signatures) for the for the ongoing operation of the electronic reporting MAGNA System system and identification of reporting entities / individuals. 5 Licensing of investment Information on license candidates for licensing advisors & investment procedures and supervision over license holders. portfolio managers 6 Related / interested parties Information regarding individuals and companies defined as related / interested parties for the purpose of fulfilling the ISA's role in protecting the public investing in the capital market. 7 Payment system for Supplier information for payment purposes. suppliers and accounting 8 Payroll / Human Resources Information regarding ISA employees, serving the ISA's payroll and human resources management system.
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11. Funds and Grants Funded by the ISA
The Israel Securities Authority offers research grants on subjects bearing on Israel's capital market policies as a whole, and issues related to the ISA's purview in particular. These subjects include, inter alia: development of the capital market and removal of economic and regulatory failures, investor protection, increasing the investing public's confidence and increasing the public's awareness of capital market issues. The research grant amounts range from NIS 5,000 to NIS 40,000. Research proposals are reviewed and approved by a committee appointed by the ISA, inter alia, according to the following considerations:
- The importance of the subject, and the materiality of its implications; - Whether the study has regulatory applications; - Whether the researcher and his academic background are suited for conducting the study; - Whether the study can be completed within less than two years. - During 2013, the ISA paid NIS 16,183 in grant funds, according the pre-determined milestones, on the following subject matters: - The price discovery process on the bond market – daily review; - "Trader liquidity" as a new liquidity measure in financial markets.
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12. Backing provided by the ISA to public entities, their names and amounts
The Israel Accounting Standards Board The ISA, in cooperation with the Institute of Certified Public Accountants in Israel (ICPAS), established the Israel Accounting Standards Board (hereinafter – the Board) for the purpose of dealing with accounting standards. The Board is incorporated as a company with share capital, without nominal value, and reports to the Tax Authority as a non for profit company. The Board operates a balanced budget, and its shareholders are not entitled to net surplus or net interests in its assets and/or net asset income. The ISA and the ICPAS have equal rights in terms of ownership and appointing directors. The majority of the Board's budget is funded by the ISA, as well as by the ICPAS. The ISA funds 81% of the Board's budget each year. In March 2013, following an order handed down by the Legal Advisor to the Government, the ISA entrusted its membership in the Board to the General Comptroller at the Ministry of Finance (hereinafter – the Trustee), including power arising directly and explicitly solely from its membership (general meeting). Excluding these powers and the appended founders' agreement, this transfer does not derogate from the ISA's powers, including those derived from the Rules and Regulations. It was determined that during the trust period, the ISA will not be involved in acting pursuant to the powers transferred to the trustee, and the trustee will not accept new members or alter the company's incorporation documents. The trust will be terminated when a notice to that effect will be provided to the trustee by the ISA, after having been approved by the Legal Advisor to the Government, or after the Israel Accounting Standards Board has been regulated by law, in accordance with the Legal Advisor to the Government's decision. No alternative format has been developed for the Board for the interim period.
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13. Report by the Supervisor over Freedom of Information at the ISA, pursuant to Section 5(a) of the Freedom of Information Law of 1998
During the reporting year, the ISA received 28 requests for information. Five of them were formally submitted, pursuant to the Freedom of Information Law, as compared with eight such requests in 2012 and two requests in 2011. Out of all the requests submitted, six were granted and the requested information was delivered; two requests were partially granted; seven requests were withdrawn by the applicans; three requests were denied since the ISA was not in possession of the requested information (pursuant to Section 8(3) of the Freedom of Information Law); seven requests were denied since they pertainted, inter alia, to information that "had been published and is available to the public" (pursuant to Section 8(4) of the Freedom of Information Law); and three requests were denied since they related to "information whose disclosure is not mandated by any law" (Section 9(a)(4) of the Freedom of Information Law and Section 13 of the Securities Law of 1968).
As to the percentage of requests to which the ISA responded in the various dates prescribed by Section 7 of the Freedom of Information Law – out of the requests for information submitted and handled as of the end of the reporting period (unless these were not formally submitted pursuant to the Freedom of Information Law), the ISA responded to 62% in 30 days, to 14% – after a period of 30 days (pursuant to Section 7(b) of the Freedom of Information Law), approximately 19% – in 120 days (pursuant to Section 7(c) of the Freedom of Information Law) and one request, which constitutes 5% of the requests, was answered in 121 days.
During the reporting year, no petitions were filed regarding the Supervisor's decision. It is noted, that many public inquiries incidentally involve a request for information as defined by the Freedom of Information Law. These requests are not filed according to the procedure prescribed by the Freedom of Information Law, and although the responses to them requires disclosure of information as defined under the Freedom of Information Law, they are not included in the Supervisor's report.
In addition, the ISA is sometimes required to provide information as defined by the Freedom of Information Law pursuant to a judicial order as part of various legal proceedings to which the ISA is party. Such cases are excluded from the report as well.
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