1 ISRAEL SECURITIES AUTHORITY Annual Report 2019 Enhancing The Market to Drive the Economy
ISRAEL SECURITIES AUTHORITY ISRAEL SECURITIES AUTHORITY
Annual Report 2019
The following translation is intended solely for the convenience of the reader. The ISA does not assume any responsibility whatsoever as to the accuracy of the translation and is not bound by its contents. For the complete original text in Hebrew click here.
Table of contents
Definition of terms...... 5 From the Desk of the ISA Chair...... 6
Chapter A About the ISA...... 12 Our Vision...... 12 The ISA’s Strategic Goals for 2019-2022...... 12 The ISA’s Areas of Responsibility...... 13 The Scope of ISA Supervision ...... 14 ISA Senior Staff, Organizational Structure, and Departments...... 15 Contact the ISA...... 20
Chapter B Market Data from the Past Year...... 21 Market Capitalization...... 21 The Primary Market...... 22 Traded Corporations...... 29 Mutual Funds...... 31 Investment Advisers, Investment Marketers, and Investment Portfolio Managers ...... 38
Chapter C Highlights of the ISA’s Activities...... 40 First Goal - Maintaining a Fair Capital Market...... 40 Enforcement...... 40 Regulation and Supervision...... 65 ISA Invests in Investors...... 76 Second Goal - Enhancing the Public Capital Market...... 78 Third Goal - Advancing Technological Innovation in the Capital Market ...... 88 Fourth Goal - Promoting Competition in the Capital Market...... 96
Chapter D Budgets 2019, 2010...... 102 Report of the Freedom of Information Officer, Pursuant to Section 5(A) of the Freedom of Information Law...... 106 Public Enquiries...... 107 ISA Brochures and Guides for the Public Published in 2019...... 108 ISA Databases Registered According to the Freedom of Information Law...... 108 ISA Funds and Grants...... 109 ISA Support to Public Institutions...... 109
Chapter E Corporate Social Responsibility...... 110 5 ISRAEL SECURITIES AUTHORITY Annual Report 2019 Enhancing The Market to Drive the Economy
Definition of terms
TASE - Tel Aviv Stock Exchange Ltd.
ISA - Israel Securities Authority
Trading platforms - Trading platforms for their own account
AML Law - Prohibition Against Money Laundering Law 5760-2000
Administrative Enforcement Law - Increased Efficiency of the Israel Securities Authority
Enforcement Proceedings (Legislative Amendments) 5771-2011
Companies Law - Companies Law 5759-1999
Investment Advice Law - Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Law 5755-1995
Penal Law - Penal Law 5737-1977
Joint Investments Law - Joint Investment Trust Law 5754-1994
Freedom of Information Law - Freedom of Information Law 5759-1998
Securities Law - Securities Law 5728-1968
Prohibition Against Money Laundering Order - Prohibition Against Money Laundering Order (Stock Exchange Members’ Duties of Identification, Reporting and Record Keeping to Prevent Money Laundering and Terror Financing) 5771-2010
Periodic and Immediate Reports Regulations - Securities Regulations (Periodic and Immediate Reports) 5730-1970
IOSCO - International Organization of Securities Commissions
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From the Desk of the ISA Chair
May 20, 2020 Iyar 26, 5780
Att: MK Israel Katz Knesset Finance Committee, Chair Ministry of Finance Israel Knesset
Re: Report on the Activities of the Israel Securities Authority in the Year 2019
I respectfully submit a report on the activities of the Israel Securities Authority (ISA) in the year 2019.
At the drafting of this letter, the countries of the world, including Israel, are dealing with a pandemic, the COV19 virus. I will therefore begin by addressing the effects of this situation. The implications of the spread of the virus for real and financial activity around the world are expressed as a substantive change in the business operations of companies and entire sectors. As a result, the market experienced sharp fluctuations in the values of traded assets, on a scale that the market has not experienced for more than a decade. In this period, the ISA operated in an emergency format through a forum of department representatives that monitored developments both in and outside Israel, and maintained direct ongoing contact with the supervised entities, in order to provide a professional response to emerging needs. The team took steps to ensure that the reporting corporations publish relevant and reliable information to help investors to make responsible investment decisions.
History has proven that downward slides in the markets, while sharp, are temporary. Nonetheless, we are unable to predict the duration or intensity of these changes. Because it is impossible to predict the future, the ISA, together with the other financial regulators in various forums, took steps to support the economy and the capital market. At the same time, the professionals at the ISA continued to offer the most professional and efficient service possible in order to protect the investing public In view of the crisis, the ISA adjusted its work plan for the coming year. The ISA studied several options for supporting and reinforcing the economy and the capital market to minimize the adverse effects created by the global COVID-19 pandemic.
The following report reflects the ISA’s work in 2019 and therefore the data presented in this report were prepared in view of the information that was available and relevant at the time.
In the reporting period, the ISA addressed the effects of the global era on Israel’s capital market regulator, and the need to take into account developments in the international arena. Global competition is increasing, standards are changing, and there is a clear need to ensure that the Israeli capital market is aligned with these changes in order to realize our desire to bolster the capital market’s appeal as a magnet for major international actors.
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From the perspective of the ISA, its regulatory duties include preparing for the future, and therefore the ISA must plan, take proactive steps, and assume a leadership position in designing the optimal regulatory architecture that will make it possible to drive and develop the capital market. Laying the foundation for modern regulation will support and encourage new growth engines and the adoption of leading global trends, especially accelerated technological developments.
The ISA’s vision and strategic plan were developed according to this view, and in the past two years the ISA has taken steps to implement both, in order to maximize the capital market’s potential for the benefit of Israel’s economy and its citizens.
The ISA’s vision centers on the understanding that the ISA will play an active role in establishing and expanding a public market that is attractive, fair, competitive, and innovative, in order to contribute to the development of Israel’s economy, all while protecting the interests of the investing public.
Implementation of the ISA’s vision and strategic plan depend, among other things, on promoting regulation through legislative procedures in the Knesset. In this respect, the past year has been challenging, and despite its efforts to realize its vision and strategic plan, the ISA was limited in its ability to promote significant reforms or legislative amendments in the Knesset. Nonetheless, through creative efforts and collaboration with public and private actors, the ISA successfully advanced a large number of important projects. The goals of these projects are inter-related and each project led by the ISA constitutes a critical piece of the entire fabric. Together, these projects are expected to propel Israel’s capital market forward to assume a position at the forefront of the world’s most advanced capital markets.
Four strategic objectives comprise the foundations of the ISA’s strategic plan: Maintaining a fair capital market; Enhancing and expanding the public capital market; Increasing competition in the capital market; Promoting technological innovation in the capital market.
Maintaining a fair capital market To achieve this goal, the ISA operates concurrently in several avenues. In the past year, alongside diverse investigations of core securities violations, significant efforts were devoted to inside information violations. The ISA also took proactive steps to supervise the supervised entities in the capital market and to enforce normative conduct. At the same time, the ISA works on projects designed to update compliance norms, encourage voluntary compliance of best regulatory practices by companies and investors, and bolster the inner circles of the gatekeepers who are in charge of the public’s investments.
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For example, as in previous years, in the past year the ISA placed special emphasis and invested substantial resources in the field of unsupervised investments. In this period, the ISA handled a large number of cases involving unsupervised ventures that operated illegally.
In addition, the ISA promoted several major projects in this field. For example, for the first time, the ISA published a document outlining its policy in all enforcement areas. Publication of the document is in line with the ISA’s values and its desire to promote transparency and share information on its actions involving the capital market. The document encompasses ISA policy in the three areas of enforcement: criminal enforcement, administrative enforcement, and involvement in private enforcement actions.
The ISA also made significant investments to bolster the technological infrastructure used by its Investigations, Intelligence, and Market Surveillance Department. The ISA initiated and invested in studies and research on new areas such as digital trading and cryptographic currencies.
Furthermore, the ISA continues to take action to strengthen the market’s gatekeepers by refining and revising staff positions and guidance on the activities of gatekeepers, such as directors, underwriters, and trustees.
Enhancing the public capital market In 2019, the ISA took action to diversify the range of investment vehicles available on the local market, with the aim of driving market growth. Within these steps, the ISA is promoting the establishment of a securitization market and, together with the TASE, developed new investment vehicles, including hybrid bonds and R&D partnerships.
In the reporting year, the ISA invested extensive efforts to connect the capital market to Israel’s high-tech sector. The ISA recognizes the significance of the local high-tech sector and its contribution to economic growth. In view of the fact that the major share of financing for this sector comes from foreign investors, the ISA is working to enhance the capital market’s access to this sector. The ISA’s aim is to diversify the sources of capital available to Israel’s high-tech sector and to allow the investing public in Israel to share the sector’s success. The ISA therefore established an advisory committee on technology and the capital market whose members are key actors in the high-tech industry, the academia, venture capital funds, and institutional investors. The committee’s teams are examining and mapping the barriers and challenges that constrain ties between Israel’s high-tech sector and its capital market, with the aim of devising appropriate solutions and actions.
Increasing competition in the capital market At the local level, in order to promote competition with the banks in the brokerage sector, the ISA continued to support the recommendations of the brokerage report that was published in conjunction with the Competition Authority, and the Broker-Dealer Law. At a broader level, the ISA promotes the adoption of the international standards applied in advanced capital markets in order to address growing competition and to attract investments in Israel’s capital market. The ISA’s activities to integrate technological innovation are expected to create access to the capital market for new target audiences, and support competition between new actors that use advanced digital tools.
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In 2016, the ISA laid the foundation for public offerings of foreign funds that meet the conditions defined in the Regulations. Today, as a result of the ISA’s strategic efforts to develop the capital market and promote competition, six of the world’s leading foreign fund managers offer 16 active funds and 23 ETFs to the public. The ETFs are listed on the TASE as dual-listed securities.
Promoting technological innovation in the capital market The ISA studies technological trends and developments with an aim of creating a supportive regulatory environment for technological innovation in general, and specifically for innovations in the field of Financial Technology (FinTech). Cultivating technological innovation is consistent with the ISA’s forward-looking perspective and its aspiration to create value for the investing public and to drive economic growth by increasing the resilience of the capital market, in line with its statutory duties.
In view of recent acceleration of technological developments, technological innovation has become a key component of the ISA’s work. In recent years, the investing public has changed their consumption patterns of financial services, and a new, younger cohort of investors has entered the market. The new technologies challenge existing regulation that was designed several decades ago, and structural and operating adjustments are critical in order to maintain its relevance to the markets and to the world.
In 2019, the ISA promoted the General Investment Advice Law, which will support greater competition in the field of digital investment advising, facilitate FinTech innovations in this sector to operate in Israel and offer the public general investment advice services through advanced digital channels. The ISA also promoted an innovative investment portfolio management service (2.0 Investment Portfolio Management Service"). Its focus on technological innovation has also motivated the ISA to adopt and implement blockchain technology in its own systems.
At the international level, the ISA signed several bilateral agreements with the US and France to solidify technological cooperation, and also played a role in launching the Global Financial Innovation Network (GFIN).
The ISA promoted several significant projects in 2019: the digital markets project, and the launch of a data science program for entrepreneurs, together with the Innovation Authority.
The world is now taking its first steps to institutionalize digital markets. The ISA believes that this is an important step forward in opening the Israeli capital market to the world and establishing its position at the forefront of the field, in line with the leading and most advanced markets in the world, especially in view of the leading role of Israel’s high-tech industry in these global trends. Accordingly, in July 2019, I appointed an interdepartmental committee to promote and institutionalize digital markets in Israel. The Committee studied the feasibility of introducing digital markets in Israel, and focused on securities issuance, trading, and settlement platforms based on Distributed Ledger Technology (DLT). One of the Committee’s main conclusions is that DLT has the potential to advance the Israeli capital market. Adopting this technology could reduce trading costs to end customers and systemic risks to the economy, create a technological environment that encourages financial innovation and opens up the capital market to classes of companies such
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as SMEs, which previously refrained from financing their operations by participating in the public capital market. The ISA is currently conducted meetings with local and foreign entrepreneurs to study and define the proper conditions necessary for institutionalizing digital markets in Israel.
The Data Science Program for entrepreneurs is a joint program of the ISA and the TASE that was developed under the Innovation Authority’s pilot program. The program invites FinTech start-up companies to develop solutions for challenges that are top priority for the capital market and the ISA. Program participants will benefit from the added value of access to ISA databases and TASE trading data. The program is designed to facilitate the adoption of technological innovations that will promote and advance the capital market.
In line with its efforts to bolster and expand the public capital market, the ISA intends to invest in developing new investment products and take action to increase major international firms’ access to the capital market, for example, through the adoption of international standards. To this end, the ISA is promoting reporting in the English language, and adoption of the I-XBRL standard that is used by leading markets worldwide. Achievement of these targets will open the Israeli capital market to investors from all over the world.
The ISA is committed to the advancement of competition as a key strategic goal and a fundamental element that will generate considerable benefits for consumers and reduce the costs of a range of financial products. Its commitment to promoting competition is always balanced by its commitment to ensuring that the Israeli capital market conforms to the highest regulatory standards practiced worldwide.
The ISA will continue its vigorous efforts to ensure that the Israeli capital market is fair, advanced, and attractive to companies and investors both in and outside Israel.
respectfully, Anat Guetta Chairwoman, Israel Securities Authority
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Chapter A - About the ISA
The Israel Securities Authority (ISA) operates under the Securities Law, which defines the ISAS’s role “to protect the interests of the public investing in securities”.
Over the years, the capital market has become one of the main pillars of Israel’s economy. The capital market allows firms and businesses to raise money to expand their business operations, and in this way contributes to economic growth, employment, and innovation. At the same time, the capital market makes it possible for the general public to benefit from the success of the economy’s leading firms by investing in them, and thus increases the profitability of the public’s savings.
The ISA is committed to protecting the interests of the investing public by defining stringent norms of conduct, enforcing compliance with these norms by all capital market actors, and promoting the development of a diverse, competitive capital market.
Our Vision The Israel Securities Authority works to establish a thriving public capital market that is attractive, fair, competitive, and innovative, with the aim of contributing to the further development of the Israeli economy while protecting the interests of the investing public.
The ISA’s Strategic Goals for 2019-2022
Maintaining a fair capital market
Advancing technological Enhancing the public innovation in the capital capital market market
Promoting competition in the capital market
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The ISA’s Main Areas of Responsibility
A. Supervision of corporations that offer their securities to the public, including issuance of permits to publish prospectuses that are the basis for public securities offerings, and review of the corporations’ reports;
B. Supervision of mutual fund managers, including issuance of permits to publish prospectuses that are the basis for mutual funds’ offerings of their units to the public, and regulation of their operations;
C. Licensing of portfolio managers, investment advisers, and investment marketers, and supervision and regulation of their operations;
D. Supervision of compliance of portfolio managers and non-bank exchange members with their obligations under the Prohibition against Money Laundering Law;
E. Supervision of the proper and fair management of the stock exchange;
F. Licensing of trading platforms to their own account, and supervision and regulation of their operations;
G. Licensing of offering coordinators and supervision and regulation of their operations;
H. Supervision of underwriters’ operations;
I. Licensing of rating companies, and supervision and regulation of their operations;
J. Inspections of the supervised entities to review for compliance with the Securities Law, the Joint Investment Trust Law, the Investment Advice Law, and other laws under the ISA’s responsibility;
K. Investigations of violations of the Securities Law, the Joint Investment Trust Law, the Investment Advice Law, and other laws related to such violations;
L. Administrative enforcement proceedings, ranging from inquiries concerning administrative offenses under the Securities Law, the Joint Investment Trust Law, and the Investment Advice Law, to the commencement of administrative proceedings before the Administrative Enforcement Committee, at the order of the ISA Chair;
M. The ISA, jointly with the Institute of Certified Public Accountants in Israel, participates in funding and operating the Israel Accounting Standards Board.
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The Scope of ISA Supervision The supervised entities 442 85 24 3,532 1,565 Public companies Bond issuers Stock exchange Individual licensees Mutual funds members 562 4 22 2 166 Exchange traded Licensed trading Underwriters Credit rating Portfolio management, funds (ETFs) platforms companies investment advising, and investment marketing firms app. 5.2 6 billion NIS Total daily offering coordinators trading volume on the TASE
259 Mutual funds 295 AUM of portfolio 93 ETFs management firms ISA regulation affects app. NIS 2.5 trillion of the total 533 NIS 4 trillion liquid assets Government bonds 820Shares and convertible securities held by the public
120 Bank of Israel 374 treasury bills Corporate bonds
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Isa Senior staff
Plenum Ms. Anat Guetta ISA Chair
Mr. Amir Wasserman, Adv. Oded Spirer, Adv. Sarah Kandler, Adv. Legal Counsel Director General Senior Advisor to ISA Chair
Offir Eyal, Adv. Dorit Kadosh, CPA Mr. Dudu Lavi Mr. Noam Katz Amir Helmer, Adv. Mr. Natan Hershkovitz International Affairs and Corporate Finance Investments Department Administration, Finance, Inspections and Information Systems Business Development Department and Human Resources Examinations Department Department Department
Ms. Hadar Horen Itzik Shurki, CPA Zippi Gez, Adv. Judith Tirosh, Adv. Mr. Ilan Gildin Dr. Ilana Lipsker-Modai, Spokeswoman and Public Stock Exchange and Investigations, Securities Department Research, Development Adv. Administrative Education Officer Trading Platforms Intelligence, and Market in the Tel Aviv District and Strategic and Enforcement Supervision Department Surveillance Department Attorney’s Office Economic Consulting Department
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The ISA Plenum
According to the Securities Law, the ISA Chair and Plenum members are appointed by the Minister of Finance. Several members are members of the public, several are government employees and one is an employee of the Bank of Israel.
The Plenum operates through its committees, which focus on the following topics: applications for permits to publish a prospectus; matters related to the supervision of the stock exchange and trading platforms; the ISA’s budget and funds; internal audits; permits and licenses granted according to the Funds Law, the Rating Law, and the Investment Advice Law; monetary fines; and financing class and derivative actions.
The ISA Plenum generally convenes monthly. In 2019, the Plenum’s activities were more limited than previous years, mainly due to the extended elections period, which limited Plenum members’ appointments and postponed filing of legislative initiatives and bills whose advancement is conditional upon Plenum discussions.
Plenum Members in 2019 Ms. Anat Guetta, Chair Ms. Shlomit Barnea Farago, Attorney Mr. Hani Haj Ihiya, CPA, Attorney Mr. Baruch Lubart, Attorney Mr. Tamim Saad, Attorney Ms. Michal Akabiya, Attorney Mr. Micky Kahn
Meetings of the Plenum and its committees in 2019 ISA Plenum – 6 meetings; Disclosure and Reporting Committee – 54 meetings; Secondary Market Committee – 7 meetings; Fines and Sanctions Committee – 4 meetings; Supervision and Regulation Committee – 6 meetings; Finance Committee – 4 meetings; Audit Committee – 4 meetings.
Number of Personnel in ISA At end December 2019, the approved number of positions was 262 (including internships and student jobs), of which 257.42 positions were filled. 93% of personnel are individuals with an academic degree, most of whom of attorneys, accountants, and economists.
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The ISA’s Departments
The Legal Counsel Department - The Legal Counsel provides legal counsel to all ISA units, oversees all legal aspects of ISA actions, and directs the supervised entities on the provisions of law and their interpretation. The Department provides guidance and legal support to ISA departments, and audits their operations to ensure that activities conform to the ISA’s powers, policies, and positions. The Legal Counsel is involved in decision making on cross-functional issues as well as in specific decisions of special importance, and promotes key projects that are on the ISA’s agenda. The Legal Counsel also leads and promotes legislation and other regulatory statements related to ISA operations, and is responsible for maintaining a dialogue with all government ministries, the Knesset, and the supervised entities on these matters. The Department represents the ISA’s position in legislative actions that are relevant to ISA operations although not initiated by the ISA. The Department also handles legal proceedings in which the ISA is involved or is a party, coordinates responses to public enquiries and requests according to the Freedom of Information Law, handles the legal aspects of ISA’s administrative matters such as its agreements and tenders, and assists in the professional in-service training of the ISA’s legalists.
The Corporate Finance Department - The Corporate Finance Department is responsible for monitoring all the corporations that issued securities to the public to raise debt or capital. The Department aims to ensure that these corporations’ disclosures meet legal requirements and constitute a fair basis for investment decision making. To fulfill its duties, the Department operates on three levels: regulation, supervision, and enforcement. In the area of regulation, the Department develops disclosure requirements and adapts them to the developments in the capital market to ensure that disclosures optimally serve investors’ interests, reflect relevant and material information, and increase the use of corporations’ reports in investment decision making. In the area of supervision, the Department ensures that the reporting corporations comply with applicable reporting requirements. In the area of enforcement, the Department reviews reporting corporations or their interested parties for compliance with the law, and refers cases of non- compliance and violations to the relevant enforcement officers in the ISA.
Investment Department - The Investment Department is responsible for the development, supervision, and regulation of the mutual funds, investment advising, investment marketing, and portfolio management sectors. The Department handles the following areas: licensing of companies and individuals - a broad range of activities such as administration of licensing exams, exemption requests, oversight of internships, and all matters related to reliability and compliance; mutual funds - reviews of prospectuses and reports, publication of circulars, regulation, corporate governance issues, approvals to fund managers and fund trustees and permits of control in funds; investment advising - supervision of several thousand advisers who are licensed according to the Investment Advice Law, including investment advisory functions in banks, with the aim of ensuring fair and professional treatment of customers. Supervisory functions include reviews of licensees’ work and compliance with the law, handling public complaints, meetings, and publication of circulars.
Stock Exchange and Trading Platforms Supervision Department - This Department is responsible for the regulation of the operations of the stock exchange, the clearing houses, and the trading platforms, with emphasis on the fair and equitable operations of the stock exchange, which handles the major share of all capital market activities. The Department handles the
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stock exchange’s requests to modify its by-laws and directives, conducts regular audits of the stock exchange’s ongoing activities, and takes action to develop and expand its operations. The Department also oversees the securities clearing and settlement systems, including their compliance with their obligations and requirements according to accepted international standards. The Department also oversees the proper and fair management of trading platforms, handles trading platform license applications, and reviews the products offered on the trading platforms to ensure that they are properly managed.
Investigations, Intelligence, and Market Surveillance Department - The Department is responsible for ensuring that the capital market and trading are fair and equitable. The Department takes action to identify, expose, and take enforcement measures against capital market offenders. The Department conducts trading inspections to identify irregular activities on the stock exchange and analyze trading irregularities and trends. The Department manages investigative proceedings concerning suspected criminal conduct in the capital market and administrative inquiry proceedings to examine suspected administrative violations in the capital market. In its efforts to eradicate financial crime, its criminal investigations cover securities violations as well as violations of the Penal Law and the Prohibition of Money Laundering Law. The Department collaborates with various enforcement agencies in Israel and in other countries, and responds to letters foreign agencies’ requests for assistance according to international treaties to which the ISA is a signatory.
Administrative Enforcement Department - The Department is responsible for administrative enforcement actions, and ensures that enforcement measures are efficiently and accurately proportionate to violation severity. The Department serves as the ISA’s administrative prosecution, and develops administrative pleadings after reviewing the relevant inquiry materials referred by the Investigations, Intelligence, and Market Surveillance Department. The Administrative Enforcement Department also assesses whether closed criminal cases contain evidence that may serve as grounds for administrative proceedings, and advises the ISA Chair to commence administrative proceedings in the appropriate cases. The Department also coordinates and manages monetary sanction proceedings and is involved in ongoing cross-departmental enforcement issues.
Securities Department at the Tel Aviv District Attorney’s Department - The Department operates within the Tel Aviv District Attorney’s Office (Taxation and Economics), and its professional decisions are guided by the State Attorney’s Office and the Attorney General. The Department specializes in all aspects of criminal litigation and the prosecution of cases investigated by the Investigations, Intelligence, and Market Surveillance Department. As a part of the Tel Aviv District Attorney’s Office (Taxation and Economics), the Department has broad powers of prosecution, and the indictments it handles concern securities violations, Penal Law violations, Prohibition of Money Laundering Law violations, and tax violations when appropriate. The Department specializes in handling violations in these areas perpetrated in public company settings or with respect to stock exchange trading. As a rule, indictments that the Department handles are brought before the Economics Department of the District Court. The Department is also skilled in handling Supreme Court appeals against District Court decisions in these areas. The Department has extensive experience and knowledge in handling cases with multiple accounting and financial issues. The Department also has expertise in the prosecution of corporations and functions in an advisory capacity to the Ministry of Justice and represents the District Attorney’s Office in various forums.
