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Report on the Activities of the Israel Securities Authority for 2012

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Report on the Activities of the Israel Securities Authority for 2012 Report on the Activities of the Israel Securities Authority for 2012 1 March 27,2013 To: To: Mr. Yair Lapid, MK Mr. Nissan Slomiansky, MK Minister of Finance Chairman of the Knesset Finance Committee Ministry of Finance The Knesset Dear Sirs, Re: Report on the Activities of the Israel Securities Authority In accordance with Section 14 of the Securities Law of 1968 (hereinafter – the Law), I respectfully submit this report on the activities of the Israel Securities Authority (ISA) for 2012. 2012 emerged as a landmark year for of the capital market in Israel in terms of regulation. During this year, the Israel Securities Authority led a number of regulatory initiatives with the following purposes in mind: to increase investor protection, improve disclosure, reinforce existing gatekeepers, and preserve the public's trust in the local capital market. During this period, which was overshadowed by the global crisis in capital markets around the world, the ISA was required, more than ever, to stand on guard and dedicate significant time and manpower resources in order to protect – above all – the interests of the investing public, while enabling reporting corporations and other market players to conduct their business as smoothly as possible. The basic assumption is that balanced regulation ensures the existence of a fair and efficient capital market, supports its stability over time, while reinforcing the trust of the investing public in general, and, in particular, attracting investors – both local and foreign. In this respect, it should be noted that the ISA attributes great significance to cooperation with various regulators, so as to ensure efficient regulation of the capital market, provided that such cooperation does not impinge upon each regulator's independence as regards its purview. Regulators' independence is a significant principle in the regulation of capital financial markets worldwide, expressed – inter alia – in the reports published by the International Monetary Fund on this subject. As part of the cooperation efforts between regulators, proper attention should be given to the need for regulating macro prudential supervision over the economy's most significant financial entities vs. the need for regulating disclosure for the sake of investors and enforcing market conduct by supervised entities. In light of the changes which occurred in the capital market, the ISA published, in 2012, a multi year strategic plan entitled "The Israel Securities Authority Roadmap", which addresses fields and industries for which current regulation is inadequate. In addition, the plan provides answers to claims of overregulation expressed by market players in the past few years. This is the most extensive expression of the ISA's worldview ever brought before the public, outlining how the ISA regards its role as regulator and the place of that regulation in the context of the market. This is a move towards transparency, which emanates for the ISA's wish to increase the public's involvement and share its plans with it. The Roadmap outlines the main projects with which the ISA is currently concerned and with which it will deal in the next few years, including deadlines for completion of these projects. The Roadmap includes an extensive series of planned regulatory initiatives and actions, in addition to a large number 2 of proposals for exemptions to be granted to supervised entities without compromising the quality of regulation, while ensuring that investors' interests continue to be upheld. The Roadmap was developed based on four key principles, in light of which the ISA operates in order to realize its regulatory goals in the upcoming years: Balance: balancing the regulatory burden placed on supervised entities, while reinforcing the system of gatekeepers as well as "market supervision" and "market discipline" mechanisms. The assumption is that as gatekeepers (both internal and external) become more efficient, and as market discipline becomes dominant in the conduct of market players, regulation over supervised entities can be eased. For this purpose, the ISA used a proactive policy, for the purpose of encouraging institutional entities to perform actions that are expected of them in order to protect the interests of shareholders and bondholders; Proportionality: supervision and regulation which take into account cost- effectiveness considerations; Transparency: enhancing regulatory certainty, increasing transparency regarding the ISA's actions, and involving the public in legislative procedures; Enforcement and deterrence: inculcation of appropriate norms and implementation of internal controls in the capital market, which will serve as deterrents against violations of the law, and exhausting legal proceedings against violators. The goals of the Israel Securities Authority for the coming years are based on three key principles: regulation, deregulation (easing the regulatory burden for supervised entities), and development of the capital market. An appropriate balance between the need for regulation and the need for deregulation – which can reduce regulatory costs without compromising the interests of investors – is an important precondition for the development of the capital market as a critical driver of economic growth. More specifically – Regulation – regulatory interference is especially important in cases where there are built-in market failures which hinder the development of a properly functioning, efficient capital market. The establishment of a tight regulatory regime over market players and its enforcement are preconditions for realizing the purpose of the capital market. In the absence of balanced regulation that ensures protection for the investing public, a capital market cannot to continue to function efficiently in the long term. Thus, the Israel Securities Authority is currently developing a number of regulation initiatives, as detailed below. Deregulation – Along with the need for extensive regulation in the capital market, it must be recognized that such regulation should be proportionate and balanced. Thus, the ISA decided to integrate the goal of deregulation into its multi-year strategy, easing regulatory requirements in a proportionate and balanced manner, wherever possible, while protecting the interests of the investing public. In order to achieve this goal, over the past few months the ISA's staff has re-examined a large number of regulatory provisions while initiating meetings with market players in order to identify statutory provisions that constitute regulatory burdens which can be eased without compromising the interests of the investing public. Finally, following a lengthy and intensive process, the ISA developed a series of proposals for regulatory exemptions for all entities under its supervision. As part of this effort, the ISA also examined the possibility of creating a regulatory scale, i.e. – defining different regulatory regimes for large vs. small supervised entities. This complex issue requires proper balance – to ensure that deregulation of smaller entities does not come at 3 the expense of protecting the interests of the investing public. Taking into consideration the necessary balance, the ISA proposed a number of exemptions which would apply exclusively to small companies, whose market capitalization is relatively low and in which the public's holdings are relatively small. Market Development – In recognition of the importance of the capital market for economic growth and for efficient resource allocation in the economy, the ISA has defined market development as a primary goal in its multi-year strategy, initiating a number of projects intended to promote this important goal, as detailed below. Scope of Activity – Data Corporations – As of December 31, 2012, 539 corporations were traded on the Tel Aviv Stock Exchange (497 of which were companies traded exclusively in Israel and 42 were dually-listed companies, i.e. – also traded on foreign stock exchanges), 72 were bond companies (i.e. – companies which have only issued bonds to the public), 23 of which are financial instrument companies and 14 were "channel" entities (i.e. – banks or insurers) In 2012, the business sector in Israel raised NIS 2,784 million in shares, warrants and convertible bonds (NIS 2,396 million of which were raised locally), as compared with NIS 3,988 million raised in 2011. This year, the business sector raised NIS 25,479 million through the issue of bonds (excluding convertible bonds), as compared with NIS 31,979 million in the previous year. Furthermore, the business sector raised approximately NIS 513 million through the exercise of warrants, as compared with approximately NIS 1,189 million in the previous year. Mutual funds – As of December 31, 2012, the number of active mutual funds reached 1,276 (as compared with 1,261 mutual funds as of the end of 2011), managed by 21 fund managers (as compared with 22 fund managers active as of December 31, 2011). The value of assets under management of mutual funds as of the end of 2012 reached NIS 170.1 billion, as compared with NIS 142.3 billion as of the end of 2011. The increase in the value of assets stems mainly from capital gains and from the capital raising trend in the industry. Exchange Traded Notes (ETNs) – in 2012, five groups of issuers were active in the Exchange Traded Notes (ETN) market, each of which included a number of companies. As of year's end, the number of ETN series stood at 464, as compared with 459 ETN series as of the end of 2011. Public
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