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Inspections and Examinations Department - The Inspections and Examinations Department was established in late 2019 following a strategic decision to consolidate the ISA’s departmental inspection units into a single, independent department with a holistic perspective on the ISA’s organizational needs. The decision reflects the recognition that an organization-wide inspection function will make optimal use of the ISA’s supervisory tools in line with ISA priorities, based on the risk level of each area of ISA activity, and will offer greater flexibility in planning and performing risk-based inspections. The Department will conduct inspections in the majority of the areas supervised by the ISA, including mutual fund managers and trustees, trading platforms, investment portfolio managers, advisory functions in banks, and reporting corporations. Future inspections will focus on supervised entities’ compliance with the law. Inspections will stress corporate governance, various aspects of IT operations, and implementation of AML/CTF directives, where relevant. Inspections of reporting corporations cover legal and accounting issues and valuations. The Department will also handle cross-departmental issues related to unsupervised entities and ventures. In this capacity, the Department will coordinate the treatment of business ventures whose their compliance with the laws under the ISA’s supervision, is questionable. The Department works under the Director General of the ISA.
Department of International Affairs and Business Development - The Department is responsible for all the international aspects of the ISA’s operations, and implements the ISA’s strategy to adapt its work to globalization, with the aim of opening the Israeli capital market to leading global markets. The Department promotes the implementation of international standards in Israeli securities laws to enhance the local market’s appeal to foreign investors and companies, and employs various methods to encourage leading international financial players’ involvement in the Israeli capital market. The Department plays an active and formative role in IOSCO policy development, and is responsible for the ISA’s growing cooperation with regulatory commissions and enforcement agencies worldwide.
Research, Development, and Strategic Economic Consulting Department - The Department is responsible for the research, development, and strategic economic consulting that supports the ISA’s operations. The Department renders consulting services based on the following elements: ongoing monitoring of the capital market and economic developments in and outside Israel; examination of the implications of decisions and specific events for the ISA’s work and for the capital market, and; generic research on issues with far-reaching implications for the capital market. In these functions, the Department uses digitized databases and measures that are developed and maintained by the Department. The Department is also responsible for the development of specific decision-support systems.
Administration, Finance, and Human Resources Department - The Department is responsible for the management of the ISA’s finances, human resources, and procurement and professional agreements. Financial management – corporate fee collection system, annual budget, obtaining budget approval from the Ministry of Finance and the Knesset Finance Committee and others; Human resources management – personnel, positions, hiring decisions, salary, labor agreements, terms of employment, career paths, professional training, and employee welfare. Procurement and professional agreements – the Department is responsible for the management of the ISA’s material resources. The Department also handles security and workplace safety. Since the ISA’s organizational restructuring in November 2019, the Department works under the Director General of the ISA.
Information Systems Department - The Department is responsible for all ISA computer systems, and thus serves the general public, the supervised entities, and ISA employees. The Department is an active partner in defining the ISA’s IT strategy, and implements the strategy according to the approved annual work plan. Since the ISA’s organizational restructuring in November 2019, the Department works under the Director General of the ISA.
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Contact the ISA
Contact the ISA including Public Inquiries:
Using the electronic form available on the ISA website - or By mail: ISA, 22 Kanfei Nesharim Street, Jerusalem 9546434 Tel: 02-6556555
Contact other ISA units that provide services to the public
Contact other ISA units that provide services to the public on the ISA’s website1.
Contact the Freedom of Information Office
To file a request according to the Freedom of Information Law or submit a question, contact Attorney Hanoch Hagar By Email: [email protected] or By Telephone: +972-2-6556456
The ISA invites you to follow ISA activities and on social media
Facebook: Israel Securities Authority
Youtube: Israel Securities Authority
LinkedIn: Israel Securities Authority
Information on the ISA’s activities are published and available to the public on the ISA website at: http://www.isa.gov.
1. Enquiries on topics such as whistleblowing, information on investment advisers, and information on licensing.
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Chapter B - Market Data from the past year
The following chapter presents data on the capital market for the year 2019. Several topics are presented with comparison figures for previous years, until the beginning of the decade. This chapter is followed by a review of the ISA’s activities in 2019, and offers an overview of the scope of ISA’s supervision and key capital market trends.
Market Capitalization
Moderate growth is evident over the past decade, especially as a result of the appreciation of existing assets. The composition of the market also changed in this period, with a declining share of the industrial sector and an increase in the financial and real estate sectors. Following are data at end 2019 in comparison with end 2009.
Total shares and participation units traded on the stock Financial sector – Increase of app. NIS 170 billion, 21% of exchange - app. NIS 820 billion compared with app. NIS 710 the market. billion at end 2009. Real estate sector – app. NIS 174 billion, 21% of the total Industrial sector – app. NIS 190 billion, 23% of the total market value of shares and participation units. In the past market value of shares and participation units. This sector decade, the market capitalization of this sector tripled. illustrates gradual decline, mainly due to the decline in market capitalization of the pharm sector.
Market value of shares and participation units, by sector, 2009-2019
1% 1% 1% % % 2% 2% 2% 1 2 % 7% 5% % 2% % 6% 7% 8% 10 7 2% 4 5% 5% 2% 59% 4% 53% 46% 47% 46% 37% 31% 42% 44% 44% 23%
8% 7% 12% 12% 10% 6% 7% 7% 6% 6% 7% 21% 14% 15% 14% 15% 12% 11% 10% 13% 16% 18% 10% 11% 10% 9% 7% 10% 10% 12% 16% 16% 21% 12% 14% 14% 12% 10% 14% 14% 13% 17% 19% 21% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Finance Real estate and construction Investments and holdings Commerce and services Industry Oil and gas exploration Energy
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The Primary Market 2019
The stock market - Capital raised Seven companies raised app. NIS 3.2 billion in IPOs, which constitute app. 22% of all issuances. Total capital raised through issues on the stock market was app. NIS 15 billion, which was double the capital raised through issues in 2018.
Capital raised in shares and participation units (NIS millions), 2014-2019
38,320 24.5% 24.3% 26,971 21.8%
14,710 13,893 11,672 9.8% 7,529 1% 0.4%
2014 2015 2016 2017 2018 2019
IPOs % All issuances
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IPOs percentage of total stock market capitalization, by country, 2014-2019
0.70%
0.70% 0.56%
0.70%
0.70% 0.35%
0.70% 0.29% 0.26%
0.70%
0.70%
0.02% 0.04% 0.70% 2014 2015 2016 2017 2018 2019
USA UK France Germany South Korea Israel
Source: Bloomberg
The above graph illustrates the significant growth in IPOs as a percentage of total market capitalization in Israel between 2017 and 2019, which is significant even in comparison to the other countries plotted on the graph: UK, USA, Germany, France, and South Korea. In 2019, IPOs accounted for a higher percentage of total market cap than any of these countries.
Issues of tradable corporate bonds - Debt raised
App. NIS 72 billion raised in corporate bond issues by 132 More than 80% of the bond issues were rated ilA- or above, companies. In the period 2016-2019, app. NIS 60-70 million according to the Israeli rating scale. was raised in corporate bond issues each year.
Volume of tradable corporate bond issues (NIS billions), 2014-2019
3 4 4 1 13 20 37 55 65 68 52 68
2014 2015 2016 2017 2018 2019
Corporate bonds Institutional trading market system (Retzef)
* Including convertible bond issues
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Capital raised and private placements of shares, convertible securities and bonds (in NIS millions), 20192
Shares, option warrants, and convertible bonds:
Public offerings Option warrants exercised
Shares and options issued on the local market 7,784 Stock options 700
Rights issues 209 Participation unit options 80
Convertible bonds issued on the local market 321 Convertible bond options 51
Offerings in foreign markets 689 Total shares, option warrants, and convertible bonds 16,123
Private placements Bonds
Shares and option warrants issued on the local 4,146 Public offerings - Corporate bonds 63,967 market Issues to employees 19 Private placements- Corporate bonds 4,626
Convertible bonds issued on the local market 32 Institutional bonds (on Retzef, the institutional 3,781 trading platform) Capital raised in foreign markets 2,093 Nesher bonds (non-listed securities system) 2,919
Convertible bonds issued on foreign markets 0 Total bonds 75,292
Total capital raised in public offerings and private 91,415 placements
Source: TASE website
Developments in TASE volumes and liquidity indices
In 2019, the daily trading volume in shares and participation Trading volume in government bonds also remained units was app. NIS 1.1 billion (NIS 974 million excluding unchanged from 2017 and 2018, with a daily average off-exchange trading), which is similar to the daily trading volume of app. NIS 2.6 billion. volume in the two previous years, 2017-2018, yet represents a 21% increase from 2016. On average, 90% of the daily Trading volumes in tradable corporate bonds declined trading volume in shares and participation units takes place by app. 12% in 2019, compared to 2017-2018, with a daily on the TASE. This figure does not include daily trading average volume of app. NIS 800 million. volume in ETFs, which in 2019 was app. NIS 200 million, on average.
2. Excluding index products.
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Average Daily Trading Volume, by security type (NIS millions) , 2012-2018
641 709 532 426
465 460 457 434
123 165 98 82 106 47 26 114 135 97 85 89 3 43 38 25
2,448 2,661 2,694 2,640 2,274 2,153 2,193 2,187 765 784 742 891 806 969 949 974 788 785 704 727 789 844 875 771
2012 2013 2014 2015 2016 2017 2018 2019 2012 2013 2014 2015 2016 2017 2018 2019 2012 2013 2014 2015 2016 2017 2018 2019
Government bonds Shares and participation units Corporate bonds*
TASE Off-Exchange
* Corporate bonds include tradable corporate bonds and convertible bonds, and do not include financial instruments.
Similarly to leading European indices, the average daily trading volume in the TA125 index has grown since 2012. The following graph illustrates the changes in the daily trading volume in TA125 compared to leading indices overseas.
Changes in the daily trading volume in TA125 compared to leading foreign indices, 2012-2019 The graph illustrates the leading US stock index increases volume significantly in compared to the other indices.
Change %
90
80
70
60
50
40
30
20
10
0
2012 2013 2014 2015 2016 2017 2018 2019
S&P 500 FTSE 100 CAC 30 DAX Index TA 125
Table of contents 26 ISRAEL SECURITIES AUTHORITY Annual Report 2019 Enhancing The Market to Drive the Economy
The improvement in liquidity is also reflected in a significant decrease in Bid-Ask spreads since 2008. However, there has been a slight increase in the last two years.
Median Bid-Ask Spread, by security type, 2008-2019
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0% 17/2/2008 17/2/2009 17/2/2010 17/2/2011 17/2/2012 17/2/2013 17/2/2014 17/2/2015 17/2/2016 17/2/2017 17/2/2018 17/2/2019
Shares and participation units Corporate bonds TA125
The above figures indicate that no significant change occurred in recent years in daily trading volumes in shares and participation units, and the daily average remained app. NIS 1.1 billion. A slight decline is evident in the daily trading volume in tradable corporate bonds, which totaled app. NIS 771 million on average. In contrast, the daily trading volume in large-cap shares (TA 125) increased. The longitudinal figures (2008-2019) indicate improved liquidity in all security types.
Activities of credit rating companies and changes in corporate bond ratings3
In the past decade the tradable corporate bond market In the past decade, the percentage of bonds that have a expanded to include app. 700 corporate bond series. low rating or are non-investment grade declined (from 56% to 16%) and their share of market capitalization of the bond In the past decade, market capitalization of tradable series also declined (from 19% to app. 5%). corporate bonds almost doubled and by end 2019 reached app. NIS 380 billion. In the past decade the market At end 2019, there were 146 tradable corporate bond series capitalization of corporate bonds almost doubled. (21% of all bond series on the market) that were rated by both rating companies operating in Israel (Maalot and At end 2019, high rated bonds (ilAA-ilAAA) accounted for Midroog). The market capitalization of these series totaled 66% of the market capitalization of total tradable debt, NIS 157 billion, and they accounted for app. 42% of the similarly to 2007. Slightly less than one third (30%) of market capitalization of all corporate bonds. the total tradable debt had a moderate rating (ilA-ilBBB) and only app. 5% received a low rating or was unrated Today, approximately one third of the series were given a (compared to 2007, when app. 19% of the total debt high rating (ilAA-ilAAA) by Maalot or Midroog. Approximately received a low rating or was unrated). one half of the series have a moderate rating (ilBBB-ilA), and app. 16% have a low rating or are unrated.
3. Local ratings only, awarded by Maalot or Midroog rating companies.
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Corporate bond series by rating, 2007-2019
56.4% 24.7% 15.7%
47.2% 7.5% 48.8%
19.6% 36.8% 24.1% 19.0%
2007 2013 2019
Unrated Low rating Moderate rating BBB-A High rating AA-AAA
Tradable corporate debt value by rating, 2007-2019
4% 4% 19% 3% 1% 49% 18% 30%
63%
44% 66%
2007 2013 2019
Unrated Low rating Moderate rating BBB-A High rating AA-AAA
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Corporate bonds rated by both rating companies concurrently, 2014-2019
% 43.7% 45.2 % 41.3% 41.8 % 39.4 37.9 %
% % 22.0 % 20.7 % 21.2 18.9 % 18.5% 19.7
2014 2015 2016 2017 2018 2019
Percentage of market value Percentage of total number of series
This chart indicates that no significant change occurred since 2014 in the percentage of bonds rated by both rating companies of the total number and market value of all tradable corporate bonds.
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Traded Corporations
Corporations traded on the stock exchange, 2014-2019 570 532 546 560 539 535
2014 2015 2016 2017 2018 2019
The change in the number of corporations traded on the stock exchange over this period was influenced mainly by delisting of companies, buyout offers, and companies converted into private entities, on the one hand, and IPOs of new companies, on the other hand. Between 2017 and 2018, the decline in the number of traded corporations stemmed mainly from the effect of Amendment 28 to the Joint Investment Trust Law, as a result of which 21 ETN companies were converted into ETFs and were delisted. No significant change in the number of traded corporations occurred between 2018 and 2019. It should be clarified that several dozen reporting corporations are not traded on the stock exchange (either because they were delisted or never registered for trade).
In 2019, 11 corporations completed an IPO: 7 corporations issued shares for the first time, and 4 issued bonds for the first time. The corporations that joined the stock exchange this year represent various sectors, including financial services, infrastructure, and retail. In 2019, 26 corporations completed their reporting obligations — 17 of which were stock companies; 12 completed their post-merger reporting obligations — one half were merged into other stock exchange companies. Three high-tech companies delisted from the TASE, and their securities continue to trade in the US.4
IPOs and companies that completed their reporting obligations, 2012-2019 38 39 33 33 30 28 26 22 18 19 13 13 9 11 5 3
2012 2013 2014 2015 2016 2017 2018 2019
Completed reporting requirements IPO
4. Source: TASE website.
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Reported transactions with controlling shareholder, private placements and purchase offers, 2016-2019
13 Purchase offer outlines 20 18 Private placements 15 108 131 (material and irregular) 147 110
No. of transactions with controlling shareholders 585 632 481 463
2016 2017 2018 2019
Debt settlements 2017-2019
Adjusted face value Adjusted face value Year No. of companies5 of the debt under of the tradable debt7 Debt under settlement settlement6 (NIS (NIS millions) of total tradable debt millions)
2019 6 3,535 376,601 0.94%
2018 3 1,766 339,752 0.52%
2017 4 838 310,529 0.27%
5. A company may be counted several times if its bond series entered settlement proceedings in different years, or if the company is in additional settlement proceedings. 6. As at the date the company entered into settlement proceedings. 7. Corporate bonds and convertible bonds (as at year end).
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Mutual Funds
Mutual funds are a type of investment vehicle that allows a large number of investors to pool their money to invest in a variety of investment channels and financial instruments, including shares, government bonds, and corporate bonds. In contrast to a direct investment in the capital market, a mutual fund allows investors to increase their exposure to a diverse range of activities and assets in the capital markets in and outside Israel. The company that manages the mutual fund and its investments (the fund manager) is a company that was approved by the ISA and its ongoing operations are supervised by the ISA.
At end 2019, there were 2,127 active mutual funds, compared to 2,093 active mutual funds at end 2018. Active mutual funds included 1,564 open-end funds, 378 tracker (index) funds, 562 ETFs, and one high- tech fund (compared to 1,482, 327, and 610 at end 2018, respectively). In the course of the year, 177 new funds were added while 143 funds were discontinued, of which 42 merged with other funds and 101 were liquidated (compared to 16 funds liquidated in 2018).
The number of fund managers was 19 at end 2019, compared to 22 at end 2018, mainly due to the conclusion of mergers motivated by the implications of Amendment 28 to the Joint Investment Trust Law. All mergers were performed within the investment houses themselves, where fund managers who managed two mutual fund management companies merged into a single company. The number of mutual trust trustees was 7.
Mutual Fund Managers’ Market Shares, December 31, 2019 (%)
0.76 1.58 3.98 12.18 0.27 1.10 0.30 6.37 2.02 0.60 14.77 12.68
1.21 1.17
7.99 17.76 0.17 8.97 6.11
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Number of Mutual funds, 2015-2019
1392 1393 1432 2093 2127
2015 2016 2017 2018 2019
Mutual Fund Assets
At end 2019, assets held in mutual funds totaled NIS 352.3 billion, compared to NIS 306.8 billion at end 2018. In 2019, assets under management increased by NIS 45.5 billion, resulting from an increase in capital gains of NIS 30.8 billion, and fund flows of NIS 14.7 billion.
Value of mutual fund assets as at December 31, 2015-2019 (in NIS billions)
352.3
306.8
243.1 229.2 214.1
2015 2016 2017 2018 2019
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Pursuant to the provisions of Section 73(C1)(1) of the Joint Investment Trust Law, a mutual fund’s classification must be published according to the guidelines defined by the Minister of Finance in the Regulations. The list of categories is available on the ISA website. Following are statistical data on the mutual funds, by classification, including the number of funds and the value of assets in each category, as at end 2019:
Managed assets of mutual funds by category, December 31, 2019
No. of funds Asset value Average fund Share of total (NIS millions) size (in NIS mutual fund millions) assets (%)
Local bonds – general 399 84,196 211 23.9%
Local bonds – corporate and convertible 319 63,367 199 18.0%
Active 133 26,809 202 7.6%
Passive 186 36,558 197 10.4%
Foreign shares 548 56,812 104 16.1%
Active 114 6,793 60 1.9%
Passive 434 50,020 115 14.2%
Israeli government bonds 246 43,681 178 12.4%
Active 149 32,552 218 9.2%
Passive 97 11,129 115 3.2%
Local shares 211 46,072 218 13.1%
Active 116 15,535 134 4.4%
Passive 95 30,537 321 8.7%
Money funds 37 29,411 795 8.3%
Foreign bonds 123 9,207 75 2.6%
Active 88 7,397 84 2.1%
Passive 35 1,810 52 0.5%
Local bonds – shekel-only 78 8,257 106 2.3%
Flexible 46 5,334 116 1.5%
Local composite bonds - General 53 2,996 57 0.9%
Leveraged and strategic 40 1,235 31 0.4%
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No. of funds Asset value Average fund Share of total (NIS millions) size (in NIS mutual fund millions) assets (%)
Active 14 536 38 0.2%
Passive 26 699 27 0.2%
Closed-end funds (high-tech) 1 442 442 0.1%
Commodities 10 377 38 0.1%
Local bonds – foreign currency 3 225 75 0.1%
Foreign – general 1 272 272 0.1%
Fund of funds 6 278 46 0.1%
Other 4 152 38 0.0%
For foreign residents only 2 24 12 0.0%
Total funds sector 2,127 352,337 166 100.0%
Total active funds 1,187 218,060 184 61.9%
Total passive funds 940 134,277 143 38.1%
Tracker funds (not traded) 378 40,892 108 11.6%
ETFs 562 93,385 166 26.5%
The market share of passive funds (ETFs and open-end tracker funds) remained unchanged from 2018. The majority of the passive funds are (traded) ETFs, which manage 26.5% of the total asset value in the mutual fund sector (compared to 28.1% at end 2018), while open-ended tracker funds (that are not traded) manage 11.6% of the total asset value in the mutual fund sector (compared to 8.7% at end 2018).
Of all active funds, the “local bonds-general” category has the highest asset value this year, unchanged from 2018. Furthermore, in 2019, the market share of the “local shares” category increased to 13.1%, compared to 10.6 at end 2018.
Mutual Fund Trustees A fund trustee is a company whose primary occupation is to fulfill trustee obligations, and was approved by the ISA Chair to serve as a trustee after proving that it meets the conditions prescribed by law. The trustee holds the fund assets in trust on behalf of the unit owners, either in a bank account or in a securities account administered by a stock exchange member. The trustee oversees the mutual fund manager and its compliance with the provisions of the Law, and fulfillment of all its prospectus-based obligations. The trustee receives a fee for its duties, which is calculated as a percentage of the fund’s asset value, and is collected from the fund’s assets. There are 7 mutual fund trustees.
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Market shares of mutual fund trustees, December 31, 2019 (%)
2.9 17.3 17.7
9.5
4.5
5.7
42.4
Mutual funds that track new tracked assets
A tracked asset is an index or a commodity that, according to the tracking fund’s investment policy, is expected to generate returns based on changes in its price. In the reporting year, ISA Staff gave its approval to funds to track 58 new indices (compared to 32 in 2018) that will be the funds’ tracked assets.
New local and foreign share and bond indices, December 31, 2019 58
36 30 28 25 22 19 11 3 Total Foreign Local Shares Bonds Total
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Management fees in the fund sector and restrictions on the frequency of fee hikes
After the Bachar Reform came into effect, and the mutual fund sector was the target of extensive reforms in 2008, management fees in the mutual fund sector have declined steadily. In the past seven years, average management fees have dropped by more than 50%. In the past five years, average management fees have dropped to below 1% and in the reporting year average management fees were 0.72%. The continued decline in management fees is a result of the strong competition in this sector and the rising value of passive assets under management (tracker funds), which charge lower average management fees (according to their distribution model, the fund manager does not pay a distribution fees but instead, investors pay a fee on each buy and sale of securities).
In 2016, the ISA Staff drafted a uniform outline reflecting the mutual funds’ commitments concerning management fee increases, and the ISA regularly publishes data on which mutual fund managers have adopted this outline. According to the outline, mutual fund managers undertake not to increase their fees or the load charges in the funds under their management within a single calendar year. This information is published on the ISA website. As of the reporting year, all the managers of the active funds adopted the outline, which implies that the fees they charged on January 1, 2020 will remain in force until December 31, 2020.
Average mutual fund management fees, 2008-2019 (simple mean)8,9
2.1%
1.9% 1.71 1.7%
1.5% 1.45 1.36 1.34 1.3% 1.22
1.1% 1.04 0.97 0.91 0.9% 0.86 0.83 0.82 0.72 0.7% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
8. In 2019, the average management fees were 0.97% in active funds and 0.42% in passive funds. 9. Several tracking funds have a variable management fee arrangement. The average management fees presented in the figure do not include variable management fees.
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This year was also characterized by mutual fund managers’ high rate of participation in general meetings. Over 70% of the mutual fund managers attended and voted in over 97% of all general meetings. Notably, in 2016, regulations were enacted that clarified and defined the types of meetings that mutual fund managers are obligated to attend, and the decision whether or not to attend is not subject to the fund managers’ discretion.
Attendance rate of mutual fund managers in general meetings that they are obligated by law to attend and vote, 2015-2019
Attended by less than 30% Attended by 30%–70% of Attended by more than 70% of the managers the managers of the managers
No. of No. of No. of No. of Year meetings meetings % meetings % meetings %
2015 662 2 0.3% 22 3.32% 638 96.30%
2016 593 24 4.05% 0 0 569 95.95%
2017 722 19 2.63% 0 0 703 97.37%
2018 682 27 3.96% 0 0 655 96.40%
2019 690 15 2.17% 0 0 675 97.83%
Investment Advisers, Investment Marketers, and Investment Portfolio Managers
Investment advisers, investment marketers, and investment portfolio managers are individuals or corporations that are licensed by the ISA to provide advice on financial assets and exchange-traded securities to the investing public, or are licensed to manage investment portfolios that contain such assets on behalf of investors. Investment advisers, investment marketers, and investment portfolio managers are professionals who have passed examinations that assessed their professional qualifications and their reliability. Corporations must also meet the minimum equity and insurance requirements defined by law. Investment advisers and marketers provide investment recommendations to customers after they assess the customer’s needs, while the customer retains the power to execute the transaction. In contrast, a portfolio manager is granted a power of attorney to perform transactions in the customer’s account. The portfolio manager exercises her discretion and makes investment decisions on the customer’s behalf based on her assessment of the customer’s needs. In contrast to an investment adviser, an investment marketer is structurally affiliated with an entity that offers financial assets to the public (such as a mutual fund) or receives benefits from said entity in exchange for the distribution of the entity’s assets. Investment marketers are subject to special rules of disclosure to customers concerning potential conflicts of interest between the investment marketer’s recommendation and the customer’s interests. In general, investment advisers, investment marketers, and portfolio managers must customize their services to the needs and instructions of the customer, to whom they owe duties of fidelity, caution, disclosure, and confidentiality; Portfolio managers are additionally subject to reporting requirements. Annual reports containing information on the portfolio management sector are published on the ISA website.
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Value of portfolio management firms’ assets under management, 2015-2019 (in NIS billions)
262 263 286 272 295
2015 2016 2017 2018 2019
Value of non-institutional investors’ assets under management, December 31, 2019 (in NIS millions)
Value of managed assets No. of companies % of all companies % of total asset value
Under 50 26 21.14% 0.25% 50-100 18 14.63% 0.75% 100-500 41 33.33% 5.59% 500-1,000 8 6.50% 3.03% 1,000-5,000 20 16.26% 20.04% Over 5,000 10 8.13% 70.34% Total 123 100% 100%
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Chapter C - Highlights of the ISA’s activities in 2019
This chapter summarizes ISA’s main activities in 2019, according to its four strategic goals and its work plan.
First Goal - Maintaining a Fair Capital Market
Fostering and maintaining a secure, reliable, and fair environment in the capital market is one of ISA’s key goals. Participation of both Israeli and foreign private and institutional investors in the capital market is contingent on a fair and orderly market that participants find trustworthy and reliable. It is a market in which participants believe that the ability to profit is not reserved for “insiders.” Accordingly, the ISA takes action to maintain the fairness of the capital market through the effective implementation of the regulatory, supervisory, and enforcement tools at its disposal.
Following are the ISA’s main activities to promote this goal in the reporting year, which were performed in addition to its ongoing regulatory and enforcement activities:
Enforcement
The ISA maintains a proactive zero-tolerance approach to securities violations that harm investors and diminish public trust in the capital market. The ISA enforces the relevant laws through a variety of enforcement actions, directing each case in an impartial, commensurate manner based on the considerations listed in the Securities Law.
In July 2019, the ISA published a comprehensive enforcement policy document for the first time, outlining its policy on all aspects of enforcement. Publication of this document is consistent with the ISA’s values and its desire to promote transparency and cooperation with the capital market. The document includes ISA’s policy guidelines in three areas of enforcement: criminal prosecution, administrative enforcement, and involvement in private enforcement proceedings. The document is available on the ISA website. In the reporting period, the ISA performed the following enforcement actions in these three areas of enforcement:
Encouragement of effective internal enforcement The Administrative Enforcement Law, which came into effect in 2011, and the ISA’s publication of criteria for evaluating the effectiveness of internal enforcement programs triggered intense activity in the area of internal enforcement, both by the ISA and by the market. Many supervised entities officially adopted internal enforcement programs to some extent, yet a question arose as to their effectiveness and actual implementation. For example, only rarely do firms and officers cite the existence of an effective internal enforcement program as a defense argument in administrative enforcement proceedings. Accordingly, the ISA set itself the goal of further encouraging the supervised entities to establish and expand their adoption and implementation of internal enforcement tools in their day-to-day operations. In 2019, the State Attorney published new guidelines on the prosecution policy for criminal prosecution and punishment of corporations. According to these guidelines, the existence of an effective internal enforcement program may be considered a mitigating factor in the prosecution and punishment of a suspected violation. The guideline determines, for the first time, that investigatory authorities must review all the considerations for prosecution listed in the guidelines, including the existence of an effective enforcement program. These guidelines are consistent with the ISA’s policy and goals.
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The ISA is studying how to promote effective internal enforcement, on two levels: First, do the internal enforcement criteria published in 2011 assist firms and are they still relevant today? The ISA studies the comments on these criteria and the need to revise them. Second, the ISA strategically develops actions to raise companies’ awareness of this issue and to encourage their adoption of effective internal enforcement programs.
In the reporting year, ISA Staff conducted many meetings and assembled ideas, insights, and comments from a range of market players. Extensive information on programs to encourage internal enforcement in other countries was also collected by ISA Staff. In the forthcoming year, the ISA plans to promote a staged program to raise awareness and encourage adoption of internal enforcement programs.
Structuring sentencing in administrative enforcement proceedings Structuring sentencing is a global trend in the field of criminal and administrative enforcement in general, and specifically in securities law. The aim is to ensure that the penalties imposed in enforcement proceedings are equitable and that severity in punishment is proportional to the gravity of the offense and the circumstances of the case. Additional benefits of structuring punishment include: creating a degree of certainty for offenders/violators regarding the expected punishment in their case, and transparency of the sentencing process for the public in general, and specifically for offenders/violators.
In the reporting year, ISA Staff worked to develop a structuring sentencing model for administrative enforcement proceedings, as part of its efforts to enhance the transparency of its enforcement policy. Within these efforts, ISA Staff conducted a comprehensive international study of sentencing policies and proposed a model that is currently under internal review. The ISA expects to publish this model in the forthcoming year.
Criminal investigations and administrative inquiries in the reported year In 2019, the Investigations, Intelligence, and Market Surveillance opened a record number of cases: 21 investigation and administrative inquiry files (12 criminal cases and 9 administrative cases). These investigation and administrative inquiry files vary by violation and offense, and by their complexity and number of parties involved. They include cases related to insider trading violations, violations related to reporting and misstatements in reports, fraud, violations of the Investment Advice Law, violations related to trading platforms, and violations related to the Penal Law and the Prohibition Against Money Laundering Law committed concurrently with core violations of the Securities Law.
Over the year, the Department concluded its work on 9 criminal cases, which were referred to the District Attorney’s Office, and on 9 administrative cases that were referred to the Administrative Enforcement Department. In addition, the ISA commenced 8 judicial inquiries in assistance to foreign agencies.
In 2019, the Department handled a total of 47 cases: it opened 21 investigation and administrative inquiry files and completed work on 18 investigation and administrative inquiries, and commenced judicial inquiries in response to 8 requests for assistance.
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As at end 2019, the Department is working on: 14 cases in which investigations are ongoing; 5 administrative inquiry cases in which the inquiry is ongoing; and 8 requests for assistance still in working process.
In 2020, an upgrade is planned for all the technological systems used by the Department in its analysis, processing, and examination of investigation materials, including the assimilation of a central investigation, review, and search management system. The new system is expected to increase the Department’s efficiency and will assist it in meeting its challenges of the Big Data era by supporting digital investigation case management on a single central platform, offering smart search, and electronic document scanning features.
Following are data on the activities of the Investigations, Intelligence, and Market Surveillance Department: Criminal investigation files opened, by violation, 2015-2019* Offence 2015 2016 2017 2018 2019 Total Securities fraud 3 1 1 - 3 8 Insider trading 3 4 1 6 4 18 Misstatements or reporting failures (in a prospectus, financial statement, 3 4 3 2 1 13 immediate report, or capital raising without a prospectus) Trading platforms offenses and offenses under the Investment Advice Law 1 1 - - 4 6 Violations under the Penal Law: bribery, theft, fraud, and obtaining by deceit 1 1 1 2 - 5 Total 11 11 6 10 12 50
*by primary offense. May include serious Penal Law violations in addition to securities violations.
Requests of assistance to foreign agencies (judicial inquiries), 2015-2019
2015 2016 2017 2018 2019 Total Judicial inquiries 16 12 8 15 8 59
Requests of assistance from foreign agencies (judicial inquiries) whose findings were transferred to foreign agencies, 2015-2019
2015 2016 2017 2018 2019 Total Judicial inquiries 11 10 8 12 16 57
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Investigation cases referred to the District Attorney’s Office, 2015-2019
Offence 2015 2016 2017 2018 2019 Total Securities fraud 8 4 - 2 - 14 Insider trading 2 3 1 2 7 15 Misstatements or reporting violations (in prospectus, financial statement, 1 3 5 2 1 12 immediate report, or capital raising without a prospectus) Violations related to the Investment Advice Law - - 1 1 - 2 Violations under the Penal Law: bribery, theft, fraud, and obtaining by deceit 2 1 1 1 1 6 Total 13 11 8 8 9* 49
*In addition to these, there is one investigations case that is being handled as a criminal case. Work on this case was concluded in 2019 and the case was referred directly to an administrative settlement.
Administrative inquiry cases opened, 2015-2019 Violation 2015 2016 2017 2018 2019 Total Securities fraud 3 3 - 1 2 9 Insider trading - - 1 - - 1 Misstatements or reporting violations (in a prospectus, financial statement, 4 3 7 3 7 24 immediate report, or capital raising without a prospectus) Trading platforms offenses and offenses under the Investment Advice Law 2 2 1 - - 5 and the Joint Investments Trust Law Total 9 8 9 4 9 39
Administrative inquiry cases referred to the ISA Chair, 2015-2019 2015 2016 2017 2018 2019 Total Securities fraud 2 3 2 3 10 Insider trading - - - - 1 1 Misstatements or reporting violations (in a prospectus, financial statement, 6 3 4 8 5 26 immediate report, or capital raising without a prospectus) Trading platforms offenses and offenses under the Investment Advice Law - 3 1 - - 4 Total 8 9 7 8 9* 41
* This figure includes a criminal investigations case that was transferred to the Administrative Enforcement Department, after work on the case was concluded, for an administrative settlement with the company in question.
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Enforcement files opened 2015-2019 2015 2016 2017 2018 2019 Total Criminal offenses 11 11 6 10 12 50 Administrative inquiries 9 8 9 4 9 39 Total 20 19 15 14 21 89
Criminal enforcement In the past year, the Securities Department at the Tel Aviv District Attorney’s Office continued to promote steps to increase the efficiency of enforcement and severity of punishment in the field of securities. This year, the Department was also involved in filing indictments in large-scale cases of significant public interest.
Indictments filed in 2019 In April, an indictment was filed against Moshe Goldman, Shaul Maor, Hadar Oshrat, Yigal Levy, Zvi, Shiff, Yael Goldman, and the company Maor Lusky (Tiltan). The indictment charged the defendants with offenses committed between 2008 and 2013, including giving and receipt of bribery, theft by an authorized individual, obtaining by deceit, securities fraud, money laundering offenses and other offenses.
The indictment described a large-scale fraud scheme, based on the exploitation of funds of provident fund and pension savers by experienced capital market players, for the purpose of generating personal profits. The suspects were also involved in a securities fraud scheme involving the sale of Cellcom shares by Deutsche Bank Israel. The profits were distributed among the defendants through a complicated network of bank accounts and shell companies worldwide. The indictment describes money laundering actions on the extraordinary scale involving app. NIS 20 million. In addition to the above charges, Goldman is also charged with obstruction of justice and witness tampering. In the indictment, the State is seeking disgorgement of the defendants’ financial assets, real estate properties, and funds of a total value of several tens of millions of shekels.
In June, an indictment was filed against Ze’ev Klimi, Boaz Dekel, Shlomo Barak, and P.M.I. Trade and Development Ltd. The defendants were charged with insider trading. According to the indictment, in January 2016, Klimi used insider information that came into his possession from an insider at Osem, regarding a merger between Nestle and Osem, approximately one week before an immediate report about this transaction was issued. Klimi purchased Osem shares in the amount of app. NIS 250 thousand before the immediate report was issued, and he shared the information with his friends Boaz Dekel and Shlomo Barak, who also purchased Osem shares in the total amount of app. NIS 700 thousand each before the report was issued.
Approximately one week after these purchases, Osem announced the upcoming transaction. Osem shares rose by more than 30% after the announcement. According to the indictment, on various dates after Osem issued its report, the defendants sold the shares they had purchased. Klimi sold his shares for a profit of over NIS 60 thousand, Dekel and Barak netted approximately NIS 170 thousand each.
In July, an indictment was filed against Amihai Segal and Yoray Aviel, charging the defendants with theft, securities fraud, money laundering, and falsification of corporation documents. According to the indictment, in 2010-2013, tens of millions of shekels were raised from investors for two foreign funds controlled by Segal, based on false promises that the funds would be invested by reputable international investment funds or by well-known experts in specific real estate properties overseas.
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On other occasions, investors were promised that the In August, an indictment was served to MK Haim Katz funds would be invested in real estate properties in Israel. and to the Knesset Chair and the Chair of the Knesset In practice, a considerable proportion of the funds were House Committee, charging MK Haim Katz with fraud and diverted to the ongoing operations of a series of private breach of trust according to Section 284 of the Penal companies controlled by Segal, to discharge Segal’s private Law. The indictment also charges Katz’s friend, Mordechai debts to banks, to purchase securities for himself, and to (Moti) Ben-Ari a capital market player who served as an other private uses, or to redeem the investments of other economic consultant to Equitel, among other things, with investors that he had enlisted. Segal used various methods fraud, breach of trust, and insider trading. According to to conceal the true nature of his actions from everyone the indictment, MK Katz promoted an amendment to around him and from the investors, and to disguise them the Securities Law despite a material conflict of interest as legitimate actions, including giving false information in between his role as an MK and his own economic interests financial statements, and was assisted for this purpose by in the amendment, and made efforts to conceal these his auditing accounting Yorai Aviel, who was also charged in interests from the Labor, Welfare, and Health Committee this case. that he headed and in which the law was promoted; and from the Ethics Committee, when the matter was brought In July, an indictment was filed against Avi Motola, Avihu before it; and made misrepresentations about this matter. Ivesitz, Galit Dory, Shaul Mashiach, Vera Yoffe, Mashiach At the same time, Katz and Ben-Ari became involved in David, Tomer Kubani, Avraham Rauchorburg, Gabby Klein, illegal coordinated transactions on the TASE, in the amount Yaakov Groeher, Meir Ben Yosef, Africa Israel Industries of several millions of shekels. When MK Katz was appointed Ltd, Negev Ceramics Ltd., and Via Arcadia Home Design a minister, he transferred the management of his securities Ltd. The defendants are charged with securities reporting portfolio to Ben-Ari as a blind trust, in violation of the rules, offenses, falsification of corporate documents, offenses without a consideration and without reporting this to the by managers and employees in a corporation, forgery, Attorney General. obtaining by deceit under aggravated circumstances, and obstruction of justice. In addition to these offenses, Ben-Ari was also charged with insider trading after, in Avi Motola and another former senior manager in Africa his capacity in the Equitel group and through his ties Industries were also charged with theft by a manager. with it, Ben-Ari was exposed to information concerning According to the indictment, Motola committed financial negotiations over a merger between Airport City and fraud in the Negev group by bestowing benefits to his Nitzba, the developments in these negotiations, and the family members and close associates in the amount of advanced stage at which the negotiations were in. Although app. NIS 1.2 million, and committed fraud and breach of he was cautioned by the secretary of Airport City that he trust. The indictment describes a systematic illegal scheme was prohibited from purchasing the group’s securities, to present “improved” misleading information concerning Ben-Ari purchased shares in Nitzba and Yoel for a total of the financial figures of Africa Industries and its subsidiaries. app. NIS 800 thousand, and at his recommendation, MK As a result of these fraudulent actions, Africa Israel Katz also purchased shares in the amount of app. NIS 1.6 Industries and several of its subsidiaries included a large million for his account and his children’s accounts. After number of misstatements in material items in their financial publication of the report about the merger, Ben-Ari and statements in the years 2011-2014. Furthermore, according Katz sold their shares at a considerable profit. to the indictment, Motola and Iveshitz instructed group employees to conceal additional misstatements in the In September, an indictment was filed against Shmuel financial statements from the accountants, in order to have Hacohen, charging him with reporting violations and insider the financial statements approved and in order to prevent trading. According to the indictment, in 2014-2016, Hacohen the discovery of the unlawful scheme in general. failed to report a large number of sales of company shares. By doing so, Hacohen caused the company to publish misleading reports to the public about his holdings. For
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example, on some occasions, Hacohen held only app. Elovitz developed a “quid pro quo” relationship based on 10% of the company’s shares yet the company reported their joint understanding that they each control and can to the public that he held app. 25% of the company’s promote the other party’s significant interests. shares. Furthermore, in the indictment, Hacohen is charged with insider trading in connection with the sale of The relationship between Netanyahu and the Elovitz Jerusalem’s holdings in Mantis Vision. Hacohen is accused couple was intense and frequent, and was conducted both of purchasing Jerusalem’s shares in the amount of app. NIS directly and through intermediaries. Within this relationship, 500 thousand while he possessed insider information on Netanyahu and his family members referred various the evolving sale. demands to the Elovitz couple regarding the coverage of specific issues, including Netanyahu’s political rivals. In November, the Attorney General decided on filing an The Elovitz couple put extreme and continuous pressure indictment against Prime Minister Benyamin Netanyahu to bear on Ilan Yeshua, then-CEO of walla, to accede to and others in various charges including a bribery charge these demands. As a result, Yeshua instructed walla’s relating to the investigation known as “Case 4000,” which editors and journalists to change items on the website was overseen by the Department. to fit Netanyahu’s demands. The Elovitz couple agreed to the demands to intervene in the items published on In this case, the indictment charges defendant Netanyahu the website, and carefully ensured that Netanyahu was with receipt of bribery under Section 290 of the Penal aware of the extent of these concessions. Netanyahu knew Law, and fraud and breach of trust under Section 284 of that the extent to which the Elovitz couple acceded to the Penal Law. According to the indictment, the Elovitz his demands was unusual, significant, and extensive, and couple is charged with jointly giving bribery under Section that these concessions were granted to him in exchange 291 of the Penal Law, joint obstruction of justice according for actions related to his public office. Within the quid to Section 244 of the Penal Law, and joint subordination pro quo relationship that developed between Netanyahu of testimony in an investigation under Section 245(A) of and the Elovtiz couple, Netanyahu exercised his powers the Penal Law. Elovitz is also charged with transactions and authority as a public servant to promote matters that in forbidden property, under Section 4 of the Prohibition Elovtiz wished to promote — for himself, for Bezeq, and Against Money Laundering Law, and causing a misleading for various companies in the Eurocom group, through item to be included in an immediate report with the which he controlled Bezeq and Walla. Within these efforts, intention of misleading a reasonable investor, under and concurrently with demands that he communicated Section 53(a)(4) of the Securities Law. to Elovtiz regarding coverage on the Walla website, Netanyahu, in the capacity of his public offices, was According to the indictment, between December 2012 involved in several incidents related to Elovitz’s regulatory and January 2017, in his capacity as Prime Minister matters and performed actions that promoted Elovitz’s and subsequently also in his capacity as Minister of significant business interests, whose value was estimated Communications, Netanyahu had the authority to grant at enormous sums. Netanyahu performed these deeds in approvals and permits for various business operations favor of Elovitz in exchange for the benefits he received performed by the Bezeq group. Netanyahu was also able to from the Elovitz couple in the field of media coverage, influence governmental issues related to the Bezeq group. described above, all the while Netanyahu acted inequitably In the relevant period, Elovitz was the controlling owner and placed himself in a conflict of interest between his of the Bezeq group, and therefore was able to influence public offices and his private interests, while deviating from the nature and character of news items published on generally accepted practice. Walla website, controlled by Bezeq. The area of media coverage was very important for Netanyhu and his family Netanyahu systematically and consistently concealed his and he considered such coverage to be critical for his relationship with the Elovitz couple from a series of official political future. Against this backdrop, Netanyahu and entities, to which he gave incomplete and misleading
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information about the nature of his relationship with Elovitz. To conceal their ties to Netanyahu, the Elovitz couple took steps to destroy evidence on their mobile phones and ordered Yeshua to take similar steps, and also instructed him to provide false information about their involvement in changes in the items posted on walla, about their ties to Netanyahu, and about his demands to intervene in various published items.
Elovitz is charged with money laundering offenses for actions involving money that Eurocom received as consideration in the Bezeq-Yes transaction, in the total amount of app. NIS 1 billion, which originated in the acts of bribery that the Elovitz couple committed. He is charged with reporting violations in view of the misstatements included in an immediate report by Bezeq, which were the result of Elovitz’s involvement in the information underlying the report.
Investigation Files and Indictments, 2019 No. of the District Attorney’s No. of indictments in 2019 No. of investigations cases investigation cases at end referred to the District 2019, in which a prosecution Attorney’s Office in 2019 decision is pending
13 7 11
Year of No. of the District Attorney’s investigation cases at end 2019, in which a referral prosecution decision is pending, 2017 1 2018 3 2019 9
Judicial Rulings in 2019
Judicial rulings in the courts of first instance:
Criminal Case 3333-80-18 State of Israel v. T.R.D. Instrum. Ltd and Others - Ruling (May 16, 2019) and sentencing (October 27, 2019) The Magistrate Court of Tel Aviv –Yaffo (the Honorable Judge Michal Barak-Nevo) convicted T.R.D. and its controlling owner Mr. Yisrael Ramot, of reporting violations under the Securities Law. The Court determines that in 2006, the company and Mr. Ramot, who was its owner and manager, committed multiple reporting violations under the Securities Law, with the intention of concealing speculative investment activities and significant losses stemming from the proceeds of an issue that the company raised that year. The company, which was engaged in the development of dental equipment, performed a public offering in 2006 and raised NIS 42 million. On October 27, 2019, Yisrael Ramot, one of the company’s controlling owners and managers, was sentenced to 14 months imprisonment and a fine of NIS 10,000. A fine of NIS 100,000 was imposed on the company.
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Criminal Case 9238-11-18 State of Israel v. Avi Matzliach - Ruling and sentencing (May 7, 2019) The District Court in Tel Aviv (Deputy President the Honorable Judge Kabub) convicted Avi Matzlich of securities fraud, theft by an authorized person, obtaining by deceit, and breach of trust in a corporation. The Court determined that between 2006 and 2015, Matzliach misappropriated investors’ funds by performing over 2,000 independent and coordinated transactions in order to transfer funds among various accounts according to his desires and needs. Among other things, Matzliach created temporary profits for investors at the expense of other investors. In addition, in 2015, while employed at Otzar Hahayal Bank, Matzliach committed the coordinated transactions using the accounts of two of his customers, and misappropriated a total of NIS 63,000 from the accounts of two investors, which he used to cover his customers’ losses, among other things. The Court sentenced Matzliach to 21 months imprisonment, a fine in the amount of NIS 20,000, and ordered him to pay damages in the amount of NIS 63,000.
Criminal Case 30646-01-19 State of Israel v. Maor Wechsler – Ruling and sentencing (February 28, 2019) The District Court in Tel Aviv (Deputy President the Honorable Judge Kabub) convicted Wechsler, a former Psagot employee, of the following offenses in a plea bargain: securities fraud, theft by an authorized individual, deceit and breach of trust in a corporation, and obtain a thing by deceit in aggravating circumstances. The Court determined that between 2013 and 2016, Wechsler conducted a fraud scheme in which he performed hundreds of fraudulent transactions between the Psagot accounts that he controlled and personal accounts that he controlled. Wechsler’s total profit from the fraud scheme was app. NIS 700,000. Wechsler was sentenced to 30 months imprisonment and a NIS 20,000 fine. At the sentencing, the Court stressed that Wechsler’s actions not only caused direct economic damage to Psagot, but also extensive damage to the public trust in the capital market in general.
Criminal Case 60588-12-18 State of Israel v. Talmor and Others – Ruling and sentencing (October 23, 2019) The District Court in Tel Aviv (Deputy President the Honorable Judge Kabub) approved the plea bargain signed with the defendants, and convicted Maayan Talmor of conspiracy to commit an offense, and committed Valerio Magay of obstruction of justice. The Court determined that Valerio Magay, who was in charge of the IT systems in the company on the date the ISA opened the investigation, contacted the company CEO during a search of the company’s offices and offered to erase email correspondence. As a result the material collected by the investigations team was incomplete. Furthermore, app. one week later, Valerio Magay made a similar proposal to Maayan Talmor, the CEO’s sister, who also worked in the company, and agreed with her that they would do so. The Court sentenced Magay to 9 months imprisonment and a fine of NIS 15,000, and sentenced Maayan Talmor to a suspended sentence of 6 months imprisonment and a fine of NIS 10,000. At sentencing, the Court determined that public interest requires that justice should be done in such cases and that the appropriate punishment is imprisonment but the Court approved the plea bargain due to defendant’s extreme extenuating personal circumstances.
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Criminal Case 23327-09-18 State of Israel v. Cohen and Others – Ruling and sentencing (January 31, 2019) The District Court in Tel Aviv (Deputy President the Honorable Judge Khaled Kabub) convicted Moti Cohen, an economist by education, of multiple offenses of managing portfolios without a license, securities fraud, obtaining by deceit under aggravating circumstances, misappropriation by an authorized individual, and other offenses, in a plea agreement. The Court determined that in 2013- 2015, Cohen and an associate entered into portfolio management agreements with 80 investors and managed their portfolios without a portfolio management license, made false representations and promises of extremely high returns. Cohen, together with his associate, misappropriated app. NIS 3 million in the customers’ funds by performing app. 5,500 independent and coordinated transactions between the accounts controlled by the suspects and their customers’ accounts. Cohen was sentenced to 46 months imprisonment and a NIS 100,000 fine notwithstanding the fact that Cohen is bankrupt.
Rulings on criminal appeal
Criminal Appeal 4045/18 Yuval Peleg v. State of Israel (May 26, 2019) The Supreme Court (the Honorable Judges N. Solberg, G. Kara, and Y. Elron) affirmed the ruling handed down by the Economic Department of the District Court in Tel Aviv (the Honorable Judge Kabub) in the matter of Yuval Peleg, who was convicted of giving bribery, fraudulently influencing the price of securities, obtaining by deceit under aggravating circumstances, and money laundering offenses. Peleg was convicted of colluding in a fraud partnership developed with Guy Maman, who was in charge of managing the stock portfolios of Migdal Insurance pension funds. Between 2006 and 2011, the two colluded in a securities fraud scheme, using Maman’s knowledge and mastery of Migdal’s accounts. The two netted a total of app. NIS 11 million from their fraudulent activities. The Supreme Court determined that the sentence imposed on Peleg — 33 months imprisonment and a fine of NIS 1.5 million — is proportionate to the severity of his offenses and the circumstances of the case “which are of the more extreme circumstances observed in our country in recent times.” Nonetheless, in view of Peleg’s admission of guilt, the Supreme Court found it appropriate to reduce the fine to NIS 1 million.
Criminal Appeal 4627/17 David Edri and Shay Ben David v. State of Israel (July 16, 2019) The Supreme Court (the Honorable Judges A. Fogelman, N. Solberg, and Y. Vilner) dismissed appeals against the ruling in the matter of David Edri, who served as the director of the brokerage department at Psagot investment house, and Shay Ben David, who served as director of Psagot’s brokerage dealing room, and their conviction of violations of the Securities Law and the Penal Law, including fraudulently influencing the price of securities, obtaining by deceit under aggravating circumstances, and deceit and breach of trust in a corporation in Edri’s case. The Supreme Court re-affirmed that in genuine trading transactions, an intention to influence the price of securities is sufficient to constitute the foundations of deceitful action in a fraud offense. Furthermore, the Court accepted the State’s position and clarified that in genuine transactions, it is not necessary to show that the trading activities were unusual compared to those that the trader would have performed had he not intended to influence the price of securities. The Supreme Court determined that the elapse of time deserves greater weight than had been given by the District Court, and although it did not disturb the division of events and periods and the overlapping and cumulative periods
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determined by the District Court, the Supreme Court believed that the overall punishment is not proportionate to the severity of the deeds and therefore reduced the sentences. The Supreme Court partially accepted the appeals against the sentence and reduced the imprisonment sentence imposed on David Edri to 42 months, and the sentence imposed on Ben David to 22 months.
Administrative enforcement In 2019, administrative proceedings were brought in 10 cases, and 2 additional cases were closed after the evidence was reviewed and closure of the case was recommended. The Administrative Enforcement Department also managed 3 additional cases that had been filed in previous years: two large-scale cases concerning accounting aspects of reporting, with an extraordinarily large scope of evidence, a large number of violators, and a high degree of complexity. One of these cases will be continued to be managed in the first half of 2020.
In 2019, the Department handled a total of 15 administrative cases. Seven additional administrative cases that were referred to the Department this year are in preparation. Four of these cases will be submitted to the Committee by the end of Q1/2020, and another case is pending.
Following are the main data on administrative enforcement actions in 2019 Administrative cases opened in 2019 Violation No. of cases Missing / misleading statements 4 Reporting violations and misleading the authority 1 Offering and selling securities without a prospectus 3 Managing a trading platform without a license 1 Securities fraud 1
Decisions of the Administrative Enforcement Committee Enforcement settlements
Administrative case 8/17 ISA v. Albar Mimunit Services Ltd On February 13, 2019, the Administrative Enforcement Committee approved an enforcement settlement between the ISA and Albar Mimunit Services Ltd. In the settlement, the company admitted to four violations of negligent inclusion of misleading information in the company’s financial statements for the years 2010-2012 and in the financial statements for Q3/2013. According to the settlement, the company was negligent in reviewing the estimate used to calculate the licensing expenses of the company’s vehicle fleet in the profit and loss statement, which affected the calculation of prepaid licensing expenses in the balance sheet. In the enforcement settlement, a monetary fine of NIS 850,000 was imposed on the company, and the company undertook to take steps, within three months of the settlement, to prevent recurrence of the violations, including development of a procedure to control and validate estimates, development of a procedure for collecting the information and data underlying the estimates, and assimilation and revision of the procedure from time to time.
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Administrative Case 3/18 ISA v. Taldor Computer Systems (1986) Ltd. On April 30, 2019, the Administrative Enforcement Committee approved an enforcement settlement between the ISA and Taldor Computer Systems (1986) Ltd. The settlement attributed to the company violations of negligent inclusion of misleading statements in the financial statements beginning from the financial statements for the year 2010 to the financial statements for Q3/2013.
Initially, this case was investigated in the criminal track, at the conclusion of which Merav Gat, the financial director of managed services division in Taldor, was prosecuted for reporting offenses, and for manipulating the financial statement figures over years, in such manner as to increase the division’s earnings, and consequently, the earnings of the public company. The District Attorney’s Office closed the criminal case against the remaining suspects, but the matter was referred to the administrative track because it was the position of the ISA that the company, Aryeh Rimini CEO, Eyal Tuchmand CFO, and Ofer Erez the auditing accountant, had been negligent in their duties, failed to establish sufficient controls or identify warning indications, and as a result failed to discover Gat’s actions over a long period.
The company admitted to most of the facts listed in the enforcement settlement, but did not admit that these facts constitute reporting violations. Nonetheless, in the settlement, the company agreed to assume enforcement measures in the form of a monetary fine of NIS 1,150,000.
Administrative Case 3/18 ISA v. Aryeh Rimini On June 2, 2019, the Administrative Enforcement Committee approved an enforcement settlement between the ISA and Aryeh Rimini, who served as CEO of Taldor Computer Systems (1986) Ltd on the relevant date for the violations. The settlement determined that Rimini was negligent in the duty of supervision imposed on a CEO of a public company, with respect to the financial statements from the annual financial statements for the year 2010 to statements for Q3/2013, which contain misleading information. Among other things, as a CEO Rimini failed to resolve the flaws in the company’s internal controls and specifically in the transfer of the financial data of the company’s managed services division to the headquarters of the public company for incorporation in the consolidated financial statements. Rimini admitted to the majority of the facts listed in the settlement and agreed to sanctions, but did not admit that the facts constitute violations. In the settlement, a NIS 100,000 fine was imposed on Rimini as well as a suspended fine in the same amount.
Administrative Case 4/19 ISA v. Atrade Ltd. On July 23, 2019, the Administrative Enforcement Committee approved an enforcement settlement between the ISA and Atrade Ltd. In the settlement, the company admitted that between December 8, 2016 and March 28, 2017, it violated the terms of its license by allowing several of clients to execute new transactions in financial instruments prohibited for trading by the ISA. The company thereby committed a violation of managing a trading platform without a license or in violation of the terms of its license, and in violation of the provisions of the Securities Law. Under the settlement, a monetary fine of NIS 500,000 was imposed on the company, in addition to a suspended fine in the same amount. In addition, the company undertook to action to prevent recurrence of the violation by adopting and implementing a comprehensive internal enforcement program based on standards agreed upon in the settlement, which include, among others,
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appointment of an external monitor. The monitor will confirm the effective implementation of the enforcement program and its procedures, and submit a reporting of findings to the ISA on a quarterly basis.
Administrative Case 3/19 ISA v. Wize Pharma Ltd, Uri Eizenberg, and Ron Miron On August 1, 2019, the Administrative Enforcement Committee approved a settlement between the ISA and Wize Pharma Ltd, Uri Eizenberg who served as replacing CEO and CFO of the company on the date relevant to the violations, and Ron Miron, who served as CBOD of the company on the date relevant to the violations. In the settlement, the respondents admitted to two violations concerning the negligent inclusion of misleading statements in the company’s periodic report for the year 2015 and the report for Q1/2016, with respect to the company’s ability to quickly obtain Fast Track approval for the sale of the medication for treating dry eye in the US. The Panel concurred with the ISA’s position that the approval track for marketing a specific medication is material information that directly affects the date on which the products may first be sold and on which revenues from the market may be received. Under the settlement, a monetary fine of NIS 200,000 was imposed on the company, considering the company’s financial situation. A fine of NIS 175,000 was imposed on Eizenberg, who was prohibited from serving as a senior officer in a supervised entity for a period of nine months, and a monetary fine of NIS 150,000 was imposed on Ron Miron in addition to a suspended monetary fine in the same amount.
Administrative Case 5/19 ISA v. Kitov Pharma Ltd, Isaac Israel, Paul Waymack, and Simcha Rock On August 13, 2019, the Administrative Enforcement Committee approved a settlement between the ISA and Kitov Pharma Ltd, Isaac Israel, who served as the company’s CEO on the date relevant to the violations; Paul Waymack, who served as the company’s CBOD on the relevant date; and Simcha Rock, who served as the company’s CFO on the relevant date. Under the settlement, the company and Isaac Israel admitted to two violations of negligent inclusion of misleading information in two immediate reports submitted by the company in connection with an independent committee it appointed to analyze the results of a clinical trial the company conducted on its flagship drug. Waymack and Rock were involved and admitted to one violation.
Initially, this case was investigated in the criminal track. In view of the extenuating circumstances that emerged in the investigation and the personal circumstances of the violators, the parties decided to sign an enforcement settlement rather than pursue the investigations and transfer findings to the District Attorney’s Office. Under the settlement, a monetary fine of NIS 1,500,000 was imposed on the company, a monetary fine of NIS 200,000 and prohibition to serve as a senior officer in a supervised entity for 12 months was imposed on Isaac Israel. A fine of NIS 100,000 and a suspended monetary fine in the same amount were imposed on Paul Waymack, and a fine of NIS 80,000 was imposed on Simcha Rock and suspended prohibition on serving as an officer in a supervised entity for a period of 6 months.
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Administrative Case 1/19 ISA v. MHR1 Investment Management Ltd, Zach Hermon, and Yagil Manovitz On October 3, 2019, the Administrative Enforcement Committee approved a settlement between the ISA and MHR1 Investment Management Ltd. group, and Zach Hermon and Yagil Manovitz, two of the owners who are also the group’s co-CEOs and directors. Under the settlement, the respondents admitted to three violations of negligent offering and sale of securities to the public without a prospectus in 2014-2017 and an additional violation of negligently misleading the ISA. Among other things, securities were offered through advertisements on the Internet, on the company’s website and on other websites, and in the financial press in Israel. These publications included statements regarding an expected return of 10% and contained a description of the location of the property and other details. Furthermore, in two of the partnerships in the group, the respondents also sold securities to more than 35 investors in a consecutive 12-month period. Under the settlement, a monetary fine of NIS 350,000 was imposed on the group, and a fine of NIS 150,000 was imposed on each of the owners, Zach Hermon and Yagil Manovitz.
Administrative Case 3/18 ISA v. Ofer Erez On October 7, 2019, the Administrative Enforcement Committee approved a settlement between the ISA and CPA Ofer Erez, the managing partner on behalf of the accounting firm that audited the financial statements of Taldor Computer Systems (1986) Ltd in the period relevant to the violations. The settlement attributes to CPA Erez violations of negligent inclusion of misleading information in the auditor’s opinion on the annual financial statements of Taldor for the years 2010-2012. CPA Erez admitted to the majority of the facts listed in the enforcement settlement and agreed to sanctions but did not admit that these facts constitute violations. Under the settlement, a monetary fine of NIS 150,000 and a suspended monetary fine in the same amount were imposed on Erez.
The Committee expressed its opinion on the principle that an accountant who audits a public company effectively serves as its gatekeeper, whose function is to supervise it and oversee its operations to prevent recurrence of violations. An auditing accountant is supposed to assist the company in identifying any flaws in its procedures and reports that were unnoticed by its officers. An auditing accountant must adopt a vigilant, cautious, and skeptical approach in order to ensure that no misstatements in the financial statements are overlooked.
Administrative Case 3/18 ISA v. Eyal Tuchman On October 7, 2019, the Administrative Enforcement Committee approved a settlement between the ISA and Eyal Tuchman, who served as CFO in Taldor Computer Systems (1986) Ltd in the period relevant to the violations. The settlement attributed to Tuchman violations of negligent inclusion of misleading information in the company’s financial statements, beginning from the financial statements for the year 2010 until the financial statements for Q3/2013. According to the position of the ISA, Tuchman was negligent by failing to perform sufficient tests to verify the accuracy of the data transferred by CPA Gat from the division to the company’s headquarters, although he was required to test the accuracy of the data that she managed. Tuchman admitted to the majority of the facts listed in the settlement and agreed to sanctions but did not admit that these facts constitute reporting violations. A monetary fine of NIS 150,000 was imposed on Tuchman, including a suspended prohibition on serving as an officer in a supervised entity for a period of 12 months.
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The Committee accepted the ISA’s principled argument that, as the company’s CFO, the respondent had direct responsibility for the preparation of the financial statements and verification of the accuracy of the data contained therein.
Administrative Case 7/19 ISA v. Iintoo Investments Ltd. On December 5, 2019, the Administrative Enforcement Committee approved an enforcement settlement between the ISA and Iintoo Investments Ltd. Under the settlement, the company admitted to the violation of negligently offering securities to the public without a prospectus, through the actions of the company’s representatives who provided information to potential investors concerning their returns on the various investment tracks. The representatives presented the financial data or returns to more than 35 offerees, in each of the projects in which the company was invested and each of the tracks, and therefore failed to meet the terms of the exemptions to publishing a prospectus defined in the law. Under the settlement, a monetary fine in the amount of NIS 300,000 was imposed. The company also undertook to take steps, within three months from the settlement approval date, to prevent recurrence of the violation and to revise its existing enforcement procedure in the matter of implementation of the provisions of Section 15 of the Securities Law, to ensure that the procedure is assimilated, and to monitor its implementation.
Administrative Case 6/19 ISA v. Hagshama Fund Ltd. On December 9, 2019, the Administrative Enforcement Committee approved an enforcement settlement between the ISA and Hagshama Fund Ltd. Under the settlement, the company admitted to the violation of negligently offering securities to the public without a prospectus and in violation of exemptions defined in the law regarding the obligation to publish a prospectus. On a specific date after the launch of the company’s application in July 2017 and in the months thereafter until mid-December 2017, the application displayed presentations about the company’s past projects that included financial data whose inclusion is prohibited in publications other than a prospectus, according to the granted exemption, but these presentations were exposed to and accessible by all application users as a result of a technical malfunction that the company failed to identify. Under the settlement, a monetary fine of NIS 300,000 was imposed on the company and the company was required to take steps to prevent the recurrence of the violation and undertook to develop and adopt an enforcement procedure concerning the implementation of the provisions of Section 15 of the Securities Law.
Administrative Case 10/17 ISA v. Boris Avrahamov On December 26, 2019, the Administrative Enforcement Committee approved an enforcement settlement between the ISA and Boris Avrahamov, who served as the director of budgetary control in U. Dori Construction Ltd in the period relevant to the violations, and was in charge of preparing budgetary control reports that were used as the basis for preparing the company’s financial statements. Under the settlement, Avrahamov admitted to the commission of six violations of negligently including misleading information in the company’s financial statements in the period between Q4/2012 and Q1/2014, which caused the erroneous presentation of the profitability of the company’s projects. The financial statements included misleading information that necessitated a restatement of the company’s financial statements in respect of errors in the amount of NIS 441 million. Of this amount, NIS 313 million is attributed to violations under the settlement. Avrahamov admitted that he negligently included misleading information in the budgetary control reports,
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of which he was responsible in the capacity of his position and which he signed, resulting in the inclusion of misstatements in the six financial statements that are the subject of the proceeding. The Committee Panel accepted the ISA’s interpretation that the administrative violation that requires evidence that the violator “included” misstatements in the financial statements also applies to Avrahamov due to his responsibility for preparing the budgetary control reports, despite the fact that he did not prepare the financial statements or sign them. Under the settlement, a monetary fine in the amount of NIS 200,000 was imposed on Avrahamov, a suspended fine was imposed in the same amount, and a prohibition from serving as an officer in a supervised entity for a period of two years.
This is the first of three enforcement settlements signed with violators in this case and, as at the date of this report, were brought before the Administrative Committee. A ruling in the cases of three additional individuals involved in the case is expected to be handed down by the Committee in the course of 2020.
Administrative enforcement proceedings
Administrative Case 8/17 ISA v. Ynon Amit and Irit Franko On April 12, 2019, the Administrative Enforcement Committee Panel published its decision in the matter of Ynon Amit and Irit Franko. The Panel determined that Amit and Franko are responsible for the commission of four violations of negligent inclusion of misleading information in the financial statements of Albar Mimunit Services Ltd. for the years 2010-2012 and for Q3/2013 (see above on the Panel’s decision to approve an enforcement settlement between the ISA Chair and the company). The Committee determined that the respondents were negligent, as a result of flaws in the control and oversight of the use of the estimate that was used to calculate the licensing expenses of the company’s vehicle fleet in the profit and loss statements, and that affected the calculation of prepaid licensing expenses. Negligence was reflected in the respondents’ failure to establish controls to test and validate the results of the estimate, and their failure over several years to identify warning indications arising from the financial statement figures. The Panel therefore decided to impose on Ynon Amit, who served as the company CEO in the relevant period, a monetary fine in the amount of NIS 60,000, a suspended fine in the same amount, and prohibition on serving as a senior officer in a supervised entity for a period of six months. The Panel also imposed on Irit Franko, who served as CFO of the company in the relevant period, a monetary fine in the amount of NIS 60,000, a suspended fine in the same amount, and suspended prohibition on serving as a senior officer in a supervised entity for a period of six months.
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Decisions on appeals
Administrative Appeal 18156-12-17 Gal Chet v. ISA and others On September 19, 2019, the District Court in Tel Aviv (Economic Department, the Honorable Judge Khaled Kabub) dismissed the appeal brought by Attorney Gal Chet against the decision of the Administrative Enforcement Panel, which found him responsible for the commission of a reporting violation of misleading reporting by the public company Therapix Biosciences Ltd.
A matter of principle arose in this case, on whether it is possible within an administrative proceeding, to impose liability for inclusion of misstatements in the financial statements of a public company, on external legal counsel who were involved in these actions and acted negligently. The Court determined that it does not see any justification for make an exception for the external counsel by excluding it from the administrative proceeding. The Court believed that, based on the wording of the violation and the explanatory note in the law, the administrative violation should be interpreted as applicable to anyone who included and was directly involved in the inclusion of misleading information in a report. The identity of the violator is not limited to the company’s organs or officers. The Court determined that in the circumstances of the case before it, Attorney Chet played a material and central role, and the company commissioned his services to be responsible for the company’s reports. The Court determined that Chet is responsible for the violation of including misleading information in an immediate report, and affirmed the enforcement measures imposed on Chet in the administrative proceeding: a monetary fine in the amount of NIS 60,000 and a suspended fine in the same amount. In addition, the petitioner was ordered to pay court costs in the amount of NIS 10,000.
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Monetary fines
In 2019, the Administrative Enforcement Department studied the imposition of simple monetary fines on supervised entities in 38 cases. Of these, monetary fines were imposed in 20 cases, and these included fines in matters that were the subject of enforcement actions for the first time, such as violations related to the employment of interns. In 18 cases, the Department decided not to pursue a monetary fine proceeding. Seven additional cases are in various stages of a monetary fine proceeding.
Of the 20 cases in which monetary fines were imposed, 16 monetary fines were imposed under the Securities Law and/or the Companies Law, and 4 monetary fines were imposed under the Investment Advice Law.
Monetary penalties imposed under the Securities Law and/or Companies Law
Offender Penalty Violation - Section and description amount 1 Plasto Kargal Ltd NIS Section 36 of the Securities Law and Regulation 10(b)(14) or Regulation 10(b)(1)(d) of group 69,158 the Reporting Regulations – failure to present the board of directors’ reasoning that warning indications do not indicate a liquidity problem in the company. 2 Aaora Investment NIS Provisions of Regulations 41(A1) of the Annual Financial Statements – lack of disclosure Ltd 200,376 in the periodic reports for the years 2016 and 2017 of a consideration in a transaction with controlling shareholders. 3 Fantasy Network NIS Provisions of Regulations 30 and 36 of the Reporting Regulations and Legal Position 15,000 104-4: Prohibition on publishing information before submission to the ISA – Publication of information to the public through means other than the MAGNA reporting system – failure to publish an immediate report. 4 Panaxia NIS Provisions of Regulation 36(a1) of the Reporting Regulations and Sections 3(3)(c) and Laboratories Israel 22,500 2(2) of the Fifth Addendum to the Reporting Regulations – missing information in an Ltd (formerly, immediate report on acquisition of an asset. Herodium Investments Ltd) 5 Intercure Ltd. NIS Provisions of Regulation 36(a1) of the Reporting Regulations and Sections 3(3)(c) and 22,500 2(2) of the Fifth Addendum to the Reporting Regulations – missing information in an immediate report on acquisition of an asset. 6 Next Gen Biomed NIS Section 94(a) of the Companies Law – CBOD was not in service for a period exceeding Ltd. 54,000 60 days. 7 Medivie NIS Provisions of Regulation 33 of the Reporting Regulations – failure to make timely report Therapeutic Ltd. 54,000 of change in holdings. 8 Lodan Engineering NIS Section 239(a) of the Companies Law – two external directors were not in service for a Company Ltd. 34,143 period exceeding 90 days. 9 Shefa Yamim Ltd. NIS Section 239(a) of the Companies Law – two external directors were not in service for a 45,000 period exceeding 90 days.
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10 Kamen Capital Ltd. NIS Section 94(a) of the Companies Law – CBOD was not in service for a period exceeding 22,500 60 days. 11 Medivie NIS Section 94(a) of the Companies Law – CBOD was not in service for a period exceeding Therapeutic Ltd. 45,000 60 days. 12 Arazim Investments NIS Section 239(a) of the Companies Law – two external directors were not in service for a Ltd. 45,000 period exceeding 90 days. 13 Vitale Capital Ltd. NIS Section 36 of the Securities Law and Regulation 39 of the Reporting Regulations and 135,000 Section 119 of the Companies Law – failure to file financial statements for Q2/2018 in a timely manner, and a CEO was not in service pursuant to the provisions of the Companies Law. 14 Rapak NIS Provisions of Regulations 8B(a) and 49 of the Reporting Regulations – failure to attach Communications 107,572 very material valuations to the company’s periodic report for the year 2017 and to and Infrastructure the statements for Q1/2018 in the matter of the Ramat Gavriel and Alon Tavor power Ltd. stations. 15 Algomizer Ltd. NIS Sections 15A(a)(1) and 15(b) of the Securities Law and Regulation 2 of the Securities 15,000 Regulations (items concerning Sections 15A through 15C of the Law). 16 Roy Tamari, NIS 3,276 Section 37 of the Securities Law together with the provisions of Regulation 33 of the controlling Reporting Regulations – failure to report a change in holdings to the company. owner of Panaxia Laboratories Israel
Monetary penalties imposed under the Investment Advice Law
Offender Penalty Violation - section and description amount 1 Halman Aldoby NIS Directive of the ISA under Section 28 of the Investment Advice Law – violations Investment Portfolio 104,496 concerning the employment of three interns. Management (2007) Ltd. 2 Etzioni Value- NIS Section 26(A) of the Investment Advice Law together with Regulations 2(A), 10, and 12 of Based Portfolio 32,210 the Regulations on reporting to customers – Defects in periodic reports to customers. Management Ltd.
3 Bank Leumi L’Israel NIS Section 28(B) of the Law (Section 4 of the Directive for Investment Advising Licensees Ltd. 220,000 and Investment Marketing Licensees concerning Referral of Customers to Portfolio Management Services – Dissuading Customers from obtaining portfolio management services.
4 Alumot Investment NIS Section 26 of the Investment Advice Law and provisions of Regulations 2(A), 5, and 11 of Portfolio 54,164 the Regulation of Investment Advice, Investment Marketing, and Portfolio Management Management Ltd. Regulations (Reports) 5772-212 – Defects in the Periodic Reports to Customers.
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Private-Civil Enforcement
Legal proceedings to which the ISA is a party Following is a list of the civil and administrative proceedings filed against the ISA in the reporting period or that were pending this year:
A. Civil Action 1634/06 Abayev Yuri and others v. Roseneftgas Invest Ltd and others; Civil Action 27603-12-11 Abramovich and others v. ISA and others; Civil Action 1470/06 Havitz Vladimir and others v. Roseneftgas and others; Administration Appeal 61352-06-13 Havitz Vladimir and others v. Israel Police and others; Civil Appeal 2394/18 Plony v. Israel Police and others. Monetary claims were filed against the Israel Police, the Prison Service, and the ISA concerning a fraudulent scheme perpetrated by Gregory Lerner. The claims were filed by app. 560 citizens, alleging that app. 2,500 individuals lost app. NIS 120 million in Mr. Lerner’s fraudulent scheme. Among other things, the plaintiffs alleged that Mr. Lerner received this sum in a public offering of securities without a prospectus, in violation of the Securities Law, and that the ISA was aware of the violation of the Securities Law but did not prevent the activity that led to the harm suffered by the plaintiffs and was therefore negligent.
In response to a ruling by the District Court that dismissed the claim against all respondents, an appeal was filed to the Supreme Court in March 2018, Civil Appeal 2394/18 Plony v. Israel Police and others.
The Supreme Court handed down its decision in April 2019, dismissing the appeal and determining that while the Israel Police, the ISA, and the Prison Service indeed are obligated to protect the well-being and property of the State’s citizens, each in its field, it is not possible to impose on them any liability for the appellants’ losses and that such liability is not part of our law, and the State’s treasury is too poor to provide free insurance to risk-taking investors.
B. Civil Action 26307-03-16 Rotem and others v. ISA; Civil Action 11283-09-16 Kessler and others v. ISA; Civil Action 62033-11-17 Dvorah v. ISA; Civil Action 11094-11-17 Haim Aharon v. ISA; Civil Appeal 6313/19 ISA v. Rotem Shmuel and others Four proceedings were consolidated in view of the similar cause of action underlying all cases. These are claims against the ISA in the amounts of NIS 800,000, NIS 300,000, NIS 153,000, and NIS 700,000. The cause of action is the ISA’s alleged negligence in supervising Utrade Premium Ltd. The plaintiffs allege that they lost the money they had invested in the aforementioned company, and the ISA may have been negligent in supervising the company’s conduct. In June 2019, a decision was handed down in this proceeding, partially deciding in favor of the plaintiffs. The ISA was ordered to compensate the plaintiffs in the amount of app. NIS 890,000.
In October 2019, the ISA filed an appeal with the Supreme Court against the lower court’s ruling (Civil Appeal 6313/19 ISA v. Rotem Shmuel and others). As at the date of this report, the appeal is in the stage of closing submissions.
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C. Civil Action 31876-03-16 Sudit v. ISA A claim filed against the ISA in the amount of NIS 100,000. The cause is alleged negligence in supervision of Utrade Premium Ltd. The plaintiff argued that funds invested in the aforementioned company were lost and the ISA may have been negligent in supervising the company’s conduct.
As at the date of this report, the proceeding in this matter is pending.
D. Civil Action 21397-11-16 Walid Sayid v. State of Israel and others; Civil Action 6931-05-17 Plony v. State of Israel and others These are two tort actions filed against the ISA that were consolidated. According to these claims, the ISA was negligent in filing indictments against the plaintiffs and thereby caused them damage. The position of the ISA is that the claim should be dismissed as the indictment against the plaintiffs was based on a solid legal and factual foundation and the proceeding in their matter was handled fairly.
As at the date of this report, statements of claim and medical opinions have been filed and the parties referred to mediation before the Honorable (ret.) Judge Adi Zarkin, who advised to resolve the case in settlement.
E. Civil Action 46340-10-19 Saar Weintraub v. State of Israel In October 2019, a tort action was filed against the District Attorney’s Office – Taxation and Economics, in the amount of app. NIS 7 million by the plaintiff after he was acquitted in the criminal proceeding against him. The plaintiff argued that the District Attorney was negligent in its decision to file an indictment against him without properly performing all the necessary tests and by disregarding exculpatory materials and evidence. Moreover, it was argued that the decision stemmed from extraneous considerations and motives.
As at the date of this report, the proceeding is pending.
F. Administrative Appeal 676-11-19 Giluy Naot – Movement for the Protection of Investors v. ISA In November 2019, an administrative appeal was filed against the ISA under the Freedom of Information Law. The appeal was filed by the non-profit Giluy Naot – Movement for the Protection of Investors (Registered Association), in which the Court was requested to order the ISA to deliver to the appellant copies of its correspondence with three companies named in the appellant’s freedom of information request, related to a draft prospectus, and notes from meetings that the ISA held with the companies’ representatives in this matter. The ISA filed its response to the administrative appeal. According to the ISA’s position, the information requested in the appeal should not be furnished for several reasons, including because disclosure of the requested information constitutes an extension of the due disclosure obligations defined by law and that publication of the requested information is prohibited by law. As at the date of this report, the proceeding is pending.
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G. Administrative Appeal 54496-0-18 Amteck Investment Portfolio Management Ltd v. ISA; Administrative Appeal 7690/18 Amteck Investment Portfolio Management Ltd v. State of Israel – ISA An administrative appeal filed by Amteck Investment Portfolio Management Ltd against the ISA’s decision to regulate “the signaling service” under “Directive to licensees in connection with rendering services through the use of technological means.” The matter of the appeal was Section 29 of the Directive, which prohibits interactions between a customer and a human entity on behalf of a license holder who renders signaling services, as, according to the petitioner, this section extremely exceeds the boundaries of reasonableness, is not proportionate, and is detrimental to the petitioner’s freedom of occupation.
In July 2018, a decision was handed down dismissing the appeal and affirming the ISA’s position. In October 2018, the appellant filed an appeal against the ruling by the lower court to the Supreme Court, Petition for Administrative Appeal 7690/18 Amteck Investment Portfolio Management Ltd v. State of Israel – ISA, and in November 2019, the appellant retracted its appeal, which was stricken.
H. Administrative Appeal 39063-06-18 Moshe Beeri v. ISA In June 2018, an administrative petition was filed against a decision by the ISA not to exercise its financing right granted under Section 55C of the Securities Law, and not to provide financial assistance to fund an appeal against a decision to certify a settlement in a class action case against Elscint Ltd and others (Civil Action (Haifa) 1318/99).
The ISA’s decision not to exercise the said financing authority was made because it was not convinced that there was a reasonable chance that the Court would accept the appeal, and it believed that in the public interest in the current case is not sufficient for the ISA to assist in financing its expenses.
In February 2019, the petition was stricken due to the petitioner’s failure to pay court fees.
I. Administrative Appeal 48953-01-19 Vilensky v. ISA In January 2019, a petition against the ISA was filed due to the absence of reasoning given for the Chair’s decision to initiate an administrative inquiry and enforcement proceedings against the petitioner.
In May 2019, the Court certified the understandings reached by the parties, in which the petitioner waived his claims and requested relief in exchange for the ISA’s agreement to modify the wording of the ISA Chair’s decisions on commencing an administrative enforcement proceeding from then on.
Administrative Petition 18156-12-17 Gal Hat v. ISA In December 2017, Attorney Gal Hat filed a petition against the Panel’s decision in proceeding Administrative Claim 8/16 ISA Chair v. Gal Hat. In brief, the petitioner argued that the Administrative Enforcement Committee erred when it found Attorney Gal Hat liable for an administrative violation of inclusion of misleading information in an immediate report. It was also argued that the Committee erred in the enforcement means it imposed on the petitioner.
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In September 2019, a ruling was handed down dismissing the petition. See above for the decision of the administrative enforcement proceeding. See the ISA website for all decisions in proceedings that have been concluded.
The ISA’s involvement in private enforcement In 2019, the ISA continued its involvement in the field of private enforcement of securities law and corporate law, in three main channels: (a) financial assistance in class actions and derivative related to securities; (b) assessment and active involvement in settlements in these actions; (c) support and professional opinions in legal proceedings.
One of the goals of the ISA is to remove obstacles to private enforcement and encourage worthy private proceedings. The ISA assigns great importance to private enforcement proceedings and their encouragement for several reasons: private enforcement is the only course of action for compensating investors for the damage caused to them by a violation; the possible outcome of compensation or other relief makes private enforcement a deterring factor before a violation is committed; private enforcement contributes to the development of law and the range of existing enforcement measures; private enforcement constitutes residual and supplementary enforcement for violations that are not “handled” by the ISA, either due to budgetary constraints or limited authority.
The ISA aims to contribute to the development of private enforcement by offering tools and creating a convenient “work environment” for investors interested in filing worthy class actions and derivative claims.
A. Financing class actions and derivative claims One of the ISA’s most significant tools for encouraging private enforcement is participation in financing class actions in the field of securities and derivative claims. Accordingto to Section 55C of the Securities Law and Section 205A of the Companies Law, the ISA may assist in financing the expenses of class action or derivative proceedings, as relevant, if it persuaded that the action has public interest and there is a reasonable chance that the Court will certify the action as a class or derivative action. The ISA regularly exercises its power to finance class actions and derivative actions. Information on all the approved financing requests is available on the ISA website.
In 2019, the ISA decided to provide financial assistance in principle in two new proceedings and to provide specific financial assistance in three proceedings for which financial assistance was previously approved in principle. Assistance typically involves financing of expert opinions, whose cost is high.
Following are new proceedings for which the ISA decided to provide financial assistance in principle in the reporting year.
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A.1. Class Action 60401-12-17 Eli Buchriss v. Apollo Power Ltd and others The main allegation underlying this action is that Apollo Power published an immediate report on the morning of December 18, 2017, concerning an experiment that the company had conducted in mining cryptocurrencies using a solar system that is under development by Solapint, which included misleading and missing information about the experiment and consequently caused losses to the movants who purchased securities following said report.
In November 2019, the District Court dismissed the motion to certify and determined, among other things, that the plaintiff satisfied the burden required at this stage and proved that there is a reasonable possibility that the immediate report was a misleading report, but the movant failed to satisfy the burden of proving that the investing public sustained losses in the aftermath of said report. The Court ordered the movant to pay court costs in the total amount of NIS 30,000.
A.2. Class Action 48536-12-17 Amotz Horev v. Poalim IBI – Management and Underwriting Ltd and others The main allegation underlying this action is that the company concealed material information from investors by failing to disclose material details about significant risks related to the issues of US real estate firms, which is the company’s main and most profitable source of revenue. It was also alleged that the respondents violated general and specific disclosure obligations under the Securities Law and its regulations. As at the date of this report, the proceeding is pending.
Positions on settlements in which the ISA was involved In 2019, the ISA studied the settlement approval requests filed in securities class actions and derivative actions, and was involved in the drafting of 11 opinions filed in said actions. In a considerable number of cases, these positions affected the approved settlement arrangements, in a manner that was beneficial for the members of the class. The positions of the Attorney General that were filed jointly with the ISA in settlements are available on the ISA website.
Civil legal proceedings in which the ISA expressed a professional opinion in the past year and/or in pending proceedings
In the reporting year, the ISA expressed its position to the courts in legal proceedings that were considered to be of special or principled importance. On occasion, these positions were filed jointly with the Attorney General or his legal counsel, but even in these cases, the ISA played a significant role in drafting the positions. For additional information on these positions, see the ISA website.
Collaboration in enforcement and information exchange The ISA considers collaboration with other supervisory and enforcement agencies in the area of securities to be extremely important, and a critical means to achieve the ISA’s enforcement goals. The ISA conducts an increasing number of investigations that require actions outside Israel’s borders and information from foreign entities, and these necessitate ongoing international cooperation.
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IOSCO (the global leading organization of securities commissions) published a Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (MMoU). The MMoU has been signed by 124 commissions, and creates a significant basis for the ISA’s enforcement actions in the international arena. In 2019, the ISA sent 10 requests to foreign agencies for information and assistance in judicial inquiries, of which 6 requests concerned proper and fit assessments. The ISA also handled 20 requests from foreign regulators, including 11 requests concerning proper and fit assessments.
Administrative arrangement for continued cooperation with EU commissioners To continue its collaboration with EU agencies and regulators, the ISA signed an Administrative Arrangement for transfers of personal data. The Administrative Arrangement is designed to ensure that securities regulators that are connected through MOUs on cooperation to promote the markets and protect investors (including through enforcement and supervision) may continue to exchange personal data to corresponding agencies in the EU and vice versa, despite the limitations implicit in the General Data Protection Regulations (GDPR) with respect to the transfer of personal data from European countries.
At end December 2019, 28 EU countries and 17 regulators outside the EU signed the Administrative Arrangement (including the CFTC and SEC - United States, the OSC and QAMF -Canada, the FSA - Japan, the SFC - Hong Kong, and the ASIC- Australia).
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Regulation and Supervision
Preparations for signing the Enhanced IOSCO MMoU
The ISA is preparing to file an application to sign the extended IOSCO agreement (EMMoU), which includes the following five new powers that signatory authorities commit to use to assist foreign agencies that submit a request for assistance:
To obtain and share audit work papers; To obtain and share existing Internet service provider records; To compel physical attendance for testimony; To obtain and share existing telephone records. To freeze assets;
Signatories to the EMMoU may request these forms of assistance from any other signatory. The ISA plans to file an application for IOSCO’s review in the first quarter of 2020.
Declaration of intentions to collaborate in enforcement action with the Italian Commissione Nazionale per le Società e la Borsa In view of Britain’s secession from the EU, MTS s.p.a., which operates the MTS s.p.a Israel trading platform on which Israel government bonds and treasury bills (Makam) are traded, transferred its operations from England to Italy, which is a member of the EU. In response, and in view of the fact that the financial instruments traded on this platform are Israeli instruments, and several platform participants are Israelis or have a linkage to Israel, the ISA and the Italian Commissione Nazionale per le Società e la Borsa signed a declaration of intention of supervisory collaboration concerning the operation of this platform. This declaration determines, among other things, a mechanism for ongoing updates between the agencies, and confidentiality clauses.
The ISA is also involved in the following additional projects to promote a fair capital market, in addition to the ongoing regulatory and supervisory work by its departments:
Code of professional conduct for members of audit committees / financial statements committees In the past year, ISA Staff drafted a code of professional conduct for the members of independent board committees, which places emphasis on the processes they administer in the capacity of their duties as gatekeepers of the public’s money. For example, the appointment of accountants and the considerations used to form a recommendation on the accountant’s appointment and salary; ongoing agreement with the auditing accountant and oversight of compliance with the auditor’s independence; the committees’ duties in approving the financial statements. In the process of developing the code of professional conduct (which included a comparative study of law and meetings with various capital market actors), ISA Staff found significant variance across firms in the manner in which their committees perform their duties with respect to these issues. The code of professional conduct is therefore expected to assist committee members in performing their duties as prescribed by law and to improve the quality of reporting and auditing of financial statements. ISA Staff intends to publish the code of professional conduct in 2020.
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Mandatory underwriting project A legislative reform in securities laws, which included comprehensive regulation of underwriting activities, was concluded in 2007. Additional elements that were regulated by the new reform included the option to sell securities without a tender and the option to offer securities based on a draft prospectus before a permit is granted by the ISA. Nonetheless, the significance of the underwriting sector has declined over time, and today, most issues are administered by distributors that provide no underwriting guarantee and consequently bear no responsibility for the information contained in the prospectus.
In contrast to other developed markets, Israel is an exception in the absence of a gatekeeper that ensures full prospectus disclosures at the very sensitive point in time when firms stand to benefit from their offer to the public. The ISA is promoting a project designed to incorporate a gatekeeper function in the prospectus publication process. The project also encompasses additional issues related to gatekeepers’ functions in public issues, including but not limited to defining underwriters’ and distributors’ duties of reliability, and amendments to the conflict of interest rules that apply to underwriters and distributors.
Companies with no majority shareholder The number of public companies in Israel with no majority shareholder has risen in recent years. Of all the companies in Israel’s capital market, app. 12% have no majority shareholder. These companies account for 28% of the total market capitalization.
The corporate governance rules grounded in Israel legislation are largely directed at companies with a majority shareholder. A joint team of the Ministry of Justice and ISA was established to explore the need to adjust these rules in view of the fact that unique corporate governance issues and concerns arise with respect to companies with no majority shareholder. This is also an opportunity to make necessary amendments to the law and encourage companies with no majority shareholder to register for trade (including as dual-listed companies) on the stock exchange.
The team published a call for public comments, conducted many meetings with public representatives (representatives of firms, attorneys, and academic scholars), and studied the large number of responses to its call. The team is currently developing its proposal for amendments to the Companies Law and the Securities Law.
Adjusting of supervision of mutual funds 1. 1. In late 2018, Amendment 28 to the Funds Law came into effect, transforming the majority of ETNs, which were issued under the Securities Law, into ETFs. In the reporting year, efforts were directed to make the necessary adjustments to facilitate the supervision of this new product.
2. 2. In late 2017, units of foreign mutual funds (that is, mutual funds registered outside Israel) were offered for the first time to the public in Israel. This trend continued in 2018 and 2019, and several foreign mutual managers currently offer units to the public. In 2019, the first foreign ETFs were registered for trade in Israel. ISA Staff continues to study the operations of these funds and regularly addresses the issues and concerns that arise with respect to foreign fund managers, their representatives, and their distributors. On December 31, 2019, 5 foreign fund managers and 14 open-ended foreign funds were active, and 23 foreign ETFs were registered for trade in Israel.
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Supervision of licensees 1. This year, representatives of the banks and mutual fund managers, and ISA Staff participated in a series of round-table meetings, with the aim of establishing an ongoing dialogue between investment advisers in the banks and mutual fund managers. The meetings focused on the material concerns of each party with respect to the products in question (the mutual funds) and their distribution by the investment advisory functions in the banks, and especially the changes required to resolve these concerns and improve the situation.
2. Mandatory insurance - In the reporting year, ISA Staff studied the insurance requirements that apply to licensees in order to ensure that licensees’ operating risks match the insured amount (limit of liability) that licensees are required to carry in favor of its customers. Changes promoted in the past year include:
Publication of a circular that limits portfolio management of companies willing to insure portfolio management companies’ obligations to regularly revise the insurance operations, and consequently reduce insurance premiums. amounts in their policies, subject to certain conditions. This The data were published in early 2020. move is designed to provide a short-term solution. Promoting an amendment to Regulation of Investment Data collection on insurance events that occurred in Advice, Investment Marketing and Portfolio Management the period 2015-2019 – This information was collected Regulations (Equity and Insurance) 5760-2000 – the by ISA Staff based on the reports submitted by licensed proposed amendment will allow licensees to define their companies. The data were published in order to limit of professional liability according to the scale of their increase transparency and provide information on operations and their specific features. The proposed the risks embodied in licensees’ operations. The data amendment was published for public comments in January were published with the aim of increasing the number 2020.
Risk management – Investment intermediaries After Chief Risk Management Director was appointed to focus on the area of investment intermediaries, a draft directive was published for public comments in January 2020 on the main principles of risk management in the mutual fund sector. Among other things, the directive imposes on fund managers a duty to actively identify, assess, manage, document, and disclose risks and report them to the relevant authorities. The directive also defines an obligation to appoint a risk manager, and lists the procedures and principles that must guide the risk manager’s work.
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Licensing for investment advising, investment marketing, and portfolio management Investment advising, investment marketing, and portfolio management require a license issued by the ISA. Licenses are issued to individuals who pass the ISA’s licensing exams and complete an internship as required by law (it is possible to obtain a partial exemption from these requirements, depending on the circumstances), and after an assessment of the applicant’s reliability has been performed.
At end December 2019, 3,532 licensed professionals were active in the market, of which 801 investment portfolio managers, 2,228 investment advisers, and 503 investment marketers.
Licenses issued to individual portfolio managers, investment advisers, and investment marketers, 2015-2019
Year Portfolio managers Investment advisers Investment marketers Up to 2015 2,934 7,444 1,717 2016 128 114 104 2017 114 139 112 2018 116 79 109 2019 90 53 119 Total licenses issued 3,382 7,829 2,161
Corporate licenses granted, converted, and revoked in 2019
Portfolio Investment Investment management adviser marketing Total companies companies companies On December 31, 2018 162 124 12 26 Licenses granted 14 2 - 12 Licenses cancelled due to conversion - - - – Cancelled voluntarily 10 3 2 5 Revoked by the ISA - - - - Added due to conversion - - - - On December 31, 2019 166 123 10 33
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Licensing – Exams and internships10
Pass rates in 2019 exams11 Subject No. of examinees Annual pass rate12
Securities law and professional ethics 299 74% Accounting 984 50% Statistics and finance 899 44% Economics 847 41% Professional A 1,275 40% Professional B 152 59%
Applications for permits under Section 49A of the Securities Law and extension of the conditions for a general permit Section 45 of the Securities Law determines that only a company that was issued a stock exchange license may open and manage a stock exchange in Israel (“a system for trading in securities”). Under Amendment 63 to the Securities Law 5777- 2017 concerning a structural change in the stock exchange, Section 49A was added to the Securities Law, determining that no person may make an offer to provide trading services in securities using a securities trading system unless the system is managed by a stock exchange that is licensed in Israel. This Section also authorizes the ISA Chair to permit a person to make an offer to provide securities trading services using a securities trading system managed by a stock exchange outside Israel under specific conditions.
It is the position of the ISA that Section 49A, which is drafted broadly, prohibits the offering of securities trading services through a system that does not operate under a stock exchange license, and therefore applies to offers of securities trading services involving securities that are not traded on a stock exchange in Israel, such as brokerage services for the purchase of securities on stock exchanges outside Israel.
This section determines a permit regime for entities seeking to engage in the aforesaid activities, rather than a supervisory regime. The section is not a substitute for planned comprehensive regulation in the area of broker-dealers, which is designed to impose a supervisory regime on entities engaged in brokerage activities. With the aim of protecting the investing public, the terms of said permit define the minimum conditions that must be met by entities seeking to engage in such activities.
The general permit, published under Section 49A, determines minimum conditions that must be met by applicants of a permit to offer securities trading services on stock exchanges outside Israel to the general public. The general permit distinguishes between the type of activity performed, the entities that offer the services, and the target audiences of these services. The conditions of the original general permit determine that a permit to make offers to the general public only will
10. Licensing exams are held on two dates – in May/June and in November/December. In 2019, 4,456 exam units were administered, compared to 4,694 exam units in 2018. 11. Exemptions from exams – Regulation of Investment Advice, Investment Marketing, and Portfolio Managements Regulations (License Applications, Exams, Internship, and Fees) 5757-1997 determines that an individual who holds a relevant academic degree, as defined in the Regulations, is entitled to receive an exemption from the three fundamental exams: economics, accounting, and statistics and financing. In the reporting year, 549 applications for exemptions from exams were reviewed and 531 were approved. 12. Beginning in 2017, the calculation is based on the number of examinees who pass the exam relative to the number of units in the exam (and not relative to the number of examinees). Pass rates are calculated as a weighted average of the two exam dates.
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be issued only to entities with proven reliability and skills based on their status as banking corporations or non-bank stock exchange members, or brokers subject to specific supervision in the US and EU.
The ISA studied a large number of practical questions that were referred to the ISA with respect to the new permit regime, and published its position on these questions in a Q&A document that is available on the ISA website. The ISA received several hundred applications for a general permit. Applications were submitted to the ISA by supervised entities in Israel and supervised entities outside Israel, including a large number of brokers who are supervised as banking corporations in Switzerland and failed to meet the conditions of the original general permit. After a comparative study of Swiss regulation, the conditions of the general permit were modified to allow brokers who are supervised as Swiss banks to meet the minimum requirements for a permit to offer trading services on foreign stock exchanges to the general public.
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Supervision of offer coordinators An offer coordinator is a company that is supervised by the ISA and is required to register in the ISA’s registry of coordinators. An offer coordinator operates an online platform of offers based on a crowdfunding model. Offering companies may use the platform to offer securities of various offering companies according to the Securities Regulations (Securities Offers through Offer Coordinators) 5777-2017.
In 2019, two offer coordinators registered in the offer coordinators registry that is supervised by the ISA. The registry contains a total of 6 offer coordinators. In 2019, ISA Staff worked to define various aspects of crowdfunding activities. ISA positions and directives on this topic are available on the ISA website.
Inspections for in-depth examination of various issues Inspections are an important element in the supervisory toolbox. Inspections make it possible to conduct a thorough examination of supervised entities’ compliance with the law and applicable regulatory rules, and increase deterrence and compliance.
Inspections in 2018-2019
Stock exchange members (AML) Cross inspections – Trading platforms* Corporations – valuations and appraisals Cross inspections – Corporations** Cross inspections – Investments*** Business continuity and emergency preparedness Corporate governance – investment houses Ethical conduct of examinations Adequacy of internship Advisory functions in banks “Guidance” inspections – new portfolio managers Licensed companies Mutual funds
18 16 14 12 10 8 6 4 2 0
2018 2019
* Cross inspections were conducted in 4 trading platforms. ** Cross inspections were conducted in 9 corporations. *** Cross inspections were conducted in 21 mutual fund managers and trustees.
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Permits granted to reporting corporations to publish a prospectus Section 23A of the Securities Law defines the legal arrangement that permits the publication of a shelf prospectus, under which securities may be offered to the public on multiple occasions within a 24-month period (with an option to extend this period by 12 months), by publishing a shelf offering report that generally does not require an ISA permit. The shelf prospectus arrangement is designed to increase reporting corporations’ access to the capital market by reducing the time from the date of a corporation’s decision to raise capital, to the actual capital raising event, and to reduce the costs of the capital raising process. Today, the majority of permit applications filed by corporations are applications to publish shelf prospectuses. The data in the following chart indicate that, throughout 2019, shelf prospectuses accounts for app. 80% of all prospectus permits.
Permit applications to publish a prospectus and permits granted 2017-201913
Prospectuses Shelf prospectuses Year Applications Permits granted IPO permits (of Shelf Corporations Total shelf filed total permits) prospectus that offered prospectus permits (of total securities reports permits) according to a shelf prospectus 2017 173 134 (31%) 42 (66%)89 160 260 2018 163 129 (32%) 42 (63%)82 139 247 2019 147 130 (14%) 19 105 (80%) 152 252
Inspection of prospectuses and financial statements The Corporate Finance Department performs quarterly and annual examinations of reporting corporations as part of the prospectus inspection process. The examination is either initiated by the Department or triggered by a specific event (such as the introduction of new operations, debt settlement, etc.). A complete corporate examination is performed according to the prospectus inspection procedure or financial statements inspection procedure, and is scheduled for each corporation on a 4-5-year cycle, on average. In addition to this cycle, the Department’s staff exercises its discretion, sets priorities, and reviews the information known to the Department in order to determine which corporations will undergo an inspection, the type of inspection (partial or comprehensive), and the key topics for review.
13. The data refer to prospectuses that were filed and prospectuses that were granted a permit in the period from February 1 of each of the years in the table to January 31 of the following year.
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Comprehensive examinations of prospectuses and financial statements, 2017-2019
9 10 New operations 6 12 19 Financial statements 30 108 Prospectuses 81 52
2017 2018 2019
Enforcement decisions and staff positions on accounting and auditing issues
Unauthorized withdrawals by controlling shareholders ISA Staff has recently encountered several reported cases of erroneous money transfers from a reporting corporation to its controlling shareholder, in violation of the law. In response, ISA Staff issued an accounting enforcement decision in which it determined that to the extent that published financial statements contain errors related to such transfers of funds, the financial statements should be deemed to contain a material misstatement, irrespective of the amount of the transferred funds. The position of ISA Staff (expressed in previous decisions) is that the qualitative considerations used to assess the materiality of an error include an examination of whether the error concerns transactions between the corporation and its controlling shareholders or operations performed in violation of legal requirements. Furthermore, in those cases of erroneous transfers to controlling shareholders, it is also necessary to examine additional aspects of the incident, in addition to restatement of the financial statements, such as whether the internal controls of financial reporting (ICFR) are effective and whether a material weakness exists in ICFR.
Discounting credit costs on apartments where proceeds from their sale are recognized over time A significant change occurred in the residential construction development sector in Israel in response to the implementation of IFRS 15, as a result of which these development companies shifted to revenue recognition over time. A study by ISA Staff indicated that several approaches were used in practice in Israel to determine whether credit costs of residential housing units
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should be discounted when the revenues from the sale of the units are recognized over time. ISA Staff requested that the IFRS Interpretations Committee (IFRIC) issue its opinion on this matter. In 2019, the IFRS published d a decision that determines that credit costs cannot be discounted in such cases. ISA Staff’s position, which is largely based on the IFRIC’s position, determines the point in time to which credit costs in respect of apartment for sale may be discounted, including credit costs in respect of the land component of the apartments. The position also determines provisions regarding the method for initial implementation of the position, the mandatory date of implementation, and the disclosure required to be attached to the financial statements until implementation.
Q&A on a legal position concerning guiding principles for implementing an ICFR effectiveness assessment Regulations 9B and 38C of the Regulations of Periodic and Immediate Reports determine a mandatory disclosure by reporting companies concerning an assessment of their ICFR system by their boards of directors and managements. Shortly after the publication date of the Regulations in 2010, the ISA issued guiding principles for implementing the Regulations. The Q&A document published in 2019 informs the public of the ISA’s position and the experience gained on this issue.
Report of findings – Flaws and defects - in valuations of cannabis companies In November 2019, the ISA reported the findings of its study on cannabis company valuations, which have been published when these operations were incorporated into public companies in the past two years. The report listed the flaws and defects in these valuations. The ISA published its report in order to share its findings with the reporting corporations, valuators and investors, and to improve future valuations in general, and valuations regarding operations in the field of medical cannabis, specifically. In some cases, the ISA’s review found material flaws and defects in the use of estimates and their underlying assumptions, such as use of discounting rates that are inappropriate for companies in their infancy, a lack of sufficient basis for income projections, and reliance on a discount cash flow (DCF) model rather than transaction value, among other findings.
ISA Staff Position on legal issues
Shares held by participants in security-based swaps In the reporting period, the ISA published a legal position regarding the treatment of shares held by participants in security-based swaps, and specifically regarding the question who is considered the “holder” of the shares during the transaction period. The position was published in response to incidents of swaps involving shares traded on the TASE, most of which were determined to be artificial transactions designed to circumvent regulatory rules and restrictions. The position paper was designed to prevent these situations and create certainty surrounding the legal implications of swap transactions, especially with respect to the reporting requirements of holdings by principal shareholders, and consequently, compliance with the TASE rules on placement on or removal from the TASE maintenance list and its indices.
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Publications on public offerings of securities In June 2019, the ISA published a Staff Position on securities marketing and advertising in general, and specifically addressed investment ventures that solicit the general public to invest in such ventures. The position addressed the problematic aspects of the use of an ISA permit to publish a prospectus as part of the marketing efforts of corporations that offer securities, without clarifying the meaning of the ISA’s permit. The position also addressed publications containing biased data from a prospectus for the purpose of marketing the issue, and the use of data published in a prospectus in other non- public securities offerings.
Amendment to Regulations to update leverage rates in trading platforms and trading platforms’ requirements to publish their annual percentage of customers who incurred losses In November 2019, the ISA published a proposed amendment to the Securities Regulations (Trading Platforms to their own Account) 5775-2014 for public comments. The amendment concerns changes in the leverage levels of the financial instruments traded on trading platforms, and imposing a requirement on trading platforms to publish the percentage of their customers who lose money. The ISA intends to continue to promote this amendment in 2020.
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Following are the ISA’s activities to increase public awareness of responsible consumption of financial services
ISA invests in investors
Investors’ interests underlie all ISA activities. The ISA invests directly in actions designed to promote the general public’s knowledge of the capital market, to provide information on the range of financial products available, and to teach the public rules of conduct and caution. The ISA believes that the capital market should be accessible to the general public and in the reporting year the ISA invested resources in developing unmediated communications with investors, and in producing friendly and accessible contents.
Extension of activities to social networks In response to the steady growth in the use of social networks as a source of information, the ISA expanded its activities on two major platforms that are used by two important target audiences. To extend its activities on these social networks, the ISA invested resources to optimize information dissemination on these channels. The ISA expanded its activities on Facebook to offer the public information and tools for responsible consumption of financial services. The main thrust of its operations on this network are posts concerning existing investment products and warning signs that the public should be aware of to protect themselves against scams. The easy-to-read format and style of the information posted on social media helps investors overcome the “psychological barrier” that many members of the public have with respect to financial education, and encourages investors to become familiar with and learn more about these topics. The ISA also expanded its activity on LinkedIn, which it uses to increase the visibility and accessibility of ISA activities to members of the business communities in and outside Israel, and to raise awareness of firms, investors, and financial brokers of the regulation that the ISA is promoting to develop the capital market. In the forthcoming year, the ISA plans to launch activities on two additional platforms, Instagram and Twitter, on which it will provide information and tools for responsible consumption of financial services to additional target audiences.
The number of ISA Facebook page followers rose from 4,327 on January 1, 2019, to 11,161 on December 31, 2019, reflecting an increase rate of app. 257%.
4,327 11,161
1.1.2019 31.12.2019
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New project - monthly education focus In 2019, the Investor Education Unit initiated a new education project, allowing the public to gain in-depth knowledge of a specific topic related to ISA operations by accessing the ISA’s social media, and specifically Facebook pages. In selected months, the ISA will provide user-friendly information on all aspects of a selected topic, under the heading “This month, we’re talking about….”. The public will also be able to chat directly with senior ISA Staff on questions and clarifications regarding the monthly topic. In 2019 the ISA conducted two activities based on this concept. In June, the monthly topic was crowdfunding, and in December, the topic was mutual funds. This unique regulatory initiative is designed to provide personalized service and responses to questions posed by the general public. The ISA presented the project at C8 – the IOSCO Committee on Retail Investors. The project’s positive reception by members of the public who follow the ISA on Facebook motivate the ISA to expand the information available on this platform. In view of the project’s success and the positive public comments, the ISA plans to launch a monthly topic every quarter.
World Investor Week (WIW) 2019 The World Investors Week (WIW) was founded three years ago to raise public awareness of the importance of financial education and improve financial literacy and responsible consumption of financial services. WIW is a week-long global campaign that occurs in the first week of October every year, and 2019 was the third consecutive year in which ISA commemorated WIW. In 2019, events in Israel took place in the final week of October and first week of November due to the New Year’s holiday in early October. The main event of WIW 2019 was a series of short clips in which members of public answer various questions on the capital market. The answers help the ISA assess the public’s knowledge on capital market investments, and the film illustrates the importance of understanding the capital market. Also over the course of the week, each morning the ISA posted a daily question, and invited visitors to respond. The correct answer was presented at the end of the day, in a short film. WIW benefited from broad coverage on social media and on mainstream media. The short films were viewed by app. 92,000 surfers, and the ISA Facebook page was visited by 438,000 surfers over the course of the week. The most-viewed film was viewed by 150,000.
438,000 92,000 page visitors short films views
Publication of “The Guide to the Galaxy of Unsupervised Investments” In recent years, there has been an increase in the number of unsupervised investment ventures that solicit funds from the public and offer various financial investments in a manner that violates the law. On October 22, 2019, as part of the ISA’s financial education efforts for the investing public, and as part of WIW activities, the ISA published a friendly, easy-to-read “Guide to the Galaxy of Unsupervised Investments.” Based on the ISA’s lessons learned over the years, the Guide explains what unsupervised investments are, the risks they entail, how to identify them, are the warning signs related to unsupervised investments, what the ISA does to protect the investing public, and what each and every investor can do to protect themselves from this type of investment.
New ISA website In 2019, the ISA commenced work on the design and development of a new website for the ISA, with the aim of enhancing the accessibility of information to the two primary target audiences of the ISA: the investing public and the capital market sector both in and outside Israel. The first stage of website development is scheduled to be completed in 2020 and will serve as the basis for the new ISA website.
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Second Goal - Enhancing the Public Capital Market
Over the past decade there has been a steady rise in alternative investments which use tools that do not necessarily meet the classic definition of securities and involve investment vehicles that were not typically used in the past. The result is a decline in the scope and attractiveness of the public capital market. The relative retreat of the public capital market is not consistent with Israel’s public and national interests, since the public market offers unique advantages that are absent from other investments.
In the reporting year, the ISA promoted the following projects to achieve this goal:
Conclusion of efforts to modify the structure of ownership of the stock exchange Amendment 63 to the Securities Law, concerning a change in the ownership structure of the stock exchange came into effect on July 6, 2017. The amendment was introduced to create the legal foundation for the demutualization of the stock exchange, and the separation of ownership and voting rights from rights of access to trading. A second objective of the amendment was to expand the base of companies on the stock exchange, and make the stock exchange more accessible to a larger number of traders. In the past year, the stock exchange made preparations for a public offer of up to 31,717,504 shares, which were acquired by four foreign investors and held by a trustee. The public offer was filed in July 2019 according to a prospectus, and all shares were taken up. The public purchased a total of NIS 225.5 million in shares, reflecting a share price of NIS 7.1. On August 1, 2019, the stock exchange became a publicly traded company whose shares are traded on the stock exchange.
Diversification of financing sources for Israeli high-tech companies and increasing their access to the local capital market The ISA acknowledges the significance of the local high-tech sector and its contribution to economic growth. In view of the fact that the major share of financing for this sector comes from foreign investors, the ISA is taking steps to increase high- tech companies’ access to the local capital market in order to diversify their sources of financing, and to allow the public of investors in Israel to take part in and benefit from the sector’s success.
The ISA accordingly established an Advisory Committee on Technology and Capital Market Matters. Members of this committee included major actors in the high-tech sector, members of academia, venture capital funds, institutional investors, and officials who deal with relevant regulatory aspects of the high-tech and capital market sectors, including representatives of the Innovation Authority, the Tax Authority, Bank of Israel, and the Ministry of Justice. The committee meets on a quarterly basis.
The ISA also established an ad-hoc team to provide background material for the deliberations of the Advisory Committee. The team published its report in November 2019 and is available on the ISA website.
The ISA is working vigorously to develop proposals and solutions to facilitate the diversification of capital sources for Israel’s high-tech companies and enhance the public’s opportunities to invest in the local high-tech sector.
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Developing institutional investors’ expertise in high-tech sector analyses in collaboration with the Innovation Authority In 2018, the ISA and the Innovation Authority launched a novel initiative to remove one of the barriers that prevents institutional investors from investing in private R&D companies: institutional investors’ inability to price these firms, which is due to their lack of analysts who specialize in the high-tech sector. In the first stage of this initiative, the ISA and the Innovation Authority convened a round-table discussion in November 2018, attended by representatives of Israel’s institutional investors, alongside representatives of Israel’s financial regulators. A second round-table discussion was held in March 2019, where the Innovation Authority introduced the principles of its proposed model for subsidizing high-tech analyses for local institutional investors. In September 2019, this idea was formally established when the Council of the Innovation Authority approved Benefit Track no. 40 to promote investments in the high-tech industry by institutional capital market investors; On October 29, 2019, the benefit track came into effect. Between November 2019 and January 2020, representatives of the ISA and the Innovation Authority held a series of meetings and discussions with representatives of local institutional investors and on January 27, 2020 a specific meet-up took place where representatives of the ISA and the Innovation Authority answered various questions posed by representatives of the institutional investors concerning the competitive procedure to select the institutional investors that are eligible for a subsidy funded by the Innovation Authority. Bids for the competitive procedure were submitted by March 12, 2020. The Innovation Authority is expected to publish the identity of the eligible institutional investors based on the results of the competitive procedure.
Dedicated stock exchange for SMEs An inter-ministerial committee for the study of the establishment of a dedicated stock exchange for small and medium-sized enterprises in Israel (“secondary exchange”) was established in April 2017. The aim of a secondary exchange is to create an additional channel of financing for SMEs, allowing them to raise the capital necessary to drive their growth, and at the same time, contributing to the development of the local capital market.
The committee’s final report was published in June 2018 (see the ISA website), and included a series of recommendations for establishing a secondary exchange in Israel, drawing from models of secondary markets around the world and based on the specific features of the Israeli market. The first reading of the proposed Securities Law (Dedicated Exchange) 5778-2018 (“the proposed law”) was approved by the Knesset in November 2018.
In anticipation of the approval of the proposed law and in view of the developments in global capital markets, the ISA is promoting a study of additional options for a secondary exchange based on the foundations of the original recommendations. Additional potential secondary exchanges include a digital stock exchange, a long-term high-tech stock exchange, a trading platform for sophisticated investors, and a secondary stock exchange that is established in conjunction with local and international entrepreneurs. The ISA is also studying the possibility of adapting the committee’s final recommendations to additional sectors. In the event that a feasible outline for establishing a secondary exchange is developed, the committee will revisit its original recommendations and adjust them as necessary.
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Expansion of the dual-listing arrangement In 2018, the Knesset approved an amendment to the Securities Law that expanded the dual-listing arrangement to include three additional stock exchanges — Singapore Stock Exchange (SGX), Hong Kong Stock Exchange (HKEx), and Toronto Stock Exchange (TSX) — in addition to the three original stock exchanges already included in the arrangement — NYSE, Nasdaq, and London Stock Exchange — which are the source of the 56 dual-listed companies traded on the TASE. These dual-listed companies account for about 40% of the market capitalization of the TASE, its leading indices, and its trading volume. The addition of the new stock exchanges to the arrangement is the result of an in-depth study of these foreign markets by the ISA, including their regulatory regimes and applicable circles of supervision, to ensure that they can be trusted to protect the investing public in Israel.
Furthermore, the TASE signed an agreement with the Singapore Stock Exchange, designed to encourage dual IPOs on both exchanges. In 2019, the ISA supported the preparatory phase toward the agreement by implementing the necessary adjustments to regulation. The ISA also held discussions with regulatory authorities in Singapore, which led to their reciprocal recognition of the ISA’s regulation on prospectus filings and ongoing reporting requirements. As a result, today a company may issue its securities on both stock exchanges concurrently using an Israeli prospectus prepared according to Israeli securities rules.
Extending the dual-listing arrangement to dual-listed REIT funds Within its strategy to develop the capital market and expand its dual-listing arrangements as a key growth engine for the stock exchange, the ISA promoted an amendment to the TASE listing rules concerning the registration of REIT funds that are traded on dual-listing stock exchanges. The listing rules currently permit the registration of companies and partnerships only (and in the real estate industry – only companies), while the proposed amendment will permit legal entities incorporated as trusts and subject to the unique corporate governance regime and tax regime of foreign REIT funds to register for trade on the TASE. Registration of REIT funds is expected to expand and diversify the investment options available to the public.
Publication of a guide for dual-listed companies ISA Staff has prepared a comprehensive regulatory handbook for dual-listed companies, which includes all the necessary information on registering for trade, prospectuses and issuances, ongoing reporting requirements, and other matters. The Guide was distributed at a dedicated conference for dual-listed companies and reflects the ISA’s positions on various aspects of dual-listing regulation. The ISA intends to regularly update the Guide and use it as a platform for expressing ISA Staff positions and facilitating access to regulation that applies to dual-listed companies.
Adoption of I-XBRL, the world’s most advanced electronic reporting standard The ISA published a consultation document for public comments, presenting a policy proposal designed to improve financial statement users’ access to and analysis of the data contained in these statements, and to resolve the challenges of the current reporting method of periodic and interim financial statements.
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The current reporting method poses difficult challenges for the users of these reports. Among other things, the system does not support rapid retrieval and extraction of financial data for use in analyses and comparative studies. Furthermore, financial statements published in Hebrew make it difficult to foreign investors to read and analyze the information they contained and make informed decisions on investing in Israel’s capital market.
The proposed policy requires companies to report all sections of their periodic and interim financial statements in a structured manner, such that different sections are tagged at different levels of detail. The use of I-XBRL, which is an accepted standard used in developed markets, will open the Israeli capital market to investors from all over the world, and will place it on equal terms with the standards conventionally used in those markets.
The ISA plans to implement this policy in a staged manner. In the first stage, the ISA will conduct a pilot study with a small number of companies listed on the TA125. Participation in this stage will be voluntary, and experience will accumulate gradually. Next, as the legislative and regulatory process advances, and based on the experience gained by market actors and technological developers, the policy will be applied as a mandatory directive to all reporting companies, excluding banking corporations, insurance companies, and dual-listed companies.
Adjusting the reporting language of reporting corporations in Israel As part of the ISA’s actions to adapt regulation to the developments in the international arena, and with the aim of developing the local capital market, the ISA studied the option of allowing reporting corporations to report in English instead of the existing reporting in Hebrew. The ISA conducted a comparative study of reporting languages on leading global markets and held discussions with a range of capital market actors including public companies, underwriters, attorneys, and accountants. After completing the study, it is the ISA’s recommendation to permit all public companies in Israel, which so desire, to publish their reports in English as their default reporting language, in order to increase major international companies’ access to Israel’s capital market, attract foreign investors to the Israeli capital market, and adopt the reporting standard that is used in international major markets. This recommendation was approved by the ISA Plenum, and a draft amendment was published for public comments in December 2018. ISA Staff has studied the public comments, and the proposal that was ratified in 2019 awaits further legislative action.
Diversification of investment instruments in the local capital market Securitization – The ISA published a document for public comments on a policy to be implemented in connection with public issues of asset-based securities (securitization products). In this document, the ISA presented its position on the issuance of simple securitization products and outlined the features of simple securitization products. The ISA is currently studying the public comments received and is expected to publish a final document that will facilitate the public issue of asset-based securities.
At the same time, the ISA continues to work alongside other government and regulatory entities to promote a proposed law on securitization, based on the work of a public committee on this topic and its recommendations published in November 2015.
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Hybrid bonds – Within its efforts to diversify the financial products available to investors, the ISA published a policy document on non-convertible hybrid bonds in which issuers have flexibility regarding principal or interest payment dates. The document is intended to increase market actors’ awareness of and familiarity with the key features of hybrid bonds, and to solicit public comments on the terms and features that the public seeks in such instruments. After the ISA studies and analyzes the public comments, and an amendment to the TASE listing rules is implemented, the ISA intends to publish a final policy document that will permit the issuance of hybrid bonds.
Hedge funds and fund of hedge funds – In the reporting period, the ISA issued a public discussion on ideas and proposals regarding an outline for alternative trust fund offerings, specifically hedge funds and funds of hedge funds. This publication marks the beginning of a move designed to enable public offerings of alternative funds regulated under the Joint Investment Trust Law. This initiative is designed to give the investing public access to investment products that are currently available only to a limited group of investors (sophisticated investors) yet also offer the benefits of investing in mutual funds subject to ISA supervision. According to the emerging outline, these funds will be eligible for various statutory exemptions from the quantitative restrictions that apply to funds, in order to allow the alternative funds to conform to the operating patterns that are typical of unsupervised hedge funds. In 2020, the ISA intends to continue its efforts to determine the features of such offered products by publishing an outline of specifications of alternative funds for public comments. The ISA will then take action to establish the public offering of such products in legislation.
Regulation of rules for analyzing capital market information An analysis presents and dissects the operations of the reviewed company and assesses investments in the company. A company’s analysis is performed by external analysts. The ISA believes that analytical studies are instrumental in increasing knowledge about the capital market and make an important contribution to fair pricing and increased tradability of securities of reviewed companies on the stock exchange, and increase interest in these companies. To increase the number of analytical studies conducted on companies that are traded on the stock exchange, especially during a securities issuance ,the ISA is taking action to regulate the field of analyses. The Analysis Program of Public Companies in the high-tech and industrial sectors, and analysts fees in this program, which is mediated by the TASE, are governed by the rules of Regulation of Investment Advice, Investment Marketing ,and Investment Portfolio Management (Receipt of Benefits for Analytical Studies) 5774-2014. A decision was made to add two tracks to the analysis rules in order to allow the situation in which the end-customer does not pay the analysts’ fee, provided that the analyst meets certain rules designed to prevent conflicts of interest: (a) in the case of an analysis of an IPO performed by an “authorized corporation” (under the Investment Advice Law), where analysts receive their fee directly from the issuer; (b) in the case of an analysis on the occasion of an IPO or a repeat issuance, where the analysis if performed by a company that is related to the underwriter or distributor of the issuance, either due to a structural relationship or because the underwriter pays the analyst’s fee. The rules will also determine directives regarding the method of agreement, analysts ’fees, and the format of analytical studies, as well as disclosure rules such as disclosures regarding price history or YTM of the securities reviewed by the analyst according to these rules at different times.
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Effects of international institutional investors in public companies in Israel This study, published in December 2019, examines the effects of international institutional investors as shareholders in public companies in Israel on different aspects of the market and target firms. The question that this study examined is whether these holdings have a substantive qualitative effect on different aspects of the local market and the target firms.
According to the hypothesis examined in this study, international institutional investors function as change agents, specifically agents of change in their target markets that elevate corporate standards, including financing standards, corporate governance standards, and standards of environmental and social responsibility (ESG). The findings of the study support this hypothesis. An empirical analysis of the Israeli stock market in 2010-2019 shows that adopting such standards is consistent with excess returns generated for all investors.
The main findings of the study are:
The percentage holding of international Shares with international institutional investor institutional investors of the total market cap holdings had higher liquidity measures (lower of the Israeli market is similar to the global bid-ask spread and Cost of Round Trip [CRT]), mean and to markets of a similar size as Israel. although the difference is not statistically However, when excluding dual-listed firms, the significant when controlling for index and effective percentage holding is significantly industry effects. lower than the global mean. Corporate governance related parameters Generally, international investors have single- were analyzed on the basis of the number of digit percentage holdings in market cap independent directors and external directors, terms. In 70% of the stock/year samples, the and directors with accounting and financial percentage of total holdings by international expertise. Findings show that the number institutional investors did not exceed 10% of of these directors is statistically significantly any share’s market cap. larger in firms with international institutional investor holdings. International institutional investors typically have holdings in shares with a relatively high Excess return of shares with international market cap. institutional investor holdings was analyzed using a theoretical index that tracks these The majority (80%) of the shares held by shares. The analysis found that the theoretical international institutional investors were index generated excess returns compared included in the TA125 index, and 35% of them with TA 35 and TA 125 between 2010 and 2019. were also included in the TA35 index. The difference was not statistically significant over the entire period of analysis although The free float in shares held by international statistical significance was found in specific institutional investors is statistically sub-periods. significantly higher compared with the other shares in the Tamar equity universe (the shares that meet the minimum conditions for inclusion in investment indices).
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See the following graph for the cumulative returns on four indices: (a) F35, which represents the return on companies held by international institutional investors that are not dual-listed companies; (b) TA35; (c) TA125, and; (d) TAC35, the control group that includes the 35 largest companies that are not dual-listed, irrespective of international institutional investor holdings.
As shown below, the shares held by international institutional investors generated excess returns,
210%
190%
170%
150%
130%
110%
90% 7/2010 1/2011 7/2011 1/2012 7/2012 1/2013 7/2013 1/2014 7/2014 1/2015 7/2015 1/2016 7/2016 1/2017 7/2017 1/2018 7/2018 1/2019
F35 Institutional TA35 TA125 TAC35
Recommendations for action The findings of this study may incentivize firms in one of two ways: First, firms may be motivated to improve their performance on the parameters discussed above in order to attract international institutional investments. Second, international institutional investors that are typically highly engaged in target firms are expected to have a positive effect on the corporate standards in the Israeli market.
Several courses of action are available to firms seeking to encourage investment by international institutional investors:
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At the firm level:
Improve disclosure standards with respect to Increase free float; corporate governance and responsibility; Adopt English-language reporting (on a Initiate inclusion in global ESG indices; voluntary basis as proposed).
Actively contact international institutional investors and develop an IR function for international investors;
At the market level:
Continue the promotion of initiatives for Promote the adoption of stewardship codes structured and tagged financial reports and by domestic institutional investors. This may English-language reporting (mentioned in the improve corporate governance and corporate body of the text); responsibility standards in Israel;
Complete the initiative to establish a securities Promote a compulsory or voluntary ESG lending platform, which is being promoted by disclosure framework, in line with the practice the TASE; used in many western countries;
Promote inclusion of Israeli firms in global Maintain a dialogue with international indices – to follow up on ongoing efforts by institutional investors and various domestic the ISA and the TASE; market players to identify additional incentives to investment in Israel. Establish mechanisms to encourage international investment, such as developing an index of firms with international institutional investor holdings. However, a sufficiently broad and reliable index requires an improvement in the reporting of international institutional investors’ holdings;
Dual-listing for foreign traded funds traded on other exchanges Foreign funds that meet the conditions defined in the Regulation and are approved by the ISA have offered their units to the public in Israel since 2017. In 2019, for the first time, the ISA approved a dual-listing arrangement for the dozens of ETFs traded on the TASE and listed in dual-listed exchanges that appear in Schedule two and three of the Securities Law. In line with the ISA’s forward-looking strategy outlined by the ISA Chair, which calls on the ISA to adjust its activities to globalization and take action to increase Israel’s capital market access to global markets, the ISA intends to promote a legislative amendment that will allow ETFs listed on other dual-listing exchanges (excluding the exchanges listed in the annex to the Law) to become dual-listed securities on the TASE as well.
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Exposing the Israeli capital market to international participants The entry of major international market participants into the Israeli capital market is a significant step in the market’s global development, in line with the ISA’s strategy for the coming years. ISA Staff therefore intends to take action to expose the Israeli capital market to major global institutions including investment banks, underwriters, investment funds, and publicly traded companies. To this end, ISA Staff will conduct meetings with senior executives of those entities and raise their awareness of various features of the Israeli capital market and the recent changes in the market. ISA Staff will also take action to identify and eliminate regulatory obstacles that inhibit the entry of global actors into Israel’s capital market, in order to create an environment that is conducive to their activities in the local capital market.
Promoting the inclusion of Israeli companies in global indices Within its efforts to promote the global development of Israel’s capital market, the ISA is taking action to open the capital market to foreign investors in response to the global growth of passive investment in index products. The ISA commenced a series of meetings with international stake holders in order to explore the inclusion of Israeli companies in leading global indices, which will expose the Israeli market to more foreign investments.
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Third Goal - Advancing Technological Innovation in the Capital Market
The past decade has been characterized by the accelerated development of breakthrough technologies, including innovative technologies for financial markets. The field of specialized financial technologies, known as FinTech is designed to improve access and increase the efficiency and cost-effectiveness of financial services. The share of both local and global investments directed to the FinTech industry has grown considerably over the past few years, and Israel is also a leading innovator in this field.
Habits with respect to the use of financial systems are changing as a new wave of young end-users enters the market and as people respond to recent technological developments. These same technological changes challenge existing modes of regulation, which were designed decades ago, and as a result, call for a change in the structure of the regulatory regime and its operation.
The ISA intends to examine and track technological trends and developments and take steps in conformity with its duties to create a supportive regulatory environment to accommodate innovations in general, and specifically FinTech innovations, based on a forward-looking perspective and recognition of this field’s contribution to the investing public, to the resilience of the local capital market, and to economic growth.
As a preliminary step, the ISA established the FinTech Innovation Hub, which is designed to provide regulatory assistance to technology companies that are developing new products for financial services.
Following are the ISA’s main actions in the reported period:
The Committee for Promoting and Institutionalizing Digital Markets in Israel In accordance with its strategic program to promote innovation in the capital market, in July 2019, ISA Chair Ms. Anat Guetta appointed an interdepartmental committee to promote and institutionalize digital markets in Israel. The Committee focused on platforms for issuing, trading, clearing, and settlement based on distributed ledger technology (DLT), and on the typical features of this technology, including the use of tokens and smart contracts. The Committee’s report was published on the ISA website in December 2019.
The Committee also held discussions with a large number of stakeholders and regulatory authorities worldwide from diverse backgrounds, as well as entities engaged in the business and/or technological aspects of setting up trading infrastructure or investing in digital markets, and companies that have already raised or plan in the future to raise capital using digital assets overseas.
The Committee concluded that DLT has the potential to advance the Israeli capital market. Assimilating this technology may reduce trading costs for end customers, reduce systemic risks to the economy, create a technological environment that encourages financial innovation, and open the capital market to classes of companies such as SMEs, which previously refrained from financing their operations by participating in the public capital market.
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The Committee also mapped the emerging regulatory concerns related to licensing and supervision of digital trading platforms. Evidence from around the world shows that the trading and settlement platforms that have made relatively rapid progress were established as secondary or alternative trading platforms (e.g., ATSs in the US, and MTFs in the EU) by relative newcomers to the industry. A comparative review of the regulatory regimes in the United States and Europe reveals that platforms are subject to a hierarchical regulatory regime, in which different types of platforms are subject to different regulatory requirements or exemptions, such as an exemption on securities exchange licensing requirements, which may be issued to platforms with limited trading volumes. In Israel, the licensing and supervisory directives in the Securities Law regarding stock exchanges were shaped by the view of a significant national exchange that operates through its members. As a result, several of the regulatory requirements that apply to exchanges might impede the establishment of relatively small trading platforms.
The Committee was also impressed that quite a few of the leading blockchain technology companies in the field originate from Israeli initiatives. A regulatory foundation that supports the establishment of alternative trading systems might therefore be an excellent opportunity for integrating these FinTech companies into financial and intermediary services, and especially into the world of securities trading.
The Committee also mapped additional regulatory concerns that the ISA intends to address with the aim of creating a supportive environment for a digital market in Israel.
Proposed amendment to reshape the regulatory foundation of the Advice Law The Investment Advice Law regulates investment advising, investment marketing, and portfolio management operations. The Law imposes a licensing requirement on anyone engaged in investment advising, an area that by law includes any advice relating to the expediency of investing in securities and financial assets, wherever such services are performed, whether the services are rendered in a personal interaction between an investment adviser and a customer sitting opposite them in a branch of a bank, or whether advice is rendered in the form of analyses that are disseminated to a large population simultaneously.
The Law was initially designed for “classic” investment advising, which typically took place in banks, where advising is rendered on a personal basis and customer expect the advice to be based on their specific individual needs, wants, and preferences, as these are conveyed to the investment adviser. For this reason, the statutory obligations imposed on investment advisers assume refer to a “personal” relationship between investment advisers and their customers. These requirements include, but are not limited to, action to identify the customer’s needs and instructions, customize the services to these needs, sign an agreement with the customer, disclose any conflicts of interests that the adviser may have, and obtain the customer’s consent to the adviser’s actions. These obligations are not suited for activities and services that are not personal and are rendered to a large public rather than to specific individuals. They are also not suited to activities and services that may be conducted on the broad range of technological means that did not exist in the past.
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Although some adjustments were made within the limit of the ISA’s powers, recent developments — the transformation of many activities and the emergence of technological means that make it more possible than ever to communicate with a large public, as a replacement for personal interactions with individual customers — highlight the need to separately define and regulate the area of general advising, in distinction to personal advising that is regulated under the Investment Advice Law.
In response to this need, the ISA has proposed an amendment to the Investment Advice Law in a manner that will separately regulate engagement in general investment advising. The proposal was published for public comments in April 2019, and a large number of comments and questions have been received from various entities.
After a reconsideration of the issues expressed in the public comments, the ISA plans to publish a revised proposal for public comments in early 2020 and will continue to promote the amendment through legislative action.
Public discussion regarding a new field of activity: Digital retail brokerage in Israel In August 2019, the ISA and the TASE published a call for a public discussion on the retail brokerage market, whether in securities trading or in the distribution of mutual funds to the general public. Introducing retail brokerage activities is designed to enhance the access of the public of investors to trading in securities and purchasing or selling mutual funds. Increasing the number and diversity of retail brokers will increase competition and access to securities trading services, and reduce costs for the investing public. This move is consistent with the strategic programs of the ISA and the TASE, which both seek to advance technological innovation in the capital market and reduce the costs of financial services. The TASE and the ISA held meetings with various stakeholders to explore this issue, and in these meetings participants discussed the issues, problems, and obstacles that the development of this field faces. In response to this information, the ISA will examine the adjustments required to be made in existing regulation. The ISA and the TASE will examine the adjustments required to be made in the TASE by-laws. A study of this issue and the implementation of necessary adjustments, specifically by reducing capital requirements and fully digitizing the procedures for opening a securities account, is designed to encourage and facilitate retail brokerage services in the local market and ensure that practices are in line with the world’s most developed and advanced capital markets.
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Customers’ electronic signatures on portfolio management agreements In 2019, the ISA issued a circular designed to improve the efficiency of procedures involving licensees and their customers, with the aim of facilitating agreements with customers who receive investment advice or portfolio management services in the traditional manner, while protecting customers’ interests and rights. The main changes with respect to the previous circular are:
A customer’s consent to receive financial The circular permits licensees to modify services does not require their graphic agreements with customers online, and signature, and other indications of consent licensees are not required to conduct a face- are sufficient. to-face meeting for this purpose.
The circular does not require licensees to use secured or certified digital signatures. Instead, the circular determines the principle that all licensees must take reasonable measures to identify a customer and obtain their consent.
2.0 Portfolio Management service model In the past year, the ISA has worked in conjunction with other relevant participants in the capital market to develop the 2.0 Portfolio Management service model. The first step in this process was a Request for Information on the model, issued by the ISA. After public comments were received and the ISA conducted meetings with a large number of representatives of the capital market and the banks, and software development professionals, the ISA Plenum approved the directive that defines the features of this service in December 2019.
2.0 Portfolio Management services will be rendered by portfolio management companies that are also engaged in investment marketing, and will offer portfolio management services based on four special purpose mutual funds that each portfolio management company will manage on behalf of the mutual fund manager, in a hosting model. These four special purpose funds correspond to four risk profiles of customers. Portfolio management services based on the unique benefits on a mutual fund platform will increase access to capital market investments for groups that are typically barred from using traditional portfolio management services due to their minimum investment requirements of several hundreds of thousands of shekels. The new service is expected to promote competition in the portfolio management market and allow customers to compare the performances of various portfolio management companies.
In terms of the customer’s experience, customers will receive a user-friendly, fully digital service that is conducted entirely on the service provider’s dedicated app. After an assessment of their needs, customers will receive a recommendation to purchase units in the special purpose fund that matches their profile, and customers who decide to make an investment may purchase the units directly on the service provider’s dedicated app. Over the lifetime of the investment, customers will have access to information that is relevant to their investment, allowing them to increase or reduce their investment as they see fit.
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To facilitate the offering of investment recommendations on the service provider’s dedicated app, the ISA developed an API appendix that describes the features of the standard interface for transferring customer and transaction data from the service providers’ dedicated apps to execution by the banks or stock exchange members where the customers’ accounts are administered. The appendix is available no the ISA website.
ISA Staff published a request to licensees who wish to offer 2.0 Portfolio Management services to the public to join the ISA in developing a standard, off-the-shelf customer needs assessment questionnaire and data processing algorithm to be used to determine customers’ risk profiles, which will ensure standardization among 2.0 Portfolio Management service providers with respect to their customer risk profile assessment procedures. The team is expected to complete the development of a generic needs assessment procedure in 2020.
The Data Sandbox Program for Israeli start-up companies
In a joint project of the ISA, the Innovation Authority, and the TASE, start-up companies in the FinTech sector were invited to apply to join the Data Sandbox Program, which gives participating companies access to ISA’s databases and the TASE’s trading data.
The program includes a pilot study of the solutions that the start-up companies developed to address challenges such as the expanding operations of the stock exchange and the capital market; increasing the supervised entities’ access to financial regulation and certainty for their operations; simplifying and increasing the efficiency of the ISA’s work, specifically with respect to data management and data flows; assimilating automation; increasing accessibility of information, and; improving the digital customer identification and authentication process.
Program participants also receive access to databases (the MAGNA system, and the stock exchange trading system), as well as guidance, professional oversight, and financing (20%-50%) of their R&D costs related to specific solutions.
The program also creates an opportunity for collaboration between start-up companies and the ISA’s supervised entities, depending on the type of product developed by the company, and supervised entities’ willingness to collaborate.
In 2020, several applicants will be selected for the program. For additional information, see the Innovation Authority website.
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Integrating blockchain technology in ISA’s information systems After the ISA implemented blockchain technology in its primary information systems (YAEL, the system used to transmit electronic messages from the ISA to the supervised entities) in 2018, in 2019 the ISA completed the assimilation of blockchain technology in the TASE’s voting system and trading system (MAGNA).
Blockchain technology increases information security, reliability, and transparency and prevents denials. Complete information on investors’ voting is retained, and the MAGNA system now stores information from the moment it is transmitted by authorized reporting entities, and processed, to its dissemination to the public.
International collaboration to promote integration of FinTech in the capital market In 2019, the ISA stepped up its participation in international work groups and initiatives devoted to the unique challenges and risks of integrating innovative technologies, such as DLT, AI, novel methods of information privacy protection, and others, in the capital market. The ISA’s involvement in these forums stems first and foremost from its recognition of the global nature of these technological developments and the fact that they pose similar challenges for many countries. Therefore, to support its efforts to develop effective policy that addresses these new challenges and prevents arbitrage effects that may harm the investing public, the ISA increased its collaboration and coordination in order to learn from the experience and knowledge of others. These teams and programs also create an opportunity to heighten global awareness of the quality of Israeli regulation and promote the Israeli capital market.
The ISA joins the Global Financial Innovation Network (GFIN) In January 2019, together with other regulators from around the world, the ISA launched the Global Financial Innovation Network (GFIN), an international network for promotion of financial innovation. The network has over 50 organizational members including regulators and international organizations such as the IMF and the World Bank, committed to support financial innovation while protecting the interests of the public of investors. The initiative for the international network was developed by the British regulator (the FCA) and other organizations, with the aim of establishing an international sandbox and a forum in which leading regulators worldwide can share practical and innovative information.
The GFIN also hopes to create a new framework for financial regulators to collaborate and share experience and approaches related to innovation. The GFIN aspires to provide innovative firms with an environment in which to communicate with various regulators in a manner that supports the cross-border financial innovations of those firms. The international sandbox is designed for firms that wish to test their innovative products, services, or business models in multiple jurisdictions concurrently.
Together with other financial regulators, the ISA was an active partner in defining the conditions of GFIN membership, its organizational structure, and rules of operations for its members. Following a series of discussions, the GFIN defined the following goals:
To act as a network of regulators that collaborate and share To create an international environment for firms interested experience in the field of financial innovation including in performing cross-border trials; emerging technologies and business models; To permit local FinTech firms to participate in the To provide a forum for joint policy work in the field of international sandbox. RegTech, based on shared experience and knowledge;
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In 2019, the ISA participated in the GFIN work stream dedicated to RegTech. Work in this stream focused on establishing collaborations to promote greater efficiency and innovation in the field of compliance with regulatory rules. Members presented technological projects designed to facilitate and streamline compliance using various means including machine executable regulations, developed either by them or by organizations in their jurisdiction.
In August 2019, the ISA participated in a project initiated by the work stream to conduct the first international survey of its kind on supervised entities’ reporting costs based on regulatory guidelines. The aim of the survey was to collect data in order to better understand the costs and the resources required to meet disclosure and reporting requirements, in order to better assess and promote technological means that improve and increase the efficiency of supervised entities’ compliance. The survey was designed to provide information on the reporting costs of supervised entities and how they allocate resources to compliance, in order to obtain a reliable indication of actual costs.
As a participant in the survey, the ISA translated the questionnaire into Hebrew, disseminated the online version of the questionnaire to all its supervised entities, and collected and analyzed the data. More than 104 supervised entities in Israel took part in the survey. The ISA hopes to use the information and data obtained from the survey, together will data collected around the world, to examine and assess innovative models and reporting methods, and to design simpler and more effective methods of disclosure and reporting that are consistent with regulatory requirements
In late 2019, the ISA’s concluded its participation in the RegTech work stream and the ISA began to participate in the Collaboration work stream, which is dedicated to the advancement of innovative supportive regulation.
Membership in IOSCO forums on FinTech
A. IOSCO Fintech Network – In 2018, IOSCO established a Fintech Network to update members on developments in the field of FinTech. The Network is designed to promote IOSCO projects in the fields of AML, AI, DLT, RegTech, and SupTech, and to discuss policy issues related to FinTech. The ISA has been a member of the network since its establishment and is a member of the AI and DLT working groups. In 2019, the ISA was actively involved in preparing a policy document on the legal classification of stablecoins, which was used as the foundation for a statement by the IOSCO Board on global stablecoins
B. ICO Consultation Network – In response to the growing interest of regulators around the world in cryptographic assets, a consultation network was established, through which members can share information on cryptographic assets. The ISA has been a member of the network since its establishment and participates in all its activities.
In addition to specific work groups in the field of FinTech, ISA representatives also participated in discussions and programs related to technological issues in IOSCO’s permanent work streams. In 2019, the ISA was actively involved in drafting documents and work products on the regulatory aspects of digital distribution of financial instruments, investment funds’ exposure to cryptographic assets, regulators’ use of technological means, and other topics.
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The ISA is a signatory to specific FinTech MOUs to increase collaboration in innovation
In 2019, the ISA signed MOUs with three additional regulators:
Autorité des marchés financiers (AMF), France; Croatian Financial Services Supervisory Agency (HANFA), Croatia. Department of Financial Services (DFSNY), New York State, USA;
MOUs lay a foundation and define principles for cooperation and information exchanges with the aim of encouraging and cultivating innovation in financial services. Among other things, MOUs regulate the mechanisms of communications between the authorities, which allow them to share entrepreneurs’ requests for regulatory assistance and guidance. These and other arrangements will allow entrepreneurs to offer innovative financial services in several markets concurrently, with the support of the relevant regulators and their assistance in understanding the regulation in this field.
These MOUs join the MOU signed by the ISA in 2018 with the Swiss financial regulator (FINMA), which strengthened the ties between these regulators in the past year.
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Fourth Goal - Promoting Competition in the Capital Market
In the Israeli capital market, financial services and management of the public’s financial assets are highly centralized. Healthy and effective competition enhances market efficiency and improves the services and product offerings available to the investing public. The ISA endeavors to promote competition in the capital market to augment market efficiency, make it more accessible to the public, and render it attractive to investors operating in world markets.
Following are the ISA’s actions in the reporting year:
Publication of final recommendations of the joint team of the ISA and the Competition Authority to increase competition in the brokerage market
In August 2019, a joint team of the ISA and the Competition Authority published its recommendations for promoting competition in the brokerage/securities trading services market. The team found that 97% of retail customers who trade in securities prefer to do so through banks, despite the fact that bank fees are generally higher than the fees charged by non- bank stock exchange members. The team also identified several obstacles that reduce or prevent competition in this sector:
Securities trading services constitute one of a bundle of The procedure for opening an account with a non-bank services that banks render to their customers. Customers stock exchange member is more complicated because, tend to use securities trading services available in the bank among other things, non-bank stock exchange members that administers their current bank account and that offers do not operate a network of offices. them a bundle of banking services. Customers who make an attempt to transfer their securities The public believes that banks are safer than non-bank trading activities to a non-bank stock exchange member stock exchange members. encounter vigorous customer retention efforts by banks, including offers of discounts that are not available to other Banks offer customers investment advice services, while customers. non-bank stock exchange members are not permitted to offer investment advice. They may offer investment Customers find it difficult to compare the fees that the marketing services, but generally do not do so. different providers charge.
The team developed the following recommendations to promote competition in the brokerage market:
Recommendations for implementation in the short term:
Conclusion of the broker-dealer legislation, including the customer’s accounts from the current provider to the broker-dealer regulation that is similar to regulation in new provider, and the current provider will be required to developed capital markets. The new regulation will increase conform to a defined timetable to complete the transfer. protection for the public of investors and thus increase the public’s trust in these activities. Opening a new securities account online –Non-bank stock exchange members that open a new account for Transferring securities trading activities – When a customer customers will be subject to more lenient procedures, transfers their securities account, the new trading service including online KYC and authentication using measures provider will handle all aspects related to the transfer of including digital signatures, video conference calls, and
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bank transfers made directly from the customer’s source in which the system may be used, such as transfers of account. accounts from one service provider to another.
Improvements in the closed system and in the account Open banking – The legislation that implements the Strum transfer procedure, including: regulation of the information Committee’s recommendations regarding APIs is expected that the new financial services provider receives when a to make it easier for customers to compare prices and bank transfer is performed (including complete information assess the costs and benefits of transferring their account on the transferor’s identity); permitting banks to open to a competing service provider. accounts on the closed system; expanding the cases
Recommendations for implementation in the long term:
Customer compensation scheme – Establish an inter- Issuing means of payment – Stock exchange members ministerial team to study the establishment of a joint will be permitted to issue means of payment directly from compensation scheme that would cover investors in the a customer’s trading account. Such permits will make it event of corporate fraud or negligence. Such a scheme is unnecessary to transfer funds and will facilitate customers’ expected to enhance the stability of the financial system financial management. and increase investors’ sense of security.
More lenient rules for opening new remote securities accounts In 2019, the ISA Chair approved an amendment to the directive that defines the authentication process on the closed system for non-bank stock exchange members, allowing new accounts to be opened without the customer’s physical presence in the stock exchange member’s office. The amendment also removed restrictions on the type of activities and the scope of investments that may be performed in accounts that are opened digitally and managed by non-bank stock exchange members. For example, the total assets in such accounts are no longer limited to NIS 1 million, and the accounts may now also be used for off-exchange transactions and coordinated securities transactions. The amended directive was published on the ISA website in February 2019. Removing these restrictions is designed to facilitate the entry of international participants into Israel’s capital market, and consequently expand the investment opportunities available to the public and promote competition in the brokerage sector.
Promoting the use of digital identification technology in opening new securities trading accounts Today, non-bank stock exchange members may open accounts for customers without conducting a physical meeting or obtaining original documents, if the accounts are opened in a “closed system”. This means that funds, securities, and financial assets are transferred to the customer account at the non-bank stock exchange member from the customer’s account that is administered by a bank or another stock exchange member (“the source account”), and are eventually transferred back to the source account. The ISA intends to broaden the permission granted to non-bank exchange members to enable their customers to digitally open accounts, even if such accounts are not part of a “closed system”. In such a case, the process of identification of customers and verification of documents will be performed by advanced online and offline technological means.
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Developments in the structure of holdings in Israel’s economy In July 2019, the Research, Development, and Strategic Economic Consulting Department published a study on the developments in the structure of holdings in companies in Israel in the past decade, as a result of changes that were made due to the requirements of the Law for Promotion of Competition and Reduction of Concentration, enacted in 2013, and other factors.
The main findings of this study are:
The share of companies controlled by a controlling shareholder (excluding dual-listed companies) has declined in recent years, yet remains high.
Companies with a controlling shareholder, 2010-2018 92% 92% 89% 89% 88% 86% 88% 74%
2010 2014 2017 2018
% market capitalization of companies with controlling shareholder % companies with controlling shareholder
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The number of business groups that control publicly traded companies in Israel also declined in recent years.14 The following figure presents the percentage of publicly traded companies in the business groups of the publicly traded companies on the stock exchange.
Publicly traded companies that were part of business groups as a percentage of the total publicly traded companies on TASE (2010, 2014, 2017)
25% 22% 23%
2010 2014 2017
The value of the 10 largest business groups in the economy The share of institutional investors’ holdings in the also declined from 44% of the total market capitalization in tradable assets of the 10 largest groups declined. At 2010 to 29% at end 2017. end 2017, the tradable securities (shares and bonds) of the 10 largest business groups accounted for 43% of the institutional investors’ total assets in tradable shares and bonds, compared with 55% at end 2010.
14. A business group: Three or more companies traded on the stock market that are engaged in at least two different business sectors and are under the control of a single controlling shareholder (an individual, family, or group).
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In line with the requirements of the Anti-Concentration Law, the number of layers in pyramid structures in the Israeli economy declined significantly. The following figure presents the distribution of companies in the third or higher layer.
Companies in layer 3 or lower in Israel, 2010-2018
1 9 19
41 5
23 4 14 3 7 8
2010 2014 2016 2017 2018
No. of companies in layer 3 No. of companies in layer 4 No. of companies in layer 5 No. of companies in layer 6
In more than 80% of the cases, layers in pyramidal Since 2010, the average share of external directors structures were eliminated without any adverse effect on increased to one third by end 2018 (the increase in the public market coverage. In other words, in most cases TA125 companies was more significant than in smaller these companies remained publicly traded companies or companies). were merged into other publicly traded companies.
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Chapter D
ISA 2019 Budget Performance Report (in NIS thousands)
Item Item Approved budget Updated budget Budget no. 2019 2019 performance 2019
Total expenses 189,320 189,320 173,162
Total salary expenses 109,180 109,180 100,974
No. of employees [228] [228] [228]
1001 Salaries - ISA employees 86,700 86,700 80,979
1002 Pension and severance pay contributions 12,900 12,900 11,842
1003 Overtime 5,050 5,050 4,410
1004 Temporary employees for ad-hoc projects 400 400 346
No of legal interns and students [ 34 ] [ 34 ] [34]
1005 Legal interns and students 3,050 3,050 2,531
1006 Salary of ISA Chair 900 900 840
1008 Reimbursements to ISA members 180 180 25
Total payroll-related expenses 9,620 9,620 9,162
2001 Training 1,120 1,120 1,088
2002 Vehicle maintenance 1,600 1,600 1,270
2004 Travel, per diem, and shipping in Israel 6,800 6,800 6,714
2005 Loan fund 100 100 90
Total maintenance expenses 21,710 21,710 20,637
3001 Organizational expenses 1,000 952 901
3002 Office supplies 630 630 443
3003 Building maintenance and repairs 18,750 18,750 18,008
3004 Post and telephone 780 828 828
3005 Equipment, machinery, and furniture 550 550 458
Total professional activities 12,510 12,510 10,660
4002 Licensing of investment advisers and portfolio managers 1,900 1,900 1,714
4004 Legal expenses 940 1,209 1,209
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Budget Item Approved budget Updated budget Item performance no. 2020 2019 2019
4005 Professional library 470 470 299
4007 Accounting standards (participation) 1,250 1,250 1,250
4008 Inspections and enforcement 2,590 2,590 2,329
4010 Public education 580 580 230
4011 Consultants 1,270 990 985
4012 Seminars 300 300 7
4015 Academic research fund 110 110 24
4016 International relations 600 600 514
4017 Internal audit 350 361 361
4018 Financial statements 530 530 431
4019 District Attorney’s office 1,620 1,620 1,305
Total Information systems 18,100 18,756 18,381
5003 Computer maintenance 16,600 17,256 17,256
5004 Acquisition of computerized information 1,500 1,500 1,125
Total development budget 14,200 13,544 13,321
6001 Information systems (software and hardware) 14,100 13,444 13,335
6003 Leasehold improvements 100 100 14
Total reserve 4,000 4,000 0
7005 Reserve for salary 2,300 2,300 0
7006 Reserve for price hikes 700 700 0
7010 General reserve 1,000 1,000 0
Total revenues 189,320 189,320 198,720
9001 Prospectus fees 59,800 59,800 59,616
9002 Annual fees 109,700 109,700 114,315
9003 Financing expenses (income), net 1,100 1,100 10,099
9004 Investment adviser fees 15,700 15,700 14,690
9050 Financing expenses in respect of reserves 3,020 3,020 0
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ISA 2020 Approved Budget (in NIS thousands)
Item no. Item Approved budget 2020
Total expenses 188,600
Total salary expenses 107,810
No. of employees [233]
1001 Salaries - ISA employees 85,700
1002 Pension and severance pay contributions 13,000
1003 Overtime 5,000
1004 Temporary employees for ad-hoc projects 360
No of legal interns and students [ 34 ]
1005 Legal interns and students 2,750
1006 Salary of ISA Chair 900
1008 Reimbursements to ISA members 100
Total payroll-related expenses 9,580
2001 Training 1,020
2002 Vehicle maintenance 1,500
2004 Travel, per diem, and shipping in Israel 7,000
2005 Loan fund 60
Total maintenance expenses 21,540
3001 Organizational expenses 950
3002 Office supplies 510
3003 Building maintenance and repairs 19,050
3004 Post and telephone 550
3005 Equipment, machinery, and furniture 480
Total professional activities 12,760
4002 Licensing of investment advisers and portfolio managers 2,150
4004 Legal expenses 950
4005 Professional library 450
4007 Accounting standards (participation) 1,250
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Item no. Item Approved budget 2020
4008 Inspections and enforcement 2,910
4010 Public education 580
4011 Consultants 1,070
4012 Seminars 290
4015 Academic research fund 100
4016 International relations 590
4017 Internal audit 350
4018 Financial statements 480
4019 District Attorney’s office 1,600
Total Information systems 18,210
5003 Computer maintenance 17,100
5004 Acquisition of computerized information 1,110
Total development budget 14,700
6001 Information systems (software and hardware) 14,000
6003 Housing and leasehold improvements 700
Total reserve 4,000
7005 Reserve for salary 2,300
7006 Reserve for price hikes 700
7010 General reserve 1,000
Total revenues (estimated) (188,600)
9001 Prospectus fees (59,500)
9002 Annual fees (114,700)
9003 Financing income, net (500)
9004 Investment adviser fees (14,900)
9050 Financing expenses in respect of reserves 1,000
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Report of the Freedom of Information Officer, pursuant to Section 5(A) of the Freedom of Information Law
The following present information on requests for information submitted to the ISA in the reporting period and in the preceding year, pursuant to Section 5(A) of the Freedom of Information Law and Regulation 7 of the Freedom of Information Regulations 5759-1999:
2018 2019
The ISA provided all the information requested 15 2
The ISA provided part of the information requested 11 9
The ISA denied the request for information 14 10
The ISA’s work on the request for information was suspended due to outstanding fees 0 0 The ISA’s work on the request for information was suspended due to reasons related to the requester 2 3
Work on the request is in progress 2 7
Total requests for information submitted to the ISA 44 31
Information on requests that were denied or partially denied: *
Grounds for denial No. of requests denied
8(3) – insufficient resources 1
8(3) – the ISA does not have the information 4
8(4) – the information is in the public domain 8
9(a)(3) – infringement of privacy 3
9(a)(4) – prohibited by law 5
9(b)(1) – disruption to ISA’s functioning 8
9(b)(4) – internal meetings 5
9(b)(6) – commercial secret 4
9(b)(7) – obtaining the info was conditioned with non-disclosure 5
9B)(8) – enforcement agency’s work method or procedure 3
14 – law is not applicable 3 *A request may be denied for more than one reason.
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Information on requests processed, by time to response:
Time to response No. of requests %
Up to 15 days 12 50%
16-30 days 5 20.8%
31-60 days 5 20.8%
61-120 days 2 8.3%
More than 120 days 0 0%
Total 24* 100% * Seven requests are pending or were discontinued for reasons related to the requester.
Public Enquiries
To provide optimal service and reinforce its ties with the investing public, the ISA invests continuous efforts to improve the quality of its response to public enquiries, both in terms of the quality of the examinations that it conducts and its responses, and its efficiency in terms of quick, relevant responses.
In the reporting period, the ISA handled approximately 750 public enquiries, which touched upon a broad range of issues, and originated from a broad range of groups.
Public enquiries by topic
9% 11%
8% 12%
8%
Stock exchange - trading and general issues Reporting corporations’ activities (excluding criminal issues) 15% Trading platforms - regulation and supervision Intelligence and violations Suggestions for improvement and general comments % 23 Legal aspects of the ISA’s operations Licensing, supervision, and regulation of investments 15% Other
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ISA brochures and guides for the public published in 2019
Strategic Plan 2019-2022 Competition in the Retail Brokerage Market – Joint Examination by the Innovation Authority and the ISA Committee to Examine the Regulation of Distributed (Hebrew version) Cryptographic Currency Issuance to the Public – Final Report Comprehensive Regulation Guide for Dual-Listed Companies Committee to Promote Traded Funds for Investments in Infrastructure – Final Report (Hebrew version) Guide to the Galaxy of Unsupervised Investments (Hebrew version)
All the brochures and guides are available on the ISA website.
ISA databases registered according to the Freedom of Information Law
Database Description and objectives
Operations of portfolio managers Information on the customers of portfolio managers and non-bank exchange and non-bank exchange members, for the purpose of supervision and enforcement according to the ISA’s members powers Business intelligence (BI) Information related to trading on the stock exchange, for the purpose of supervision trading fairness Intelligence and Investigations Information related to trading on the stock exchange, for the purpose of supervision Department database trading fairness Corporations and electronic Information on senior officers appointed by the reporting corporations for reporting signatories on MAGNA, for the purpose the ongoing operations of the electronic reporting and authentication system Licensing of investment advisers Information on licensing procedures, for applicants and for the purpose of supervising and portfolio managers licensees Parties of interest Information on individuals and companies defined as parties of interest, for the purpose of fulfilling the ISA’s role in protecting the investing public Payments to suppliers and Information on suppliers, for the purpose of making payments bookkeeping Payrolls (MALAM) The ISA salary payment system Human resources (RECORD) Information on ISA employees, for the purpose of HR management Security cameras The ISA’s security cameras Database of parties with voting Information on securities holding, for the purpose of participation in electronic voting rights
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ISA funds and grants
The ISA awards research grants to researchers who study issues that have implications for capital market policy in Israel, and specifically research work related to the ISA’s operations and goals, such as capital market development and removal of economic obstacles and regulatory inefficiencies, protection of the investing public, increasing investor trust, and raising public awareness of various capital market issues. Grants range between NIS 5,000 and NIS 120,000 per award.
Applications are evaluated and approved by an ISA committee, based on considerations that include but are not limited to:
The significance of the topic and its implications; The fit between the researcher’s qualifications and education, and the research; The study’s potential as a basis for implementation in regulatory practices; The research will be concluded within 24 months.
In 2019, the ISA awarded NIS 16,800 in respect of milestones reached by a research on “The Effects of Increased Passive Investments on Returns, Information, and Market Quality”.
No new research grants were approved in 2019.
ISA support to public institutions
The ISA established the Israel Accounting Standards Board in conjunction with the Institute of Certified Public Accountants in Israel. The Standards Board is incorporated as a company with a share capital of no par value and reports to the tax authorities as a non-profit institution. The Standards Board operates under a balanced budget, and according to its structure, its shareholders are not entitled to net surplus earnings, rights, or accruals on its assets. The ISA and the Institute of Certified Public Accountants in Israel have equal rights of ownership and equal rights to appoint directors. The Board’s budget is funded by the ISA (81%) and by the Institute of Certified Public Accountants in Israel.
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Chapter E - Corporate Social Responsibility
The ISA attributes great importance to practices that make a positive societal and environmental impact, within the constraints of its obligations as a statutory corporation whose role is to protect the investing public and the resources placed at its disposal., ISA Chair has expressed her support for the growing trend of voluntary adoption of ESG norms by institutional investors, which focus attention to environmental, societal, and corporate governance considerations. Although the ISA is not a business corporation, it places high value on being a role model for its supervised entities. Below, the ISA presents its activities in a range of areas related to corporate responsibility values.
1. ISA Values The following are the ISA’s values that inform its intra-organizational work and its interfaces with the financial system, the capital market sector, and other external entities:
Excellence Integrity and fairness The ISA will take steps to perfect its The ISA will take steps to adopt high capabilities and deepen its expertise standards of fairness and integrity, and in the capital market and all areas of will exercise its powers in a balanced, its operations, constantly introducing equitable, appropriate, and commensurate improvements in its work methods manner. and practices.
Transparency Accountability The ISA will aspire to operate The ISA will act out of an overall under high standards of sense of responsibility for the transparency, in order to create consequences of its actions. certainty and clarity, grounded in its responsibility for issues related to due disclosure.
Collaboration Relevance As a part of the financial system, the The ISA will constantly examine ISA will strive to establish collaborative changes in investors’ needs in and partnerships and share knowledge outside Israel, in order to promote in order to protect the interests of an attractive, advanced capital the public and to promote market market. development. Effectiveness The ISA will strive to achieve its goals efficiently, based on an efficient use of resources.
The ISA’s ethical code is available on the ISA website.
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1. Transparency and Public Engagement in Decision Making
The ISA strives to promote transparency and to involve the public in its decision making, subject to its statutory obligations and its commitment to organizational efficiency, through the following efforts:
A. Involving the public in regulatory initiatives The ISA plays a major role in initiating and promoting legislation in the areas that are under its direct responsibility. The ISA supports the public’s involvement in various stages of legislative procedures in which the ISA is involved, including in the preliminary stage before legislative proposals are drafted. Involving the public in this manner helps create clarity and certainty with respect to the ISA’s work on its legislative initiatives, improves public transparency of the ISA’s regulatory work, and effectively opens up the ISA to receive public comments that improve the achievement of regulatory goals, without excessively burdening the supervised entities. In all these respects, the public’s involvement contributes to more efficient, transparent regulation, and reduces the regulatory burden on supervised entities as far as possible. Within these efforts, the ISA adopted an internal procedure for initiating regulation, which is designed to increase the public’s involvement in the ISA’s initiatives and legislative proposals before they are promoted to the legislative procedures outside the ISA (where necessary). The procedure defines directives for publishing legislative outlines for public comments, public hearing procedures, and preparation of summaries of public comments for deliberation and approval by the ISA Plenum. The procedure is available on the ISA website.
B. Publication of transcripts of ISA Plenum meetings Section 13 of the Securities Law determines that, as a rule, the ISA’s policy should not be disclosed. In order to increase the transparency of the ISA’s work as far as possible, the ISA Plenum has decided to publish the transcripts of its meeting, subject to certain exceptions. The format of these transcripts has changed over the years and the transcripts are now presented as brief summaries. The transcripts cover all the topics discussed at the Plenum meetings and are now public, with the exception of topics that are considered inappropriate for publication, such as discussions on matters whose publication may violate the privacy of individuals or companies, administrative matters, and studies and updates on specific topics. The transcripts are available on the ISA website.
C. Publications of ISA positions and actions on the ISA website On its website, the ISA routinely publishes its position papers and reports on its activities, subject to its professional considerations and to the duty of confidentiality that applies to the ISA by law, provided that such publications have no adverse impact on its operations or other protected interests. These publications target a variety of audiences including the public of investors, the entities supervised by the ISA, government officials, financial regulators in and outside Israel, and others. Among other things, the ISA publishes draft legislation for public comments, and ISA directives, as well as approved legislation and final versions of ISA guidelines and directives, ISA Staff position papers on legal and accounting issues, ISA responses to requests for pre-ruling on legal and accounting issues, enforcement decisions on monetary fines and administrative enforcement proceedings (subject to the provisions of law), ISA positions that were filed with the courts, economic research, and various administrative notices.
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2. Fair Work Environment High quality human resources are the key factor behind the ISA’s its success and its ability to achieve its goals on behalf of the investing public, and to develop the capital market and the Israeli economy. In 2017, the ISA was awarded first prize in the Social Employer Competition sponsored by Calcalist, a leading financial newspaper, and the Maagalim Fund. The ISA took steps on multiple levels to create a fair, service-oriented work place that encourages creativity and innovation:
A. Fairness and transparency vis a vis all ISA employees ISA employees have several channels at their disposal to receive updates and exercise their rights, including an internal portal for employees, an open-door policy, employee satisfaction surveys, feedback and evaluation processes, and a union.
B. Diversity in the workplace Diversity in the workplace has been part of the ISA’s work plan for several years. Diversity in the workplace contributes to creativity and a plurality of opinions, and is important for both the organization and its employees. To this end, and in order to reduce prejudices and discriminatory hiring of employees with disabilities and to increase awareness of the importance of diversity in its departments, the ISA conducted workshops for employees and managers on diversity in the workplace. The ISA has also earmarked specific jobs for individuals with disabilities. This policy is reflected in the ISA’s budgetary proposal for the year 2020, which includes two additional positions for employees with disabilities.
C. Gender balance Over the years, the ISA has invested efforts to promote equal gender rights, both in the Plenum and the executive board, and among all employees. ISA hiring data for 2019 indicate that 52% of ISA employees are women and 48% are men. At the managerial level, app. 35% of ISA’s employees are women, and women constitute app. 46% of the members of the executive board. Full gender pay equity exists with respect to ISA employees.
D. Sexual harassment officer The ISA appointed a sexual harassment officer in charge of preventing sexual harassment. The sexual harassment officer conducts frequent sessions for all ISA employees with the aim of raising awareness and preventing sexual harassment. Information on this issue is also posted on ISA bulletin boards and on other ISA communication channels.
E. Advanced welfare policy The ISA promotes an employee welfare policy that helps its employees maintain a constructive work-family balance through measures such as flexible work hours and at-home work options. The ISA invests much thought into all aspects of employee welfare including health, support for employees on military reserves duty and their families, support for employees experiencing grief and loss, pension advice, subsidies for living arrangements and summer camp, a summer camp in August on the site of ISA offices, loans on special terms, annual vacations, and team-building events.
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F. Military reserve duty To encourages its employees to volunteer for military reserve duty, the ISA provides special grants to support its employee volunteers. In 2017, the ISA was awarded the Ministry of Defense Reserves Protector Award, which is given to employers that support and encourage their employees to serve in the Reserves.
G. Interfaces with vendors The ISA works with app. 1,300 suppliers that provide the goods and services necessary for its ongoing operations. The vast majority of its large and medium-sized vendors were selected in tender and competitive pricing procedures, which are conducted according to the Mandatory Tenders Law and its regulations. The ISA expects its vendors to conform to high standards of ethical behavior and integrity, according to the values that guide the ISA’s own conduct. The ISA’s terms of payment to its suppliers comply with the Payment Ethics Law.
3. Social Responsibility “All of Israel are responsible for one another” is a principle that is embedded deeply in the ISA’s values and organizational culture. Over the years, within the constraints of its resources, the ISA has contributed to society in numerous ways.
A. Volunteer work in Shiur Aher For the past 14 years, ISA employees have participated in a volunteer program for Shiur Aher, a non-profit organization that operates in Jerusalem and Tel Aviv. The organization promotes equal opportunities in education, and encourages significant public engagement in the education system to create a bridge between citizens from different fields and school children from disadvantaged populations. In 2019, 52 ISA employees volunteered at Hayarden School in Tel Aviv’s Hatikva neighborhood, and at Gilo Comprehensive for Sciences and Arts School in Jerusalem (a total of 120 volunteer hours). As volunteers, ISA employees give talks to school children on topics related to law, economics, accounting, information systems, the Internet, to name a few. The children participate in unique experiences with the volunteers, such as a mock trial in which the students play the roles of judges, attorneys, and witnesses; visits to the courts and meetings with a judge; and visits to the ISA offices in Jerusalem and Tel Aviv.
B. Community service The ISA holds team-building days that focus on community service. Once every two years, each ISA department sponsors a project in collaboration with a non-profit or other organization and employees play an active role in assisting the organizations according to the organizations’ needs.
C. Donations of furniture and computer equipment The ISA donates furniture and computer equipment that are no longer in use by the ISA. Donation recipients are non-profit organizations whose work benefits society and the environment. In 2019, 4 TVs and 35 computer monitors were donated to three non-profit organizations. In addition, in a special volunteering day at an emergency shelter in Jerusalem, the ISA donated a PC, shower units, bedding, and painting materials.
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D. Increasing public awareness of responsible consumption of financial services From time to time, the ISA holds workshops and lectures for the general public to teach basic tools for informed financial decision making, and introductory talks on the capital market. The workshops and lectures are offered to the general public or targeted groups at no cost.
4. A Commitment to Environmental Responsibility
A. Reducing paper consumption For the past several years the ISA has invested efforts to reduce its paper consumption. In addition to regular activities for employees during work hours described below, the ISA also promoted three major initiatives:
Digital tracking and oversight replaces Migration of work interfaces with and the use of printed materials – In the past payments to external suppliers to an year, the ISA had led a move to reduce online environment – The ISA now uses paper consumption in its activities online interfaces for purchase orders, involving oversight on disclosures and invoices, and other records involving reporting of publicly traded companies. its suppliers. The migration to a digital Within this move, the ISA purchased interface generates savings estimated sophisticated computers to review and at several tens of thousands of printed monitor the reports and prospectuses pages. In the coming year, digitization of published by the supervised entities. As suppliers’ agreements is planned, which a result, the printing of several thousand will contribute to savings of an additional pages is saved each year. several thousand printed pages each year. The ISA also plans to purchase Migration of all work processes and printing management and control interfaces with supervised entities software to reduce waste caused by to an online environment – The ISA duplicate printing. migrated the majority of its work with its supervised entities to paperless online activities. As early as 2003 the ISA transitioned to digital reporting for its supervised entities. In the past year, supervised entities’ fee payments have gradually been migrated to electronic voucher payments. For example, regulated corporations now pay their annual fee vouchers online. The ISA is currently migrating payment of fees for corporate prospectuses to electronic payment vouchers as well.
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The main activities that ISA performs regularly to promote environmental responsibility:
Recycling of paper and newspaper Bottles and cans are collected for recycling Multiple re-use of internal envelopes
B. Reducing environmental pollution
Service vehicles - The ISA leases cars for its employees and encourages the use of hybrid vehicles, which are more environmentally friendly. Of the 25 cars leased by the ISA for its employees in 2019, 35% were hybrid vehicles.
Energy efficiency - Energy-saving LED bulbs are installed in ISA offices. The ISA posts reminders on the organizational portal and sends email reminders to remind its employees to save energy. The ISA also uses an external firm to check potential energy savings measures.
Recycling electronic waste - The ISA places buckets in its offices to collect used batteries for recycling.
Use of environmentally friendly paper - In 2019, ecological paper accounted for close to 50% of all ISA paper purchased.
As in previous years, the HR Unit promotes an annual theme that accompanies ISA employees’ work in various projects over the course of the year. The theme for 2020 is environmental responsibility, and engagement with this topic will be reflected in all ISA activities that affect the environment. Work on the annual theme will take place in two foci: one, as a capital market regulator, in its work with the supervised entities; and two, intra-organizational activities designed to make the ISA a more environmentally friendly organization.
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5. Privacy Policy and Cyber-Attack Prevention In order to prevent the numerous (known and unknown) attacks that target the ISA’s system, the ISA’s maintains a sophisticated, multi-layered security system. The ISA carefully maintains the most recent versions of its systems, including its legacy system, and continuously assesses new, unique systems. Existing system, such as its firewalls and anti-virus software, are smart systems that apply machine learning to identify irregular network patterns and activities. These systems can be used to track suspicious activities and monitor the user environment, including changes to licenses. The systems also use rules that report attempts to access sensitive information, and other irregular activities.
The ISA’s information privacy policy and cyber-defense policy is based on the Privacy Protection Law and the international information security standard ISO027001, to which the ISA has been certified by the Israel Standards Institute.
This year, the ISA was subject to many cyber-attacks that failed, thanks to its sophisticated systems that thwarted these attempts.
The ISA maintains databases that are subject to the Privacy Protection Law, and therefore it implements a series of measures to protect its databases: access is restricted to password holders; a combination of technological tools are used to prevent unauthorized access; the ISA conducts employee training; and the ISA uses work procedures and controls, and monitors system access, to name a few. To date, the ISA has not been a victim of a security incident with significant consequences.
6. Hygiene and Safety in the Workplace The ISA has an external officer who promotes workplace hygiene and safety throughout the year. Two safety coordinators underwent training at the Israel Institute for Occupational Safety and Hygiene and assist the external officer in handling current safety issues and hazards. The ISA also conducts first-aid workshops and refresher training courses for the emergency officers on each floor of its offices, who are representatives of the ISA departments and are in charge of first responder activities in the event of an emergency. ISA offices were adapted to create a disability-inclusive environment ISA employees attend periodic training sessions on work safety, and emergency safety drills are conducted each year to prepare employees for various emergency scenarios.
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ISRAEL SECURITIES AUTHORITY